Business Organization II

The Revised Corporation Code of the Philippines

Republic Act No. 11232

Classifications of Corporations

Statutory classes of corporations:

A. Stock or non-stock (Section 3)

B. Private Corporation created under a General Law and Corporation created by Special Law,
Government Owned and Controlled Corporations (GOCC) (Section 4, BP 68)

Applicable Law - Special Law vs. Corporation Code

Applicable Rules: Regular Rules of Court or Interim Rules on Intra-Corporate Disputes;

What is an intra-corporate dispute?

Cases:

1. VITALIANO N. AGUIRRE II and FIDEL N. AGUIRRE, vs. FQB+7, INC., NATHANIEL D.

BOCOBO, PRISCILA BOCOBO and ANTONIO DE VILLA, G.R. No. 170770 January 9, 2013;

G.R. No. 170770 January 9, 2013

VITALIANO N. AGUIRRES II and FIDEL N. AGUIRRE, Petitioners,

vs.
FQB+7, INC., NATHANIEL D. BOCOBO, PRISCILA BOCOBO and ANTONIO DE
VILLA, Respondents.

DECISION

DEL CASTILLO, J.:

Pursuant to Section 145 of the Corporation Code, an existing intra-corporate dispute, which does
not constitute a continuation of corporate business, is not affected by the subsequent dissolution
of the corporation.

Before the Court is a Petition for Review on Certiorari of the June 29, 2005 Decision1 of the Court
of Appeals (CA) in CA-G.R. SP No. 87293, which nullified the trial court’s writ of preliminary
injunction and dismissed petitioner Vitaliano N. Aguirre’s (Vitaliano) Complaint before the
Regional Trial Court (RTC) for lack of jurisdiction. The dispositive portion of the assailed Decision
reads:

WHEREFORE, the assailed October 15, 2004 Order, as well as the October 27, 2004 Writ of
Preliminary Injunction, are SET ASIDE. With FQB+7, Inc.’s dissolution on September 29, 2003
and Case No. 04111077’s ceasing to become an intra-corporate dispute said case is hereby
ordered DISMISSED for want of jurisdiction.

SO ORDERED.2

Likewise assailed in this Petition is the appellate court’s December 16, 2005 Resolution,3 which
denied a reconsideration of the assailed Decision.

Factual Antecedents
On October 5, 2004, Vitaliano filed, in his individual capacity and on behalf of FQB+7, Inc.
(FQB+7), a Complaint4 for intra-corporate dispute, injunction, inspection of corporate books and
records, and damages, against respondents Nathaniel D. Bocobo (Nathaniel), Priscila D. Bocobo
(Priscila), and Antonio De Villa (Antonio). The Complaint alleged that FQB+7 was established in
1985 with the following directors and subscribers, as reflected in its Articles of Incorporation:

Directors Subscribers
1. Francisco Q. Bocobo 1. Francisco Q. Bocobo
2. Fidel N. Aguirre 2. Fidel N. Aguirre
3. Alfredo Torres 3. Alfredo Torres
4. Victoriano Santos 4. Victoriano Santos
5. Victorino Santos5 5. Victorino Santos
6. Vitaliano N. Aguirre II
7. Alberto Galang
8. Rolando B. Bechayda6

To Vitaliano’s knowledge, except for the death of Francisco Q. Bocobo and Alfredo Torres, there
has been no other change in the above listings.

The Complaint further alleged that, sometime in April 2004, Vitaliano discovered a General
Information Sheet (GIS) of FQB+7, dated September 6, 2002, in the Securities and Exchange
Commission (SEC) records. This GIS was filed by Francisco Q. Bocobo’s heirs, Nathaniel and
Priscila, as FQB+7’s president and secretary/treasurer, respectively. It also stated FQB+7’s
directors and subscribers, as follows:

Directors Subscribers
1. Nathaniel D. Bocobo 1. Nathaniel D. Bocobo
2. Priscila D. Bocobo 2. Priscila D. Bocobo
3. Fidel N. Aguirre 3. Fidel N. Aguirre
4. Victoriano Santos 4. Victorino7 Santos
5. Victorino Santos 5. Victorino Santos
6. Consolacion Santos8 6. Consolacion Santos9

Further, the GIS reported that FQB+7’s stockholders held their annual meeting on September 3,
2002.10

The substantive changes found in the GIS, respecting the composition of directors and
subscribers of FQB+7, prompted Vitaliano to write to the "real" Board of Directors (the directors
reflected in the Articles of Incorporation), represented by Fidel N. Aguirre (Fidel). In this
letter11 dated April 29, 2004, Vitaliano questioned the validity and truthfulness of the alleged
stockholders meeting held on September 3, 2002. He asked the "real" Board to rectify what he
perceived as erroneous entries in the GIS, and to allow him to inspect the corporate books and
records. The "real" Board allegedly ignored Vitaliano’s request.

On September 27, 2004, Nathaniel, in the exercise of his power as FQB+7’s president, appointed
Antonio as the corporation’s attorney-in-fact, with power of administration over the corporation’s
farm in Quezon Province.12 Pursuant thereto, Antonio attempted to take over the farm, but was
allegedly prevented by Fidel and his men.13
Characterizing Nathaniel’s, Priscila’s, and Antonio’s continuous representation of the corporation
as a usurpation of the management powers and prerogatives of the "real" Board of Directors, the
Complaint asked for an injunction against them and for the nullification of all their previous actions
as purported directors, including the GIS they had filed with the SEC. The Complaint also sought
damages for the plaintiffs and a declaration of Vitaliano’s right to inspect the corporate records.

The case, docketed as SEC Case No. 04-111077, was assigned to Branch 24 of the RTC of
Manila (Manila RTC), which was a designated special commercial court, pursuant to A.M. No. 03-
03-03-SC.14

The respondents failed, despite notice, to attend the hearing on Vitaliano’s application for
preliminary injunction.15 Thus, in an Order16 dated October 15, 2004, the trial court granted the
application based only on Vitaliano’s testimonial and documentary evidence, consisting of the
corporation’s articles of incorporation, by-laws, the GIS, demand letter on the "real" Board of
Directors, and police blotter of the incident between Fidel’s and Antonio’s groups. On October 27,
2004, the trial court issued the writ of preliminary injunction17 after Vitaliano filed an injunction
bond.

The respondents filed a motion for an extension of 10 days to file the "pleadings warranted in
response to the complaint," which they received on October 6, 2004.18 The trial court denied this
motion for being a prohibited pleading under Section 8, Rule 1 of the Interim Rules of Procedure
Governing Intra-corporate Controversies under Republic Act (R.A.) No. 8799.19

The respondents filed a Petition for Certiorari and Prohibition,20 docketed as CA-G.R. SP No.
87293, before the CA. They later amended their Petition by impleading Fidel, who allegedly
shares Vitaliano’s interest in keeping them out of the corporation, as a private respondent
therein.21

The respondents sought, in their certiorari petition, the annulment of all the proceedings and
issuances in SEC Case No. 04-11107722 on the ground that Branch 24 of the Manila RTC has no
jurisdiction over the subject matter, which they defined as being an agrarian dispute.23 They
theorized that Vitaliano’s real goal in filing the Complaint was to maintain custody of the corporate
farm in Quezon Province. Since this land is agricultural in nature, they claimed that jurisdiction
belongs to the Department of Agrarian Reform (DAR), not to the Manila RTC. 24 They also raised
the grounds of improper venue (alleging that the real corporate address is different from that
stated in the Articles of Incorporation)25 and forum-shopping26 (there being a pending case
between the parties before the DAR regarding the inclusion of the corporate property in the
agrarian reform program).27 Respondents also raised their defenses to Vitaliano’s suit, particularly
the alleged disloyalty and fraud committed by the "real" Board of Directors, 28 and respondents’
"preferential right to possess the corporate property" as the heirs of the majority stockholder
Francisco Q. Bocobo.29

The respondents further informed the CA that the SEC had already revoked FQB+7’s Certificate
of Registration on September 29, 2003 for its failure to comply with the SEC reportorial
requirements.30 The CA determined that the corporation’s dissolution was a conclusive fact after
petitioners Vitaliano and Fidel failed to dispute this factual assertion.31

Ruling of the Court of Appeals

The CA determined that the issues of the case are the following: (1) whether the trial court’s
issuance of the writ of preliminary injunction, in its October 15, 2004 Order, was attended by grave
abuse of discretion amounting to lack of jurisdiction; and (2) whether the corporation’s dissolution
affected the trial court’s jurisdiction to hear the intra corporate dispute in SEC Case No. 04-
111077.32

On the first issue, the CA determined that the trial court committed a grave abuse of discretion
when it issued the writ of preliminary injunction to remove the respondents from their positions in
the Board of Directors based only on Vitaliano’s self-serving and empty assertions. Such
assertions cannot outweigh the entries in the GIS, which are documented facts on record, which
state that respondents are stockholders and were duly elected corporate directors and officers of
FQB+7, Inc. The CA held that Vitaliano only proved a future right in case he wins the suit. Since
an injunction is not a remedy to protect future, contingent or abstract rights, then Vitaliano is not
entitled to a writ.33

Further, the CA disapproved the discrepancy between the trial court’s October 15, 2004 Order,
which granted the application for preliminary injunction, and its writ dated October 27, 2004. The
Order enjoined all the respondents "from entering, occupying, or taking over possession of the
farm owned by Atty. Vitaliano Aguirre II," while the writ states that the subject farm is "owned by
plaintiff corporation located in Mulanay, Quezon Province." The CA held that this discrepancy
imbued the October 15, 2004 Order with jurisdictional infirmity.34

On the second issue, the CA postulated that Section 122 of the Corporation Code allows a
dissolved corporation to continue as a body corporate for the limited purpose of liquidating the
corporate assets and distributing them to its creditors, stockholders, and others in interest. It does
not allow the dissolved corporation to continue its business. That being the state of the law, the
CA determined that Vitaliano’s Complaint, being geared towards the continuation of FQB+7, Inc.’s
business, should be dismissed because the corporation has lost its juridical
personality.35 Moreover, the CA held that the trial court does not have jurisdiction to entertain an
intra-corporate dispute when the corporation is already dissolved.36

After dismissing the Complaint, the CA reminded the parties that they should proceed with the
liquidation of the dissolved corporation based on the existing GIS, thus:

With SEC’s revocation of its certificate of registration on September 29, 2004 [sic], FQB+7, Inc.
will be obligated to wind up its affairs. The Corporation will have to be liquidated within the 3-year
period mandated by Sec. 122 of the Corporation Code.

Regardless of the method it will opt to liquidate itself, the Corporation will have to reckon with the
members of the board as duly listed in the General Information Sheet last filed with SEC.
Necessarily, and as admitted in the complaint below, the following as listed in the Corporation’s
General Information Sheet dated September 6, 2002, will have to continue acting as Members of
the Board of FQB+7, Inc. viz:

x x x x37

Herein petitioners filed a Motion for Reconsideration.38 They argued that the CA erred in ruling
that the October 15, 2004 Order was inconsistent with the writ. They explained that pages 2 and
3 of the said Order were interchanged in the CA’s records, which then misled the CA to its
erroneous conclusion. They also posited that the original sentence in the correct Order reads: "All
defendants are further enjoined from entering, occupying or taking over possession of the farm
owned by plaintiff corporation located in Mulanay, Quezon." This sentence is in accord with what
is ordered in the writ, hence the CA erred in nullifying the Order.

On the second issue, herein petitioners maintained that the CA erred in characterizing the reliefs
they sought as a continuance of the dissolved corporation’s business, which is prohibited under
Section 122 of the Corporation Code. Instead, they argued, the relief they seek is only to
determine the real Board of Directors that can represent the dissolved corporation.

The CA denied the Motion for Reconsideration in its December 16, 2005 Resolution.39 It
determined that the crucial issue is the trial court’s jurisdiction over an intra-corporate dispute
involving a dissolved corporation.40 Based on the prayers in the Complaint, petitioners seek a
determination of the real Board that can take over the management of the corporation’s farm, not
to sit as a liquidation Board. Thus, contrary to petitioners’ claims, their Complaint is not geared
towards liquidation but a continuance of the corporation’s business.

Issues

1. Whether the CA erred in annulling the October 15, 2004 Order based on interchanged
pages.

2. Whether the Complaint seeks to continue the dissolved corporation’s business.

 3. Whether the RTC has jurisdiction over an intra-corporate dispute involving a dissolved
corporation.

Our Ruling

The Petition is partly meritorious.

On the nullification of the Order of preliminary injunction.

Petitioners reiterate their argument that the CA was misled by the interchanged pages in the
October 15, 2004 Order. They posit that had the CA read the Order in its correct sequence, it
would not have nullified the Order on the ground that it was issued with grave abuse of discretion
amounting to lack of jurisdiction.41

Petitioners’ argument fails to impress. The CA did not nullify the October 15, 2004 Order merely
because of the interchanged pages. Instead, the CA determined that the applicant, Vitaliano, was
not able to show that he had an actual and existing right that had to be protected by a preliminary
injunction. The most that Vitaliano was able to prove was a future right based on his victory in the
suit. Contrasting this future right of Vitaliano with respondents’ existing right under the GIS, the
CA determined that the trial court should not have disturbed the status quo. The CA’s discussion
regarding the interchanged pages was made only in addition to its above ratiocination. Thus,
whether the pages were interchanged or not will not affect the CA’s main finding that the trial court
issued the Order despite the absence of a clear and existing right in favor of the applicant, which
is tantamount to grave abuse of discretion. We cannot disturb the CA’s finding on this score
without any showing by petitioners of strong basis to warrant the reversal.

Is the Complaint a continuation of

business?

Section 122 of the Corporation Code prohibits a dissolved corporation from continuing its
business, but allows it to continue with a limited personality in order to settle and close its affairs,
including its complete liquidation, thus:

Sec. 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation
or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless be continued as a body corporate for three
(3) years after the time when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to dispose of and
convey its property and to distribute its assets, but not for the purpose of continuing the business
for which it was established.

xxxx

Upon learning of the corporation’s dissolution by revocation of its corporate franchise, the CA held
that the intra-corporate Complaint, which aims to continue the corporation’s business, must now
be dismissed under Section 122.

Petitioners concede that a dissolved corporation can no longer continue its business. They argue,
however, that Section 122 allows a dissolved corporation to wind up its affairs within 3 years from
its dissolution. Petitioners then maintain that the Complaint, which seeks only a declaration that
respondents are strangers to the corporation and have no right to sit in the board or act as officers
thereof, and a return of Vitaliano’s stockholdings, intends only to resolve remaining corporate
issues. The resolution of these issues is allegedly part of corporate winding up.

Does the Complaint seek a continuation of business or is it a settlement of corporate affairs? The
answer lies in the prayers of the Complaint, which state:

PRAYER
WHEREFORE, it is most respectfully prayed of this Honorable Court that judgment be rendered
in favor of the plaintiffs and against the defendants, in the following wise:

I. ON THE PRAYER OF TRO/STATUS QUO ORDER AND WRIT OF PRELIMINARY

INJUNCTION:

1. Forthwith and pending the resolution of plaintiffs’ prayer for issuance of writ of
preliminary injunction, in order to maintain the status quo, a status quo order or
temporary restraining order (TRO) be issued enjoining the defendants, their
officers, employees, and agents from exercising the powers and authority as
members of the Board of Directors of plaintiff FQB as well as officers thereof and
from misrepresenting and conducting themselves as such, and enjoining
defendant Antonio de Villa from taking over the farm of the plaintiff FQB and from
exercising any power and authority by reason of his appointment emanating from
his co-defendant Bocobos.

2. After due notice and hearing and during the pendency of this action, to issue
writ of preliminary injunction prohibiting the defendants from committing the acts
complained of herein, more particularly those enumerated in the immediately
preceeding paragraph, and making the injunction permanent after trial on the
merits.

II. ON THE MERITS

After trial, judgment be rendered in favor of the plaintiffs and against the defendants, as
follows:

1. Declaring defendant Bocobos as without any power and authority to represent

or conduct themselves as members of the Board of Directors of plaintiff FQB, or
as officers thereof.

2. Declaring that Vitaliano N. Aguirre II is a stockholder of plaintiff FQB owning fifty

(50) shares of stock thereof.

3. Allowing Vitaliano N. Aguirre II to inspect books and records of the company.

4. Annulling the GIS, Annex "C" of the Complaint as fraudulent and illegally
executed and filed.

5. Ordering the defendants to pay jointly and solidarily the sum of at least
₱200,000.00 as moral damages; at least ₱100,000.00 as exemplary damages;
and at least ₱100,000.00 as and for attorney’s fees and other litigation expenses.

Plaintiffs further pray for costs and such other relief just and equitable under the premises.42

The Court fails to find in the prayers above any intention to continue the corporate business of
FQB+7. The Complaint does not seek to enter into contracts, issue new stocks, acquire
properties, execute business transactions, etc. Its aim is not to continue the corporate business,
but to determine and vindicate an alleged stockholder’s right to the return of his stockholdings
and to participate in the election of directors, and a corporation’s right to remove usurpers and
strangers from its affairs. The Court fails to see how the resolution of these issues can be said to
continue the business of FQB+7.

Neither are these issues mooted by the dissolution of the corporation. A corporation’s board of
directors is not rendered functus officio by its dissolution. Since Section 122 allows a corporation
to continue its existence for a limited purpose, necessarily there must be a board that will continue
acting for and on behalf of the dissolved corporation for that purpose. In fact, Section 122
authorizes the dissolved corporation’s board of directors to conduct its liquidation within three
years from its dissolution. Jurisprudence has even recognized the board’s authority to act as
trustee for persons in interest beyond the said three-year period.43 Thus, the determination of
which group is the bona fide or rightful board of the dissolved corporation will still provide practical
relief to the parties involved.

The same is true with regard to Vitaliano’s shareholdings in the dissolved corporation. A party’s
stockholdings in a corporation, whether existing or dissolved, is a property right 44 which he may
vindicate against another party who has deprived him thereof. The corporation’s dissolution does
not extinguish such property right. Section 145 of the Corporation Code ensures the protection of
this right, thus:

Sec. 145. Amendment or repeal. – No right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any liability incurred by any such
corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said corporation or by any subsequent amendment or
repeal of this Code or of any part thereof. (Emphases supplied.)

On the dismissal of the Complaint for

lack of jurisdiction.

The CA held that the trial court does not have jurisdiction over an intra-corporate dispute involving
a dissolved corporation. It further held that due to the corporation’s dissolution, the qualifications
of the respondents can no longer be questioned and that the dissolved corporation must now
commence liquidation proceedings with the respondents as its directors and officers.

The CA’s ruling is founded on the assumptions that intra-corporate controversies continue only in
existing corporations; that when the corporation is dissolved, these controversies cease to be
intra-corporate and need no longer be resolved; and that the status quo in the corporation at the
time of its dissolution must be maintained. The Court finds no basis for the said assumptions.

Intra-corporate disputes remain even

when the corporation is dissolved.

Jurisdiction over the subject matter is conferred by law. R.A. No. 879945 conferred jurisdiction
over intra-corporate controversies on courts of general jurisdiction or RTCs,46 to be designated
by the Supreme Court. Thus, as long as the nature of the controversy is intra-corporate, the
designated RTCs have the authority to exercise jurisdiction over such cases.

So what are intra-corporate controversies? R.A. No. 8799 refers to Section 5 of Presidential
Decree (P.D.) No. 902-A (or The SEC Reorganization Act) for a description of such controversies:

a) Devices or schemes employed by or any acts, of the board of directors, business

associates, its officers or partners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or of the stockholder, partners, members
of associations or organizations registered with the Commission;

b) Controversies arising out of intra-corporate or partnership relations, between and

among stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and
the state insofar as it concerns their individual franchise or right to exist as such entity;

c) Controversies in the election or appointments of directors, trustees, officers or

managers of such corporations, partnerships or associations.

The Court reproduced the above jurisdiction in Rule 1 of the Interim Rules of Procedure Governing
Intra-corporate Controversies under R.A. No. 8799:

SECTION 1. (a) Cases Covered – These Rules shall govern the procedure to be observed in civil
cases involving the following:

(1) Devices or schemes employed by, or any act of, the board of directors,
business associates, officers or partners, amounting to fraud or misrepresentation
 which may be detrimental to the interest of the public and/or of the stockholders,
partners, or members of any corporation, partnership, or association;

(2) Controversies arising out of intra-corporate, partnership, or association

relations, between and among stockholders, members, or associates; and
between, any or all of them and the corporation, partnership, or association of
which they are stockholders, members, or associates, respectively;

(3) Controversies in the election or appointment of directors, trustees, officers, or

managers of corporations, partnerships, or associations;

(4) Derivative suits; and

(5) Inspection of corporate books.

Meanwhile, jurisprudence has elaborated on the above definitions by providing tests in

determining whether a controversy is intra-corporate. Reyes v. Regional Trial Court of Makati, Br.
14247 contains a comprehensive discussion of these two tests, thus:

A review of relevant jurisprudence shows a development in the Court's approach in classifying

what constitutes an intra-corporate controversy. Initially, the main consideration in determining
whether a dispute constitutes an intra-corporate controversy was limited to a consideration of the
intra-corporate relationship existing between or among the parties. The types of relationships
embraced under Section 5(b) x x x were as follows:

a) between the corporation, partnership, or association and the public;

b) between the corporation, partnership, or association and its stockholders, partners,

members, or officers;

c) between the corporation, partnership, or association and the State as far as its
franchise, permit or license to operate is concerned; and

d) among the stockholders, partners or associates themselves. xxx

The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to
the SEC now the RTC, regardless of the subject matter of the dispute. This came to be known as
the relationship test.

However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc., the Court
introduced the nature of the controversy test. We declared in this case that it is not the mere
existence of an intra-corporate relationship that gives rise to an intra-corporate controversy; to
rely on the relationship test alone will divest the regular courts of their jurisdiction for the sole
reason that the dispute involves a corporation, its directors, officers, or stockholders. We saw that
there is no legal sense in disregarding or minimizing the value of the nature of the transactions
which gives rise to the dispute.

Under the nature of the controversy test, the incidents of that relationship must also be considered
for the purpose of ascertaining whether the controversy itself is intra-corporate. The controversy
must not only be rooted in the existence of an intra-corporate relationship, but must as well pertain
to the enforcement of the parties' correlative rights and obligations under the Corporation Code
and the internal and intra-corporate regulatory rules of the corporation. If the relationship and its
incidents are merely incidental to the controversy or if there will still be conflict even if the
relationship does not exist, then no intra-corporate controversy exists.

The Court then combined the two tests and declared that jurisdiction should be determined by
considering not only the status or relationship of the parties, but also the nature of the question
under controversy. This two-tier test was adopted in the recent case of Speed Distribution, Inc. v.
Court of Appeals:
'To determine whether a case involves an intra-corporate controversy, and is to be heard and
decided by the branches of the RTC specifically designated by the Court to try and decide such
cases, two elements must concur: (a) the status or relationship of the parties, and [b] the nature
of the question that is the subject of their controversy.1âwphi1

The first element requires that the controversy must arise out of intra-corporate or partnership
relations between any or all of the parties and the corporation, partnership, or association of which
they are 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
the individual franchises. The second element requires that the dispute among the parties be
intrinsically connected with the regulation of the corporation. If the nature of the controversy
involves matters that are purely civil in character, necessarily, the case does not involve an intra-
corporate controversy.' (Citations and some emphases omitted; emphases supplied.)

Thus, to be considered as an intra-corporate dispute, the case: (a) must arise out of intra-
corporate or partnership relations, and (b) the nature of the question subject of the controversy
must be such that it is intrinsically connected with the regulation of the corporation or the
enforcement of the parties’ rights and obligations under the Corporation Code and the internal
regulatory rules of the corporation. So long as these two criteria are satisfied, the dispute is intra-
corporate and the RTC, acting as a special commercial court, has jurisdiction over it.

Examining the case before us in relation to these two criteria, the Court finds and so holds that
the case is essentially an intra-corporate dispute. It obviously arose from the intra-corporate
relations between the parties, and the questions involved pertain to their rights and obligations
under the Corporation Code and matters relating to the regulation of the corporation. We further
hold that the nature of the case as an intra-corporate dispute was not affected by the subsequent
dissolution of the corporation.

It bears reiterating that Section 145 of the Corporation Code protects, among others, the rights
and remedies of corporate actors against other corporate actors. The statutory provision assures
an aggrieved party that the corporation’s dissolution will not impair, much less remove, his/her
rights or remedies against the corporation, its stockholders, directors or officers. It also states that
corporate dissolution will not extinguish any liability already incurred by the corporation, its
stockholders, directors, or officers. In short, Section 145 preserves a corporate actor’s cause of
action and remedy against another corporate actor. In so doing, Section 145 also preserves the
nature of the controversy between the parties as an intra-corporate dispute.

The dissolution of the corporation simply prohibits it from continuing its business. However,
despite such dissolution, the parties involved in the litigation are still corporate actors. The
dissolution does not automatically convert the parties into total strangers or change their intra-
corporate relationships. Neither does it change or terminate existing causes of action, which arose
because of the corporate ties between the parties. Thus, a cause of action involving an intra-
corporate controversy remains and must be filed as an intra-corporate dispute despite the
subsequent dissolution of the corporation.

WHEREFORE, premises considered, the Petition for Review on Certiorari is PARTIALLY

GRANTED. The assailed June 29, 2005 Decision of the Court of Appeals in CA-G.R. SP No.
87293, as well as its December 16, 2005 Resolution, are ANNULLED with respect to their
dismissal of SEC Case No. 04-111077 on the ground of lack of jurisdiction. The said case is
ordered REINSTATED before Branch 24 of the Regional Trial Court of Manila. The rest of the
assailed issuances are AFFIRMED.

SO ORDERED.

2. Yujuico vs. Quiambao, et.al., G.R. No. 168639, January 29, 2007;

G.R. No. 168639 January 29, 2007

ALDERITO Z. YUJUICO, BONIFACIO C. SUMBILLA, and DOLNEY S. SUMBILLA, Petitioners,
vs.
CEZAR T. QUIAMBAO, JOSE M. MAGNO III, MA. CHRISTINA F. FERREROS, ANTHONY K.
QUIAMBAO, SIMPLICIO T. QUIAMBAO, JR., ERIC C. PILAPIL, ALBERT M. RASALAN, and
REGIONAL TRIAL COURT, BRANCH 48, URDANETA CITY, Respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:

Before us for resolution is the Petition for Review on Certiorari1 challenging the Decision dated
March 31, 2005 rendered by the Court of Appeals in CA-G.R. SP No. 87785, as well as its
Resolution dated June 29, 2006.

The facts are:

Strategic Alliance Development Corporation (STRADEC) is a domestic corporation engaged in

the business of providing financial and investment advisory services and investing in projects
through consortium or joint venture information.2 From its inception, STRADEC’s principal place
of business was located at the 24th Floor, One Magnificent Mile-Citra Building, San Miguel
Avenue, Ortigas Center, Pasig City. On July 27, 1998, the Securities and Exchange Commission
(SEC) approved the amendment of STRADEC’s Articles of Incorporation authorizing the change
of its principal office from Pasig City to Bayambang, Pangasinan.3

On March 1, 2004, STRADEC held its annual stockholders’ meeting in its Pasig City office as
indicated in the notices sent to the stockholders.4 At the said meeting, the following were elected
members of the Board of Directors: Alderito Z. Yujuico, Bonifacio C. Sumbilla, Dolney S. Sumbilla
(petitioners herein), Cesar T. Quiambao, Jose M. Magno III and Ma. Christina Ferreros
(respondents herein). Petitioners Alderito Yujuico was elected Chairman and President, while
Bonifacio Sumbilla was elected Treasurer. All of them then discharged the duties of their office.

After five (5) months, or on August 16, 2004, respondents filed with the Regional Trial Court
(RTC), San Carlos City, Pangasinan a Complaint against STRADEC (represented by herein
petitioners as members of its Board of Directors), docketed as Civil Case No. SCC-2874 and
raffled off to Branch 56. The complaint prays that: (1) the March 1, 2004 election be nullified on
the ground of improper venue, pursuant to Section 51 of the Corporation Code; (2) all ensuing
transactions conducted by the elected directors be likewise nullified; and (3) a special
stockholders’ meeting be held anew.

Subsequently, respondents filed an Amended Complaint dated September 2, 2004 further praying
for the issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction to
enjoin petitioners from discharging their functions as directors and officers of STRADEC. On
September 22, 2004, they filed a Supplemental Complaint praying that the court (1) direct Export
Industry Bank, Cezar T. Quiambao and Bonifacio G. Sumbilla to surrender to them the original
and reconstituted Stock and Transfer Book and other corporate documents of STRADEC; and (2)
nullify the reconstituted Stock and Transfer Book and all transactions of the corporation. Both
pleadings were admitted by the trial court.

As the controversy involves an intra-corporate dispute, the trial court, on October 4, 2004, issued
an Order transferring Civil Case No. SCC-2874 to RTC, Branch 48, Urdaneta City, being a
designated Special Commercial Court.5 The case was then re-docketed as Civil (SEC) Case No.
U-14.

Since Branch 48 of RTC, Urdaneta City had no presiding judge then, Judge Meliton G. Emuslan
acted as pairing judge of that branch to take cognizance of the cases therein until the appointment
and assumption to duty of a regular judge.6

On November 2, 2004, petitioners filed their Answer with Counterclaim7 in Civil (SEC) Case No.
U-14. They prayed for the dismissal of the complaint on the following grounds, among others: (a)
the complaint does not state a cause of action; (b) the action is barred by prescription for it was
filed beyond the 15-day prescriptive period provided by Section 2, Rule 6 of the Interim Rules and
Procedure Governing Intra-Corporate Controversies under Republic Act (R.A.) No. 8799; (c)
respondents’ prayer that a special stockholders’ meeting be held in Bayambang, Pangasinan "is
premature pending the establishment of a principal office of STRADEC in said municipality;" and
(d) respondents waived their right to object to the venue as they attended and participated in the
said March 1, 2004 meeting and election without any protest."8 Petitioners likewise opposed the
application for a writ of preliminary injunction as respondents have no right that was violated,
hence, are not entitled to be protected by law. They further prayed for damages by way of
counterclaim.

Meanwhile, Judge Aurelio R. Ralar, Jr. was appointed presiding judge of RTC, Branch 48,
Urdaneta City. Significantly, on November 9, 2004, he took his oath of office before Associate
Justice Diosdado M. Peralta of the Sandiganbayan, and on November 12, 2004, he assumed his
duties.9 Subsequently, or on November 25, 2004, pairing Judge Meliton Emuslan still issued an
Order10 granting respondents’ application for preliminary injunction ordering (1) the holding of a
special stockholders’ meeting of STRADEC on December 10, 2004 "in the principal office of the
corporation in Bayambang, Pangasinan;" and (2) the turn-over by petitioner Bonifacio Sumbilla to
the court of the duplicate key of the safety deposit box in Export Industry Bank, Shaw Boulevard,
Pasig City where the original Stock and Transfer Book of STRADEC was deposited. The pertinent
portions of the Order read:

ORDER

This resolves the application of plaintiffs for the issuance of writ of preliminary prohibitory
injunction.

During the hearing on the application for Temporary Restraining Order/Injunction on October 20,
2004, plaintiffs presented as witnesses: Cezar T. Quiambao, Jose M. Magno III and Eric Gene
Pilapil who testified in support of the material averments of the plaintiffs in their Amended
Complaint and Supplemental Complaint. Specifically, plaintiff Quiambao testified, among other
things, on the fact of the unlawful denial by defendant Yujuico of his request for the holding of a
special stockholders’ meeting, the location of the principal place of office of the corporation, the
deposit by him and defendant Sumbilla of the Stock and Transfer Book of the corporation in the
Export Industry Bank in Pasig City, the illegal and unjustified reconstitution of said stock and
transfer book, and the damages which he and the corporation sustained as a result of defendants’
unlawful acts including the unauthorized sale of corporate shares of stock.

Plaintiff Magno III testified that he did not attend the Annual Stockholders’ meeting held last March
1, 2004 and that he did not authorize anybody to appear for and in his behalf.

Lastly, witness Pilapil testified on the principal place of business of defendant corporation, the
holding of the Annual Stockholders’ Meeting in a place outside the principal place of business of
the corporation, and the fact that two (2) other stockholders, namely, Jose Magno III and Angel
Umali were neither present nor represented in said meeting, contrary to what was alleged in
defendants’ Answer with Counterclaim (see par. 50, Answer with Counterclaim).

xxx

After a careful evaluation of the records and all the pleadings extant in this case as well as the
testimonies of the witnesses for the plaintiffs, this court is inclined to grant the plaintiffs’ application
for the writs of preliminary prohibitory injunction in order to restrain the defendants from acting as
officers of the corporation and committing further acts inimical to the corporation and to the rest
of the stockholders thereof. It is also evident from the pleadings that defendants would not yield
to the demand of plaintiffs for the maintenance of the status quo until after the resolution of the
merits of the instant controversy.

xxx

The effect of the issuance of this Order would create a hiatus in the action of the board of directors
of STRADEC, pending the determination of the merits of the case and after trial on the merits.
It would thus be for the best interest of the corporation as well as its stockholders that an election
be undertaken of the members of the board and officers pursuant to STRADEC’S Articles of the
corporation (sic) and the Corporation Code of the Philippines, under the supervision of the court.

This is to avoid discontinuity of the operations of the corporation, which may result to its damage
and prejudice.

WHEREFORE, premises considered, let the Writ of Preliminary Injunction issue, upon posting of
the requisite bond in the amount of Five Hundred Thousand Pesos (P500,000.00) to answer for
whatever damages that the defendants would suffer on account of the issuance of the injunction
writ, restraining defendants from acting as officers of the Corporation and committing further acts
inimical to the corporation.

It is likewise ordered that a special stockholders’ meeting in the principal place of office of the
corporation in Bayambang, Pangasinan on December 10, 2004 be held. The Branch Clerk of this
court shall attend the said meeting to observe the proceedings and report his observations to this
court. For this purpose, the defendant Bonifacio Sumbilla is ordered to surrender to the court, not
later than December 3, 2004, the duplicate key given to him by Export Industry Bank, Shaw Blvd.,
Pasig City, of the safety deposit box where he and plaintiff Cezar T. Quiambao deposited the
Original Stock and Transfer Book of STRADEC which shall be the basis in the determination of
the corporate stockholding during the meeting scheduled on the above-mentioned date.

SO ORDERED.

In compliance with the above Order, the court sheriff (and respondent Cezar Quiambao, as
claimed by petitioners) caused the opening of the safety deposit box of STRADEC in the Export
Industry Bank, Shaw Boulevard Branch, Pasig City and took custody of its contents.

On December 10, 2004, petitioners, claiming that a motion for reconsideration is a prohibited
pleading under Section 8(3), Rule 1 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies under R.A. No. 8799, filed with the Court of Appeals a Petition for Certiorari with
Prayer for the Issuance of a TRO and/or Preliminary Injunction,11 assailing Judge Emuslan’s
November 25, 2004 Order. The petition was docketed as CA-G.R. SP No. 87785. In the
proceedings before the appellate court, petitioners raised the following issues:

A. Only the SEC, not the RTC, has jurisdiction to order the holding of a special
stockholders’ meeting involving an intra-corporate controversy;

B. Judge Meliton Emuslan had no authority to issue the assailed Order dated November
25, 2004 as Judge Aurelio Ralar, Jr. was already the presiding judge of RTC, Branch 48,
Urdaneta City;12 and

C. Assuming Judge Emuslan had authority to issue the assailed Order, he nonetheless
acted with grave abuse of discretion amounting to lack or excess of jurisdiction.

Meanwhile, on the same day (December 10), as directed in the November 25, 2004 Order of
Judge Emuslan, a special stockholders’ meeting of STRADEC was held in Bayambang,
Pangasinan wherein a new set of directors were elected for the term 2004-2005, namely: Cezar
T. Quiambao, Anthony K. Quiambao, and Simplicio T. Quiambao, Jr. Immediately thereafter, the
new directors elected the following officers: Cezar T. Quiambao as Chairman and President; Eric
C. Pilapil as Corporate Secretary; Anthony K. Quiambao as Corporate Treasurer; and Albert M.
Rasalan as Assistant Corporate Secretary.

On March 31, 2005, the Court of Appeals rendered a Decision13 in CA-G.R. SP No. 87785,
dismissing the Petition for Certiorari. It upheld the jurisdiction of the RTC over the controversy
and sustained the validity of Judge Emuslan’s Order of November 25, 2004. Petitioners’ motion
for reconsideration was denied in a Resolution dated June 29, 2005.14

Hence, the instant Petition for Review on Certiorari.

FIRST, petitioners contend that the Court of Appeals erred in ruling that the RTC has the power
to call a special stockholders’ meeting involving an intra-corporate controversy. They maintain
that it is only the SEC that may do so to be held under its supervision.

The respondents, in their comment, counter that the appellate court correctly ruled that the power
to hear and decide controversies involving intra-corporate disputes, as well as to act on matters
incidental and necessary thereto, have been transferred from the SEC to the RTCs designated
as Special Commercial Courts. It would be the height of absurdity, they argue, to require the filing
of a separate case with the SEC for the sole purpose of asking the said agency to order the
holding of a special stockholders’ meeting where there is already a pending case involving the
same matter before the proper court.

We agree with respondents.

An intra-corporate controversy is one which "pertains to any of the following relationships: (1)
between the corporation, partnership or association and the public; (2) between the corporation,
partnership or association and the State in so far as its franchise, permit or license to operate is
concerned; (3) between the corporation, partnership or association and its stockholders, partners,
members or officers; and (4) among the stockholders, partners or associates
themselves."15 There is thus no dispute that respondents’ complaint in Civil (SEC) Case No. U-
14 before the RTC, Branch 48, Urdaneta City involves an intra-corporate controversy, the
contending parties being stockholders and officers of a corporation.

Originally, Section 5 of Presidential Decree (P.D.) No. 902-A bestowed the SEC original and
exclusive jurisdiction over cases involving the following:

(a) Devices or schemes employed by, or any act of, the board of directors, business
associates, its officers or partners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or of the stockholders, partners, or members
of associations registered with the Commission;

(b) Controversies arising out of intra-corporate or partnership relations, between and

among stockholders, members or associates; between any or all of them and the
corporation, partnership or association and the State insofar as it concerns their individual
franchise or right as such entity;

(c) Controversies in the election or appointment of directors, trustees, officers or managers

of such corporations, partnership or associations;

(d) Petitioners of corporations, partnerships or associations to be declared in the state of

suspension of payment in cases where the corporation, partnership or association
possesses sufficient property to cover all its debts but foresees the impossibility of meeting
them when they fall due or in cases where the corporation, partnership or association has
no sufficient assets to cover its liabilities but is under the management of a rehabilitation
receiver or management committee created pursuant to this Decree. 16 (Underscoring
supplied)

Upon the enactment of R.A. No. 8799, otherwise known as "The Securities Regulation Code"
which took effect on August 8, 2000,17 the jurisdiction of the SEC over intra-corporate
controversies and other cases enumerated in Section 5 of P.D. No. 902-A has been transferred
to the courts of general jurisdiction, or the appropriate RTC. Section 5.2 of R.A. No. 8799 provides:

5.2. The Commission’s jurisdiction over all cases enumerated in Section 5 of Presidential Decree
No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional
Trial Court, Provided, That the Supreme Court in the exercise of its authority may designate the
Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission
shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final
resolution which should be resolved within one (1) year from the enactment of this Code. The
Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases
filed as of 30 June 2000 until finally disposed. (Underscoring supplied)
Pursuant to R.A. No. 8799, the Court issued a Resolution dated November 21, 2000 in A.M. No.
00-11-03-SC designating certain branches of the RTC to try and decide cases enumerated in
Section 5 of P.D. No. 902-A. Branch 48 of RTC, Urdaneta City, the court a quo, is among those
designated as a Special Commercial Court. On March 13, 2001, the Court approved the Interim
Rules of Procedure Governing Intra-Corporate Controversies under R.A. No. 8799 which took
effect on April 1, 2001.18 Sections 1 and 2, Rule 6 of the said Rules provide:

SEC. 1. Cases covered. – The provisions of this rule shall apply to election contests in stock and
non-stock corporations.

SEC. 2. Definition. – An election contest refers to any controversy or dispute involving title or
claim to any elective office in a stock or non-stock corporation, the validation of proxies, the
manner and validity of elections, and the qualifications of candidates, including the proclamation
of winners, to the office of director, trustee or other officer directly elected by the stockholders in
a close corporation or by members of a non-stock corporation where the articles of incorporation
or by-laws so provide. (Underscoring supplied)

In Morato v. Court of Appeals,19 we held that pursuant to R.A. No. 8799 and the Interim Rules of
Procedure Governing Intra-Corporate Controversies, "among the powers and functions of the
SEC which were transferred to the RTC include the following: (a) jurisdiction and supervision over
all corporations, partnerships or associations which are the grantees of primary franchises and/or
a license or permit issued by the Government; (b) the approval, rejection, suspension, revocation
or requirement for registration statements, and registration and licensing applications; (c) the
regulation, investigation, or supervision of the activities of persons to ensure compliance; (d) the
supervision, monitoring, suspension or take over the activities of exchanges, clearing agencies,
and other SROs; (e) the imposition of sanctions for the violation of laws and the rules, regulations
and orders issued pursuant thereto; (f) the issuance of cease-and-desist orders to prevent fraud
or injury to the investing public; (g) the compulsion of the officers of any registered corporation or
association to call meetings of stockholders or members thereof under its supervision; and (h) the
exercise of such other powers as may be provided by law as well as those which may be implied
from, or which are necessary or incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these laws."

Clearly, the RTC has the power to hear and decide the intra-corporate controversy of the parties
herein. Concomitant to said power is the authority to issue orders necessary or incidental to the
carrying out of the powers expressly granted to it. Thus, the RTC may, in appropriate cases, order
the holding of a special meeting of stockholders or members of a corporation involving an intra-
corporate dispute under its supervision.

SECOND, petitioners assert that Judge Emuslan did not have the authority to issue the assailed
Order of November 25, 2004 upon the appointment and assumption on "November 2, 2004"
(should be November 12) by Judge Aurelio R. Ralar, Jr. as the regular presiding judge of RTC,
Branch 48, Urdaneta City.

Significantly, respondents never refuted petitioners’ assertion. The Court of Appeals, for its part,
dismissed petitioners’ allegation by merely ruling that "this is the first time they are raising this
issue – which is much too late in the day. In any event, one cannot question the authority of the
court when it does not suit him and accepts such authority when it favors him."20 The ruling
suggests that petitioners are barred by laches and/or estoppel from raising that issue. The
appellate court likewise denied petitioners’ motion to set the case for oral arguments.

The Court of Appeals should have resolved the issue of whether Judge Emuslan had the authority
to issue the assailed Order, a jurisdictional question crucial to the resolution of the petition. It is
elementary that a jurisdictional controversy may be raised at any time.21

Indeed, as early as November 12, 2004, Judge Aurelio Ralar, Jr. assumed his duties as presiding
judge of RTC, Branch 48, Urdaneta City. Evidently, Judge Emuslan’s authority, as pairing judge
of Branch 48, to act on Civil (SEC) Case No. U-14 automatically ceased on that date. Therefore,
he no longer had the authority to issue the Order of November 25, 2004, or thirteen (13) days
after Judge Ralar, Jr. had assumed office. This is clear from this Court’s Circular No. 19-98 dated
February 18, 1998 which mandates:
TO : ALL JUDGES OF THE REGIONAL TRIAL COURTS, METROPOLITAN TRIAL COURTS,
MUNICIPAL TRIAL COURTS IN CITIES, MUNICIPAL TRIAL COURTS, AND MUNICIPAL
CIRCUIT TRIAL COURTS

SUBJECT : EXPANDED AUTHORITY OF PAIRING COURTS

In the interest of efficient administration of justice, the authority of the pairing judge under Circular
No. 7 dated September 23, 1974 (Pairing System for Multiple Sala Stations) to act on incidental
or interlocutory matters and those urgent matters requiring immediate action on cases pertaining
to the paired court shall henceforth be expanded to include all other matters. Thus, whenever a
vacancy occurs by reason of resignation, dismissal, suspension, retirement, death, or prolonged
absence of the presiding judge in a multi-sala station, the judge of the paired court shall take
cognizance of all cases thereat as acting judge therein UNTIL the APPOINTMENT and
ASSUMPTION TO DUTY OF THE REGULAR JUDGE or the designation of an acting presiding
judge or the return of the regular incumbent judge, or until further orders from this Court.

For this purpose, the provisions of Circular No.7, dated September 23, 1974, inconsistent with
this Circular are hereby amended.

x x x. (Underscoring supplied)

Thus, although the RTC, Branch 48, Urdaneta City is clothed with power to take cognizance of
Civil (SEC) Case No. U-14, the exercise of such power is entirely a different matter. Verily, in
Tolentino v. Leviste,22 this Court, speaking through Justice (now Chief Justice) Reynato S. Puno,
held:

x x x. Jurisdiction is not the same as the exercise of jurisdiction. As distinguished from the exercise
of jurisdiction, jurisdiction is the authority to decide a cause, not the decision rendered therein.
Where there is jurisdiction over the person and the subject matter, the decision on all other
questions arising in the case is but an exercise of the jurisdiction. x x x. (Underscoring supplied)

There are instances where a judge may commit errors. He may issue an order without authority.
And if clothed with power, he may exercise it in excess of his authority or with grave abuse of
discretion amounting to lack or excess of jurisdiction. Any of these acts may be struck down as a
nullity through a petition for certiorari,23 as what petitioners did before the Court of Appeals. It
bears stressing that any act or order rendered by a judge without authority, such as the questioned
November 25, 2004 Order, is no order at all. It is void. As such, it cannot be the source of any
right nor the creator of any obligation. All acts performed pursuant to it and all claims emanating
from it have no legal force and effect.24

THIRD, petitioners further contend that even if Judge Emuslan had the authority to issue the
challenged Order, still he issued it with grave abuse of discretion amounting to lack or excess of
jurisdiction. They lament that the Order effectively disposed of the merits of the main case [Civil
(SEC) Case No. U-14].

Unfortunately, despite the significance of this issue, the Court of Appeals totally ignored it by
failing to render a ruling thereon. Respondents, for their part, merely aver that Judge Emuslan
"only had the best interest of STRADEC in mind" when he issued the questioned Order. 25

We find for petitioners.

The duty of the court taking cognizance of an application for a writ of preliminary injunction is to
determine whether the requisites necessary for the grant of such writ are present. The requisites
for the issuance of a writ of preliminary injunction are: (1) the applicant for such writ must show
that he has a clear and unmistakable right that must be protected; and (2) there exists an urgent
and paramount necessity for the writ to prevent serious damage.26

In this case, Judge Emuslan’s November 25, 2004 Order, quoted earlier, is hazy and too
unsubstantial to justify the issuance of a writ of preliminary injunction. The Order does not contain
specific findings of fact and conclusion of law showing that the requirements for the grant of the
injunctive writ are present. It merely mentions the names of witnesses presented by respondents
during the hearing on the application for the issuance of the writ, but there is no specific and
substantial narration of the witnesses’ testimonies to establish the existence of a clear and
unmistakable right on their part that must be protected, as well as the serious damage or
irreparable loss that they would suffer if the writ is not granted. It does not also disclose the specific
evidence formally offered by the applicants. Obviously, the basis of the judge’s conclusion is too
uncertain. Thus, in issuing the questioned November 25, 2004 Order granting a writ of preliminary
injunction, he committed grave abuse of discretion. In Manila International Airport Authority v.
Court of Appeals,27 we held:

In the instant case, however, the trial court’s order of January 20, 1993 was, on its face, bereft of
basis for the issuance of a writ of preliminary injunction. There were no findings of fact or law in
the assailed order indicating that any of the elements essential for the grant of a preliminary
injunction existed. The trial court alluded to hearings during which the parties marked their
respective exhibits and the trial court heard the oral arguments of opposing counsels. However,
it cannot be ascertained what evidence was formally offered and presented by the parties and
given weight and credence by the trial court. The basis for the trial court’s conclusion that K
Services was entitled to a writ of preliminary injunction is unclear.

In its order of August 5, 1993, the trial court stated that it issued the injunction to prevent
irreparable loss that might be caused to K Services. Once more, however, the trial court neglected
to mention what right in esse of K Services, if any, was in danger of being violated and required
the protection of a preliminary injunction.

x x x.

x x x the possibility of irreparable damage without proof of actual existing right is not a ground for
an injunction (Heirs of Asuncion v. Gervacio, Jr., 304 SCRA 322 [1999]). Where the complainant’s
right is doubtful or disputed, injunction is not proper. Absent a clear legal right, the issuance of
the injunctive relief constitutes grave abuse of discretion (Id.).28

Furthermore, Judge Emuslan’s November 25, 2004 Order goes against the concept and objective
of a writ of preliminary injunction. A writ of preliminary injunction is a provisional remedy, an
adjunct to a main suit. It is also a preservative remedy, issued to preserve the status quo of the
things subject of the action or the relations between the parties during the pendency of the suit.
In Selegna Management and Development Corporation v. United Coconut Planters Bank,29 we
held:

x x x. Injunction is not designed to protect contingent or future rights. It is not proper when the
complainant’s right is doubtful or disputed.

x x x, courts should avoid issuing this writ which in effect disposes of the main case without trial
(F. Regalado, Remedial Law Compendium, Vol. I, 639 (7th revised ed., 1999). x x x.
(Underscoring supplied)

In the same case of Manila International Airport Authority v. Court of Appeals,30 we urged the
courts to exercise extreme caution in issuing the writ, thus:

x x x. We remind trial courts that while generally the grant of a writ of preliminary injunction rests
on the sound discretion of the court taking cognizance of the case, extreme caution must be
observed in the exercise of such discretion. The discretion of the court a quo to grant an injunctive
writ must be exercised based on the grounds and in the manner provided by law. Thus, the Court
declared in Garcia v. Burgos:

It has been consistently held that there is no power the exercise of which is more delicate, which
requires greater caution, deliberation and sound discretion, or more dangerous in a doubtful case,
than the issuance of an injunction. It is the strong arm of equity that should never be extended
unless to cases of great injury, where courts of law cannot afford an adequate or commensurate
remedy in damages.

Every court should remember that an injunction is a limitation upon the freedom of action of the
defendant and should not be granted lightly or precipitately. It should be granted only when the
court is fully satisfied that the law permits it and the emergency demands it [citations omitted].
(Underscoring supplied)

To repeat, the purpose of the writ of preliminary injunction is to preserve the status quo until the
court could hear the merits of the case.31 The status quo is the last actual peaceable uncontested
status that preceded the controversy32 which, in the instant case, is the holding of the annual
stockholders’ meeting on March 1, 2004 and the ensuing election of the directors and officers of
STRADEC. But instead of preserving the status quo, Judge Emuslan’s Order messed it up when,
in compliance therewith, a special stockholders’ meeting was held anew and a new set of directors
and officers of STRADEC was elected. That effectively resolved respondents’ principal action
without even a full-blown trial on the merits since the Order impliedly ruled that the March 1, 2004
annual stockholders’ meeting and election are void. Verily, the issuance of the questioned Order
violates the established principle that courts should avoid granting a writ of preliminary injunction
that would in effect dispose of the main case without trial.33

Equally important is the fact that the Order was issued even though respondents’ right to an
injunctive relief is doubtful or has been vehemently disputed. We note that petitioners, in their
answer with counterclaim, raised serious and valid defenses, among which is that the action is
premature since the principal office of STRADEC in Bayambang, Pangasinan is yet to be
established, as authorized by the SEC.34 Obviously, pending the establishment of a principal
office in Bayambang, Pangasinan, all the stockholders’ meetings of STRADEC have been
properly held in their principal office in Pasig City.

Another weighty defense raised by petitioners is that the action has prescribed. One of the reliefs
sought by respondents in the complaint is the nullification of the election of the Board of Directors
and corporate officers held during the March 1, 2004 annual stockholders’ meeting on the ground
of improper venue, in violation of the Corporation Code. Hence, the action involves an election
contest, falling squarely under the Interim Rules of Procedure Governing Intra-Corporate
Controversies under R.A. No. 8799. Sections 1 and 2, Rule 6 of the Interim Rules provide:

SEC. 1. Cases covered. – The provisions of this rule shall apply to election contests in stock and
non-stock corporations.

SEC. 2. Definition. – An election contest refers to any controversy or dispute involving title or
claim to any elective office in a stock or non-stock corporation, the validation of proxies, the
manner and validity of elections, and the qualifications of candidates, including the proclamation
of winners, to the office of director, trustee or other officer directly elected by the stockholders in
a close corporation or by members of a non-stock corporation where the articles of incorporation
or by-laws so provide. (Underscoring supplied)1avvphi1.net

It is important to note that the Court of Appeals itself ruled that respondents’ action before the
RTC, Branch 48, Urdaneta City is an election contest, thus:

Likewise, as clearly provided in Section 1, Rule 1 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies under R.A. No. 8799, among the intra-corporate controversies
transferred to the special courts are:

xxx

(3) Controversies in the election or appointment of directors, trustees, officers, or managers of

corporation, partnerships or associations;

xxx

Undoubtedly, therefore, the instant case is an intra-corporate controversy among the stockholders
themselves relative to the election of directors or officers of STRADEC, specifically between
respondents x x x on one hand and petitioners x x x on the other. x x x. If there is still any doubt
that the Special Corporate Court can call for a stockholders’ meeting, Rule 6 (citing Sections 1
and 2) of the Interim Rules completely puts to rest said issue.

xxx
Clearly, therefore, said Rule empowers the special corporate courts to decide election cases x x
x.35 (Underscoring supplied)

As pointed out by petitioners in their answer with counterclaim, under Section 3, Rule 6 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies under R.A. No. 8799, an
election contest must be "filed within 15 days from the date of the election."36 It was only on August
16, 2004 that respondents instituted an action questioning the validity of the March 1, 2004
stockholders’ election, clearly beyond the 15-day prescriptive period.

In sum, Judge Emuslan, in granting the writ of preliminary injunction, acted with grave abuse of
discretion amounting to lack or excess of jurisdiction.

WHEREFORE, we GRANT the instant petition and reverse the assailed Decision and Resolution
of the Court of Appeals in CA-G.R. SP No. 87785.

The Order dated November 25, 2004 of Judge Meliton G. Emuslan, RTC, Branch 48, Urdaneta
City in Civil (SEC) Case No. U-14 and the special stockholders’ meeting and election held on
December 10, 2004 in Bayambang, Pangasinan are SET ASIDE.

The last actual peaceable uncontested status of the parties prior to the filing by respondents
herein of Civil (SEC) Case No. U-14 is RESTORED.

This case is REMANDED to the RTC, Branch 48, Urdaneta City for further proceedings with
dispatch.

SO ORDERED.

3. Matling Industrial & Commercial Corp. Vs. Coros, G.R. No. 157802, October 12, 2010;

G.R. No. 157802 October 13, 2010

MATLING INDUSTRIAL AND COMMERCIAL CORPORATION, RICHARD K. SPENCER,

CATHERINE SPENCER, AND ALEX MANCILLA, Petitioners,
vs.
RICARDO R. COROS, Respondent.

DECISION

BERSAMIN, J.:

This case reprises the jurisdictional conundrum of whether a complaint for illegal dismissal is
cognizable by the Labor Arbiter (LA) or by the Regional Trial Court (RTC). The determination of
whether the dismissed officer was a regular employee or a corporate officer unravels the
conundrum. In the case of the regular employee, the LA has jurisdiction; otherwise, the RTC
exercises the legal authority to adjudicate.

In this appeal via petition for review on certiorari, the petitioners challenge the decision dated
September 13, 20021 and the resolution dated April 2, 2003,2 both promulgated in C.A.-G.R. SP
No. 65714 entitled Matling Industrial and Commercial Corporation, et al. v. Ricardo R. Coros and
National Labor Relations Commission, whereby by the Court of Appeals (CA) sustained the ruling
of the National Labor Relations Commission (NLRC) to the effect that the LA had jurisdiction
because the respondent was not a corporate officer of petitioner Matling Industrial and
Commercial Corporation (Matling).

Antecedents
After his dismissal by Matling as its Vice President for Finance and Administration, the respondent
filed on August 10, 2000 a complaint for illegal suspension and illegal dismissal against Matling
and some of its corporate officers (petitioners) in the NLRC, Sub-Regional Arbitration Branch XII,
Iligan City.3

The petitioners moved to dismiss the complaint,4 raising the ground, among others, that the
complaint pertained to the jurisdiction of the Securities and Exchange Commission (SEC) due to
the controversy being intra-corporate inasmuch as the respondent was a member of Matling’s
Board of Directors aside from being its Vice-President for Finance and Administration prior to his
termination.

The respondent opposed the petitioners’ motion to dismiss,5 insisting that his status as a member
of Matling’s Board of Directors was doubtful, considering that he had not been formally elected
as such; that he did not own a single share of stock in Matling, considering that he had been made
to sign in blank an undated indorsement of the certificate of stock he had been given in 1992; that
Matling had taken back and retained the certificate of stock in its custody; and that even assuming
that he had been a Director of Matling, he had been removed as the Vice President for Finance
and Administration, not as a Director, a fact that the notice of his termination dated April 10, 2000
showed.

On October 16, 2000, the LA granted the petitioners’ motion to dismiss,6 ruling that the respondent
was a corporate officer because he was occupying the position of Vice President for Finance and
Administration and at the same time was a Member of the Board of Directors of Matling; and that,
consequently, his removal was a corporate act of Matling and the controversy resulting from such
removal was under the jurisdiction of the SEC, pursuant to Section 5, paragraph (c) of Presidential
Decree No. 902.

Ruling of the NLRC

The respondent appealed to the NLRC,7 urging that:

THE HONORABLE LABOR ARBITER COMMITTED GRAVE ABUSE OF DISCRETION

GRANTING APPELLEE’S MOTION TO DISMISS WITHOUT GIVING THE APPELLANT AN
OPPORTUNITY TO FILE HIS OPPOSITION THERETO THEREBY VIOLATING THE BASIC
PRINCIPLE OF DUE PROCESS.

II

THE HONORABLE LABOR ARBITER COMMITTED AN ERROR IN DISMISSING THE CASE

FOR LACK OF JURISDICTION.

On March 13, 2001, the NLRC set aside the dismissal, concluding that the respondent’s complaint
for illegal dismissal was properly cognizable by the LA, not by the SEC, because he was not a
corporate officer by virtue of his position in Matling, albeit high ranking and managerial, not being
among the positions listed in Matling’s Constitution and By-Laws.8 The NLRC disposed thuswise:

WHEREFORE, the Order appealed from is SET ASIDE. A new one is entered declaring and
holding that the case at bench does not involve any intracorporate matter. Hence, jurisdiction to
hear and act on said case is vested with the Labor Arbiter, not the SEC, considering that the
position of Vice-President for Finance and Administration being held by complainant-appellant is
not listed as among respondent's corporate officers.

Accordingly, let the records of this case be REMANDED to the Arbitration Branch of origin in order
that the Labor Arbiter below could act on the case at bench, hear both parties, receive their
respective evidence and position papers fully observing the requirements of due process, and
resolve the same with reasonable dispatch.

SO ORDERED.
The petitioners sought reconsideration,9 reiterating that the respondent, being a member of the
Board of Directors, was a corporate officer whose removal was not within the LA’s jurisdiction.

The petitioners later submitted to the NLRC in support of the motion for reconsideration the
certified machine copies of Matling’s Amended Articles of Incorporation and By Laws to prove
that the President of Matling was thereby granted "full power to create new offices and appoint
the officers thereto, and the minutes of special meeting held on June 7, 1999 by Matling’s Board
of Directors to prove that the respondent was, indeed, a Member of the Board of Directors. 10

Nonetheless, on April 30, 2001, the NLRC denied the petitioners’ motion for reconsideration.11

Ruling of the CA

The petitioners elevated the issue to the CA by petition for certiorari, docketed as C.A.-G.R. No.
SP 65714, contending that the NLRC committed grave abuse of discretion amounting to lack of
jurisdiction in reversing the correct decision of the LA.

In its assailed decision promulgated on September 13, 2002,12 the CA dismissed the petition for
certiorari, explaining:

For a position to be considered as a corporate office, or, for that matter, for one to be considered
as a corporate officer, the position must, if not listed in the by-laws, have been created by the
corporation's board of directors, and the occupant thereof appointed or elected by the same board
of directors or stockholders. This is the implication of the ruling in Tabang v. National Labor
Relations Commission, which reads:

"The president, vice president, secretary and treasurer are commonly regarded as the principal
or executive officers of a corporation, and modern corporation statutes usually designate them as
the officers of the corporation. However, other offices are sometimes created by the charter or
by-laws of a corporation, or the board of directors may be empowered under the by-laws of a
corporation to create additional offices as may be necessary.

It has been held that an 'office' is created by the charter of the corporation and the officer is elected
by the directors or stockholders. On the other hand, an 'employee' usually occupies no office and
generally is employed not by action of the directors or stockholders but by the managing officer
of the corporation who also determines the compensation to be paid to such employee."

This ruling was reiterated in the subsequent cases of Ongkingco v. National Labor Relations
Commission and De Rossi v. National Labor Relations Commission.

The position of vice-president for administration and finance, which Coros used to hold in the
corporation, was not created by the corporation’s board of directors but only by its president or
executive vice-president pursuant to the by-laws of the corporation. Moreover, Coros’
appointment to said position was not made through any act of the board of directors or
stockholders of the corporation. Consequently, the position to which Coros was appointed and
later on removed from, is not a corporate office despite its nomenclature, but an ordinary office in
the corporation.

Coros’ alleged illegal dismissal therefrom is, therefore, within the jurisdiction of the labor arbiter.

WHEREFORE, the petition for certiorari is hereby DISMISSED.

SO ORDERED.

The CA denied the petitioners’ motion for reconsideration on April 2, 2003.13

Issue

Thus, the petitioners are now before the Court for a review on certiorari, positing that the
respondent was a stockholder/member of the Matling’s Board of Directors as well as its Vice
President for Finance and Administration; and that the CA consequently erred in holding that the
LA had jurisdiction.

The decisive issue is whether the respondent was a corporate officer of Matling or not. The
resolution of the issue determines whether the LA or the RTC had jurisdiction over his complaint
for illegal dismissal.

Ruling

The appeal fails.

The Law on Jurisdiction in Dismissal Cases

As a rule, the illegal dismissal of an officer or other employee of a private employer is properly
cognizable by the LA. This is pursuant to Article 217 (a) 2 of the Labor Code, as amended, which
provides as follows:

Article 217. Jurisdiction of the Labor Arbiters and the Commission. - (a) Except as otherwise
provided under this Code, the Labor Arbiters shall have original and exclusive jurisdiction to hear
and decide, within thirty (30) calendar days after the submission of the case by the parties for
decision without extension, even in the absence of stenographic notes, the following cases
involving all workers, whether agricultural or non-agricultural:

1. Unfair labor practice cases;

2. Termination disputes;

3. If accompanied with a claim for reinstatement, those cases that workers may file
involving wages, rates of pay, hours of work and other terms and conditions of
employment;

4. Claims for actual, moral, exemplary and other forms of damages arising from
the employer-employee relations;

5. Cases arising from any violation of Article 264 of this Code, including questions
involving the legality of strikes and lockouts; and

6. Except claims for Employees Compensation, Social Security, Medicare and

maternity benefits, all other claims arising from employer-employee relations,
including those of persons in domestic or household service, involving an amount
exceeding five thousand pesos (₱5,000.00) regardless of whether accompanied
with a claim for reinstatement.

(b) The Commission shall have exclusive appellate jurisdiction over all cases decided by
Labor Arbiters.

(c) Cases arising from the interpretation or implementation of collective bargaining

agreements and those arising from the interpretation or enforcement of company
personnel policies shall be disposed of by the Labor Arbiter by referring the same to the
grievance machinery and voluntary arbitration as may be provided in said agreements.
(As amended by Section 9, Republic Act No. 6715, March 21, 1989).

Where the complaint for illegal dismissal concerns a corporate officer, however, the controversy
falls under the jurisdiction of the Securities and Exchange Commission (SEC), because the
controversy arises out of intra-corporate or partnership relations between and among
stockholders, members, or associates, or 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 the
controversy concerns their individual franchise or right to exist as such entity; or because the
controversy involves the election or appointment of a director, trustee, officer, or manager of such
corporation, partnership, or association.14 Such controversy, among others, is known as an intra-
corporate dispute.

Effective on August 8, 2000, upon the passage of Republic Act No. 8799,15 otherwise known as
The Securities Regulation Code, the SEC’s jurisdiction over all intra-corporate disputes was
transferred to the RTC, pursuant to Section 5.2 of RA No. 8799, to wit:

5.2. The Commission’s jurisdiction over all cases enumerated under Section 5 of Presidential
Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate
Regional Trial Court: Provided, that the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The
Commission shall retain jurisdiction over pending cases involving intra-corporate disputes
submitted for final resolution which should be resolved within one (1) year from the enactment of
this Code. The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.

Considering that the respondent’s complaint for illegal dismissal was commenced on August 10,
2000, it might come under the coverage of Section 5.2 of RA No. 8799, supra, should it turn out
that the respondent was a corporate, not a regular, officer of Matling.

II

Was the Respondent’s Position of Vice President

for Administration and Finance a Corporate Office?

We must first resolve whether or not the respondent’s position as Vice President for Finance and
Administration was a corporate office. If it was, his dismissal by the Board of Directors rendered
the matter an intra-corporate dispute cognizable by the RTC pursuant to RA No. 8799.

The petitioners contend that the position of Vice President for Finance and Administration was a
corporate office, having been created by Matling’s President pursuant to By-Law No. V, as
amended,16 to wit:

BY LAW NO. V
Officers

The President shall be the executive head of the corporation; shall preside over the meetings of
the stockholders and directors; shall countersign all certificates, contracts and other instruments
of the corporation as authorized by the Board of Directors; shall have full power to hire and
discharge any or all employees of the corporation; shall have full power to create new offices and
to appoint the officers thereto as he may deem proper and necessary in the operations of the
corporation and as the progress of the business and welfare of the corporation may demand; shall
make reports to the directors and stockholders and perform all such other duties and functions as
are incident to his office or are properly required of him by the Board of Directors. In case of the
absence or disability of the President, the Executive Vice President shall have the power to
exercise his functions.

The petitioners argue that the power to create corporate offices and to appoint the individuals to
assume the offices was delegated by Matling’s Board of Directors to its President through By-Law
No. V, as amended; and that any office the President created, like the position of the respondent,
was as valid and effective a creation as that made by the Board of Directors, making the office a
corporate office. In justification, they cite Tabang v. National Labor Relations
Commission,17 which held that "other offices are sometimes created by the charter or by-laws of
a corporation, or the board of directors may be empowered under the by-laws of a corporation to
create additional officers as may be necessary."

The respondent counters that Matling’s By-Laws did not list his position as Vice President for
Finance and Administration as one of the corporate offices; that Matling’s By-Law No. III listed
only four corporate officers, namely: President, Executive Vice President, Secretary, and
Treasurer; 18 that the corporate offices contemplated in the phrase "and such other officers as
may be provided for in the by-laws" found in Section 25 of the Corporation Code should be clearly
and expressly stated in the By-Laws; that the fact that Matling’s By-Law No. III dealt with Directors
& Officers while its By-Law No. V dealt with Officers proved that there was a differentiation
between the officers mentioned in the two provisions, with those classified under By-Law No. V
being ordinary or non-corporate officers; and that the officer, to be considered as a corporate
officer, must be elected by the Board of Directors or the stockholders, for the President could only
appoint an employee to a position pursuant to By-Law No. V.

We agree with respondent.

Section 25 of the Corporation Code provides:

Section 25. Corporate officers, quorum.--Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a director, a
treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the
Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or
more positions may be held concurrently by the same person, except that no one shall act as
president and secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on them by
law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide
for a greater majority, a majority of the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate business, and every
decision of at least a majority of the directors or trustees present at a meeting at which there is a
quorum shall be valid as a corporate act, except for the election of officers which shall require the
vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings.

Conformably with Section 25, a position must be expressly mentioned in the By-Laws in order to
be considered as a corporate office. Thus, the creation of an office pursuant to or under a By-Law
enabling provision is not enough to make a position a corporate office. Guerrea v. Lezama,19 the
first ruling on the matter, held that the only officers of a corporation were those given that character
either by the Corporation Code or by the By-Laws; the rest of the corporate officers could be
considered only as employees or subordinate officials. Thus, it was held in Easycall
Communications Phils., Inc. v. King:20

An "office" is created by the charter of the corporation and the officer is elected by the directors
or stockholders. On the other hand, an employee occupies no office and generally is employed
not by the action of the directors or stockholders but by the managing officer of the corporation
who also determines the compensation to be paid to such employee.

In this case, respondent was appointed vice president for nationwide expansion by Malonzo,
petitioner’'s general manager, not by the board of directors of petitioner. It was also Malonzo who
determined the compensation package of respondent. Thus, respondent was an employee, not a
"corporate officer." The CA was therefore correct in ruling that jurisdiction over the case was
properly with the NLRC, not the SEC (now the RTC).

This interpretation is the correct application of Section 25 of the Corporation Code, which plainly
states that the corporate officers are the President, Secretary, Treasurer and such other officers
as may be provided for in the By-Laws. Accordingly, the corporate officers in the context of PD
No. 902-A are exclusively those who are given that character either by the Corporation Code or
by the corporation’s By-Laws.

A different interpretation can easily leave the way open for the Board of Directors to circumvent
the constitutionally guaranteed security of tenure of the employee by the expedient inclusion in
the By-Laws of an enabling clause on the creation of just any corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency administering the
Corporation Code, adopted a similar interpretation of Section 25 of the Corporation Code in its
Opinion dated November 25, 1993,21 to wit:

Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the
corporate officers enumerated in the by-laws are the exclusive Officers of the corporation and the
Board has no power to create other Offices without amending first the corporate By-
laws. However, the Board may create appointive positions other than the positions of
corporate Officers, but the persons occupying such positions are not considered as
corporate officers within the meaning of Section 25 of the Corporation Code and are not
empowered to exercise the functions of the corporate Officers, except those functions lawfully
delegated to them. Their functions and duties are to be determined by the Board of
Directors/Trustees.

Moreover, the Board of Directors of Matling could not validly delegate the power to create a
corporate office to the President, in light of Section 25 of the Corporation Code requiring the Board
of Directors itself to elect the corporate officers. Verily, the power to elect the corporate officers
was a discretionary power that the law exclusively vested in the Board of Directors, and could not
be delegated to subordinate officers or agents.22 The office of Vice President for Finance and
Administration created by Matling’s President pursuant to By Law No. V was an ordinary, not a
corporate, office.

To emphasize, the power to create new offices and the power to appoint the officers to occupy
them vested by By-Law No. V merely allowed Matling’s President to create non-corporate offices
to be occupied by ordinary employees of Matling. Such powers were incidental to the President’s
duties as the executive head of Matling to assist him in the daily operations of the business.

The petitioners’ reliance on Tabang, supra, is misplaced. The statement in Tabang, to the effect
that offices not expressly mentioned in the By-Laws but were created pursuant to a By-Law
enabling provision were also considered corporate offices, was plainly obiter dictum due to the
position subject of the controversy being mentioned in the By-Laws. Thus, the Court held therein
that the position was a corporate office, and that the determination of the rights and liabilities
arising from the ouster from the position was an intra-corporate controversy within the SEC’s
jurisdiction.

In Nacpil v. Intercontinental Broadcasting Corporation,23 which may be the more appropriate

ruling, the position subject of the controversy was not expressly mentioned in the By-Laws, but
was created pursuant to a By-Law enabling provision authorizing the Board of Directors to create
other offices that the Board of Directors might see fit to create. The Court held there that the
position was a corporate office, relying on the obiter dictum in Tabang.

Considering that the observations earlier made herein show that the soundness of their dicta is
not unassailable, Tabang and Nacpil should no longer be controlling.

III

Did Respondent’s Status as Director and

Stockholder Automatically Convert his Dismissal
into an Intra-Corporate Dispute?

Yet, the petitioners insist that because the respondent was a Director/stockholder of Matling, and
relying on Paguio v. National Labor Relations Commission24 and Ongkingko v. National Labor
Relations Commission,25 the NLRC had no jurisdiction over his complaint, considering that any
case for illegal dismissal brought by a stockholder/officer against the corporation was an intra-
corporate matter that must fall under the jurisdiction of the SEC conformably with the context of
PD No. 902-A.

The petitioners’ insistence is bereft of basis.

To begin with, the reliance on Paguio and Ongkingko is misplaced. In both rulings, the
complainants were undeniably corporate officers due to their positions being expressly mentioned
in the By-Laws, aside from the fact that both of them had been duly elected by the respective
Boards of Directors. But the herein respondent’s position of Vice President for Finance and
Administration was not expressly mentioned in the By-Laws; neither was the position of Vice
President for Finance and Administration created by Matling’s Board of Directors. Lastly, the
President, not the Board of Directors, appointed him.

True it is that the Court pronounced in Tabang as follows:

Also, an intra-corporate controversy is one which arises between a stockholder and the
corporation. There is no distinction, qualification or any exemption whatsoever. The provision is
broad and covers all kinds of controversies between stockholders and corporations.26

However, the Tabang pronouncement is not controlling because it is too sweeping and does not
accord with reason, justice, and fair play. In order to determine whether a dispute constitutes an
intra-corporate controversy or not, the Court considers two elements instead, namely: (a) the
status or relationship of the parties; and (b) the nature of the question that is the subject of their
controversy. This was our thrust in Viray v. Court of Appeals:27

The establishment of any of the relationships mentioned above will not necessarily always confer
jurisdiction over the dispute on the SEC to the exclusion of regular courts. The statement made
in one case that the rule admits of no exceptions or distinctions is not that absolute. The better
policy in determining which body has jurisdiction over a case would be to consider not only the
status or relationship of the parties but also the nature of the question that is the subject of their
controversy.

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. If, for example, a
person leases an apartment owned by a corporation of which he is a stockholder, there should
be no question that a complaint for his ejectment for non-payment of rentals would still come
under the jurisdiction of the regular courts and not of the SEC. By the same token, if one person
injures another in a vehicular accident, the complaint for damages filed by the victim will not come
under the jurisdiction of the SEC simply because of the happenstance that both parties are
stockholders of the same corporation. A contrary interpretation would dissipate the powers of the
regular courts and distort the meaning and intent of PD No. 902-A.

In another case, Mainland Construction Co., Inc. v. Movilla,28 the Court reiterated these
determinants thuswise:

In order that the SEC (now the regular courts) can take cognizance of a case, the controversy
must pertain to any of the following relationships:

a) between the corporation, partnership or association and the public;

b) between the corporation, partnership or association and its stockholders, partners,

members or officers;

c) between the corporation, partnership or association and the State as far as its franchise,
permit or license to operate is concerned; and

d) among the stockholders, partners or associates themselves.

The fact that the parties involved in the controversy are all stockholders or that the parties involved
are the stockholders and the corporation does not necessarily place the dispute within the ambit
of the jurisdiction of SEC. The better policy to be followed in determining jurisdiction over a case
should be to consider concurrent factors such as the status or relationship of the parties or the
nature of the question that is the subject of their controversy. In the absence of any one of these
factors, the SEC will not have jurisdiction. Furthermore, it does not necessarily follow that every
conflict between the corporation and its stockholders would involve such corporate matters as
only the SEC can resolve in the exercise of its adjudicatory or quasi-judicial powers.29
The criteria for distinguishing between corporate officers who may be ousted from office at will,
on one hand, and ordinary corporate employees who may only be terminated for just cause, on
the other hand, do not depend on the nature of the services performed, but on the manner of
creation of the office. In the respondent’s case, he was supposedly at once an employee, a
stockholder, and a Director of Matling. The circumstances surrounding his appointment to office
must be fully considered to determine whether the dismissal constituted an intra-corporate
controversy or a labor termination dispute. We must also consider whether his status as Director
and stockholder had any relation at all to his appointment and subsequent dismissal as Vice
President for Finance and Administration.

Obviously enough, the respondent was not appointed as Vice President for Finance and
Administration because of his being a stockholder or Director of Matling. He had started working
for Matling on September 8, 1966, and had been employed continuously for 33 years until his
termination on April 17, 2000, first as a bookkeeper, and his climb in 1987 to his last position as
Vice President for Finance and Administration had been gradual but steady, as the following
sequence indicates:

1966 – Bookkeeper

1968 – Senior Accountant

1969 – Chief Accountant

1972 – Office Supervisor

1973 – Assistant Treasurer

1978 – Special Assistant for Finance

1980 – Assistant Comptroller

1983 – Finance and Administrative Manager

1985 – Asst. Vice President for Finance and Administration

1987 to April 17, 2000 – Vice President for Finance and Administration

Even though he might have become a stockholder of Matling in 1992, his promotion to the position
of Vice President for Finance and Administration in 1987 was by virtue of the length of quality
service he had rendered as an employee of Matling. His subsequent acquisition of the status of
Director/stockholder had no relation to his promotion. Besides, his status of Director/stockholder
was unaffected by his dismissal from employment as Vice President for Finance and
Administration.1avvphi1

In Prudential Bank and Trust Company v. Reyes,30 a case involving a lady bank manager who
had risen from the ranks but was dismissed, the Court held that her complaint for illegal dismissal
was correctly brought to the NLRC, because she was deemed a regular employee of the bank.
The Court observed thus:

It appears that private respondent was appointed Accounting Clerk by the Bank on July 14, 1963.
From that position she rose to become supervisor. Then in 1982, she was appointed Assistant
Vice-President which she occupied until her illegal dismissal on July 19, 1991. The bank’s
contention that she merely holds an elective position and that in effect she is not a regular
employee is belied by the nature of her work and her length of service with the Bank. As
earlier stated, she rose from the ranks and has been employed with the Bank since 1963 until the
termination of her employment in 1991. As Assistant Vice President of the Foreign Department of
the Bank, she is tasked, among others, to collect checks drawn against overseas banks payable
in foreign currency and to ensure the collection of foreign bills or checks purchased, including the
signing of transmittal letters covering the same. It has been stated that "the primary standard of
determining regular employment is the reasonable connection between the particular activity
performed by the employee in relation to the usual trade or business of the employer. Additionally,
"an employee is regular because of the nature of work and the length of service, not because of
the mode or even the reason for hiring them." As Assistant Vice-President of the Foreign
Department of the Bank she performs tasks integral to the operations of the bank and her length
of service with the bank totaling 28 years speaks volumes of her status as a regular employee of
the bank. In fine, as a regular employee, she is entitled to security of tenure; that is, her services
may be terminated only for a just or authorized cause. This being in truth a case of illegal
dismissal, it is no wonder then that the Bank endeavored to the very end to establish loss of trust
and confidence and serious misconduct on the part of private respondent but, as will be discussed
later, to no avail.

WHEREFORE, we deny the petition for review on certiorari, and affirm the decision of the Court
of Appeals.

Costs of suit to be paid by the petitioners.

SO ORDERED.

4. Reyes vs. Regional Trial Court of Makati, et. Al., G.R. No. 165744, August 11, 2008.

G.R. No. 165744 August 11, 2008

OSCAR C. REYES, petitioner,

vs.
HON. REGIONAL TRIAL COURT OF MAKATI, Branch 142, ZENITH INSURANCE
CORPORATION, and RODRIGO C. REYES, respondents.

DECISION

BRION, J.:

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the
Decision of the Court of Appeals (CA)1 promulgated on May 26, 2004 in CA-G.R. SP No. 74970.
The CA Decision affirmed the Order of the Regional Trial Court (RTC), Branch 142, Makati City
dated November 29, 20022 in Civil Case No. 00-1553 (entitled "Accounting of All Corporate Funds
and Assets, and Damages") which denied petitioner Oscar C. Reyes’ (Oscar) Motion to Declare
Complaint as Nuisance or Harassment Suit.

BACKGROUND FACTS

Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two of the four children of the
spouses Pedro and Anastacia Reyes. Pedro, Anastacia, Oscar, and Rodrigo each owned shares
of stock of Zenith Insurance Corporation (Zenith), a domestic corporation established by their
family. Pedro died in 1964, while Anastacia died in 1993. Although Pedro’s estate was judicially
partitioned among his heirs sometime in the 1970s, no similar settlement and partition appear to
have been made with Anastacia’s estate, which included her shareholdings in Zenith. As of June
30, 1990, Anastacia owned 136,598 shares of Zenith; Oscar and Rodrigo owned 8,715,637 and
4,250 shares, respectively.3

On May 9, 2000, Zenith and Rodrigo filed a complaint4 with the Securities and Exchange
Commission (SEC) against Oscar, docketed as SEC Case No. 05-00-6615. The complaint stated
that it is "a derivative suit initiated and filed by the complainant Rodrigo C. Reyes to obtain an
accounting of the funds and assets of ZENITH INSURANCE CORPORATION which are now
or formerly in the control, custody, and/or possession of respondent [herein petitioner Oscar]
and to determine the shares of stock of deceased spouses Pedro and Anastacia Reyes that
were arbitrarily and fraudulently appropriated [by Oscar] for himself [and] which were not collated
and taken into account in the partition, distribution, and/or settlement of the estate of the deceased
spouses, for which he should be ordered to account for all the income from the time he took these
shares of stock, and should now deliver to his brothers and sisters their just and respective
shares."5 [Emphasis supplied.]

In his Answer with Counterclaim,6 Oscar denied the charge that he illegally acquired the shares
of Anastacia Reyes. He asserted, as a defense, that he purchased the subject shares with his
own funds from the unissued stocks of Zenith, and that the suit is not a bona fide derivative suit
because the requisites therefor have not been complied with. He thus questioned the SEC’s
jurisdiction to entertain the complaint because it pertains to the settlement of the estate of
Anastacia Reyes.

When Republic Act (R.A.) No. 87997 took effect, the SEC’s exclusive and original jurisdiction over
cases enumerated in Section 5 of Presidential Decree (P.D.) No. 902-A was transferred to the
RTC designated as a special commercial court.8 The records of Rodrigo’s SEC case were thus
turned over to the RTC, Branch 142, Makati, and docketed as Civil Case No. 00-1553.

On October 22, 2002, Oscar filed a Motion to Declare Complaint as Nuisance or Harassment
Suit.9 He claimed that the complaint is a mere nuisance or harassment suit and should, according
to the Interim Rules of Procedure for Intra-Corporate Controversies, be dismissed; and that it is
not a bona fide derivative suit as it partakes of the nature of a petition for the settlement of estate
of the deceased Anastacia that is outside the jurisdiction of a special commercial court. The RTC,
in its Order dated November 29, 2002 (RTC Order), denied the motion in part and declared:

A close reading of the Complaint disclosed the presence of two (2) causes of action,
namely: a) a derivative suit for accounting of the funds and assets of the corporation which
are in the control, custody, and/or possession of the respondent [herein petitioner Oscar]
with prayer to appoint a management committee; and b) an action for determination of the
shares of stock of deceased spouses Pedro and Anastacia Reyes allegedly taken by
respondent, its accounting and the corresponding delivery of these shares to the parties’
brothers and sisters. The latter is not a derivative suit and should properly be threshed out
in a petition for settlement of estate.

Accordingly, the motion is denied. However, only the derivative suit consisting of the first
cause of action will be taken cognizance of by this Court.10

Oscar thereupon went to the CA on a petition for certiorari, prohibition, and mandamus11 and
prayed that the RTC Order be annulled and set aside and that the trial court be prohibited from
continuing with the proceedings. The appellate court affirmed the RTC Order and denied the
petition in its Decision dated May 26, 2004. It likewise denied Oscar’s motion for reconsideration
in a Resolution dated October 21, 2004.

Petitioner now comes before us on appeal through a petition for review on certiorari under Rule
45 of the Rules of Court.

ASSIGNMENT OF ERRORS

Petitioner Oscar presents the following points as conclusions the CA should have made:

1. that the complaint is a mere nuisance or harassment suit that should be dismissed under the
Interim Rules of Procedure of Intra-Corporate Controversies; and

2. that the complaint is not a bona fide derivative suit but is in fact in the nature of a petition for
settlement of estate; hence, it is outside the jurisdiction of the RTC acting as a special commercial
court.

Accordingly, he prays for the setting aside and annulment of the CA decision and resolution, and
the dismissal of Rodrigo’s complaint before the RTC.

THE COURT’S RULING

We find the petition meritorious.

The core question for our determination is whether the trial court, sitting as a special commercial
court, has jurisdiction over the subject matter of Rodrigo’s complaint. To resolve it, we rely on the
judicial principle that "jurisdiction over the subject matter of a case is conferred by law and is
determined by the allegations of the complaint, irrespective of whether the plaintiff is entitled to
all or some of the claims asserted therein."12

JURISDICTION OF SPECIAL COMMERCIAL COURTS

P.D. No. 902-A enumerates the cases over which the SEC (now the RTC acting as a special
commercial court) exercises exclusive jurisdiction:

SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnership, and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:

a) Devices or schemes employed by or any acts of the board of directors, business

associates, its officers or partners, amounting to fraud and misrepresentation
which may be detrimental to the interest of the public and/or of the stockholders,
partners, members of associations or organizations registered with the
Commission.

b) Controversies arising out of intra-corporate or partnership relations, between

and among stockholders, members, or associates; between any or all of them and
the corporation, partnership or association of which they are stockholders,
members, or associates, respectively; and between such corporation, partnership
or association and the State insofar as it concerns their individual franchise or right
to exist as such entity; and

c) Controversies in the election or appointment of directors, trustees, officers, or

managers of such corporations, partnerships, or associations.

The allegations set forth in Rodrigo’s complaint principally invoke Section 5, paragraphs (a) and
(b) above as basis for the exercise of the RTC’s special court jurisdiction. Our focus in examining
the allegations of the complaint shall therefore be on these two provisions.

Fraudulent Devices and Schemes

The rule is that a complaint must contain a plain, concise, and direct statement of the ultimate
facts constituting the plaintiff’s cause of action and must specify the relief sought. 13 Section 5,
Rule 8 of the Revised Rules of Court provides that in all averments of fraud or mistake, the
circumstances constituting fraud or mistake must be stated with particularity.14 These rules
find specific application to Section 5(a) of P.D. No. 902-A which speaks of corporate devices or
schemes that amount to fraud or misrepresentation detrimental to the public and/or to the
stockholders.

In an attempt to hold Oscar responsible for corporate fraud, Rodrigo alleged in the complaint the
following:

3. This is a complaint…to determine the shares of stock of the deceased spouses

Pedro and Anastacia Reyes that were arbitrarily and fraudulently appropriated for
himself [herein petitioner Oscar] which were not collated and taken into account in the
partition, distribution, and/or settlement of the estate of the deceased Spouses Pedro and
Anastacia Reyes, for which he should be ordered to account for all the income from the
time he took these shares of stock, and should now deliver to his brothers and sisters their
just and respective shares with the corresponding equivalent amount of P7,099,934.82
plus interest thereon from 1978 representing his obligations to the Associated Citizens’
Bank that was paid for his account by his late mother, Anastacia C. Reyes. This amount
was not collated or taken into account in the partition or distribution of the estate of their
late mother, Anastacia C. Reyes.
 3.1. Respondent Oscar C. Reyes, through other schemes of fraud including
misrepresentation, unilaterally, and for his own benefit, capriciously transferred
and took possession and control of the management of Zenith Insurance
Corporation which is considered as a family corporation, and other properties and
businesses belonging to Spouses Pedro and Anastacia Reyes.

xxxx

4.1. During the increase of capitalization of Zenith Insurance Corporation, sometime in

1968, the property covered by TCT No. 225324 was illegally and fraudulently used by
respondent as a collateral.

xxxx

5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme,

the shareholdings of their deceased mother, Doña Anastacia C. Reyes, shares of
stocks and [sic] valued in the corporate books at P7,699,934.28, more or less,
excluding interest and/or dividends, had been transferred solely in the name of
respondent. By such fraudulent manipulations and misrepresentation, the shareholdings
of said respondent Oscar C. Reyes abruptly increased to P8,715,637.00 [sic] and
becomes [sic] the majority stockholder of Zenith Insurance Corporation, which portion of
said shares must be distributed equally amongst the brothers and sisters of the
respondent Oscar C. Reyes including the complainant herein.

xxxx

9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes
valued at P7,099,934.28 were illegally and fraudulently transferred solely to the
respondent’s [herein petitioner Oscar] name and installed himself as a majority
stockholder of Zenith Insurance Corporation [and] thereby deprived his brothers and
sisters of their respective equal shares thereof including complainant hereto.

xxxx

10.1 By refusal of the respondent to account of his [sic] shareholdings in the

company, he illegally and fraudulently transferred solely in his name wherein [sic]
the shares of stock of the deceased Anastacia C. Reyes [which] must be properly
collated and/or distributed equally amongst the children, including the complainant
Rodrigo C. Reyes herein, to their damage and prejudice.

xxxx

11.1 By continuous refusal of the respondent to account of his [sic] shareholding with
Zenith Insurance Corporation[,] particularly the number of shares of stocks illegally and
fraudulently transferred to him from their deceased parents Sps. Pedro and Anastacia
Reyes[,] which are all subject for collation and/or partition in equal shares among their
children. [Emphasis supplied.]

Allegations of deceit, machination, false pretenses, misrepresentation, and threats are largely
conclusions of law that, without supporting statements of the facts to which the allegations of fraud
refer, do not sufficiently state an effective cause of action. 15 The late Justice Jose Feria, a noted
authority in Remedial Law, declared that fraud and mistake are required to be averred with
particularity in order to enable the opposing party to controvert the particular facts allegedly
constituting such fraud or mistake.16

Tested against these standards, we find that the charges of fraud against Oscar were not properly
supported by the required factual allegations. While the complaint contained allegations of fraud
purportedly committed by him, these allegations are not particular enough to bring the controversy
within the special commercial court’s jurisdiction; they are not statements of ultimate facts, but
are mere conclusions of law: how and why the alleged appropriation of shares can be
characterized as "illegal and fraudulent" were not explained nor elaborated on.
Not every allegation of fraud done in a corporate setting or perpetrated by corporate officers will
bring the case within the special commercial court’s jurisdiction. To fall within this jurisdiction,
there must be sufficient nexus showing that the corporation’s nature, structure, or powers were
used to facilitate the fraudulent device or scheme. Contrary to this concept, the complaint
presented a reverse situation. No corporate power or office was alleged to have facilitated the
transfer of the shares; rather, Oscar, as an individual and without reference to his corporate
personality, was alleged to have transferred the shares of Anastacia to his name, allowing him to
become the majority and controlling stockholder of Zenith, and eventually, the corporation’s
President. This is the essence of the complaint read as a whole and is particularly demonstrated
under the following allegations:

5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the
shareholdings of their deceased mother, Doña Anastacia C. Reyes, shares of stocks and
[sic] valued in the corporate books at P7,699,934.28, more or less, excluding interest
and/or dividends, had been transferred solely in the name of respondent. By such
fraudulent manipulations and misrepresentation, the shareholdings of said
respondent Oscar C. Reyes abruptly increased to P8,715,637.00 [sic] and becomes
[sic] the majority stockholder of Zenith Insurance Corporation, which portion of said
shares must be distributed equally amongst the brothers and sisters of the respondent
Oscar C. Reyes including the complainant herein.

xxxx

9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C.

Reyes valued at P7,099,934.28 were illegally and fraudulently transferred solely to
the respondent’s [herein petitioner Oscar] name and installed himself as a majority
stockholder of Zenith Insurance Corporation [and] thereby deprived his brothers and
sisters of their respective equal shares thereof including complainant hereto. [Emphasis
supplied.]

In ordinary cases, the failure to specifically allege the fraudulent acts does not constitute a ground
for dismissal since such defect can be cured by a bill of particulars. In cases governed by the
Interim Rules of Procedure on Intra-Corporate Controversies, however, a bill of particulars is a
prohibited pleading.17 It is essential, therefore, for the complaint to show on its face what are
claimed to be the fraudulent corporate acts if the complainant wishes to invoke the court’s special
commercial jurisdiction.

We note that twice in the course of this case, Rodrigo had been given the opportunity to study the
propriety of amending or withdrawing the complaint, but he consistently refused. The court’s
function in resolving issues of jurisdiction is limited to the review of the allegations of the complaint
and, on the basis of these allegations, to the determination of whether they are of such nature
and subject that they fall within the terms of the law defining the court’s jurisdiction. Regretfully,
we cannot read into the complaint any specifically alleged corporate fraud that will call for the
exercise of the court’s special commercial jurisdiction. Thus, we cannot affirm the RTC’s
assumption of jurisdiction over Rodrigo’s complaint on the basis of Section 5(a) of P.D. No. 902-
A.18

Intra-Corporate Controversy

A review of relevant jurisprudence shows a development in the Court’s approach in classifying

what constitutes an intra-corporate controversy. Initially, the main consideration in determining
whether a dispute constitutes an intra-corporate controversy was limited to a consideration of the
intra-corporate relationship existing between or among the parties.19 The types of relationships
embraced under Section 5(b), as declared in the case of Union Glass & Container Corp. v.
SEC,20 were as follows:

a) between the corporation, partnership, or association and the public;

b) between the corporation, partnership, or association and its stockholders, partners,

members, or officers;
 c) between the corporation, partnership, or association and the State as far as its
franchise, permit or license to operate is concerned; and

d) among the stockholders, partners, or associates themselves. [Emphasis supplied.]

The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to
the SEC, regardless of the subject matter of the dispute. This came to be known as
the relationship test.

However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc.,21 the
Court introduced the nature of the controversy test. We declared in this case that it is not the
mere existence of an intra-corporate relationship that gives rise to an intra-corporate controversy;
to rely on the relationship test alone will divest the regular courts of their jurisdiction for the sole
reason that the dispute involves a corporation, its directors, officers, or stockholders. We saw that
there is no legal sense in disregarding or minimizing the value of the nature of the transactions
which gives rise to the dispute.

Under the nature of the controversy test, the incidents of that relationship must also be considered
for the purpose of ascertaining whether the controversy itself is intra-corporate.22 The controversy
must not only be rooted in the existence of an intra-corporate relationship, but must as well pertain
to the enforcement of the parties’ correlative rights and obligations under the Corporation Code
and the internal and intra-corporate regulatory rules of the corporation. If the relationship and its
incidents are merely incidental to the controversy or if there will still be conflict even if the
relationship does not exist, then no intra-corporate controversy exists.

The Court then combined the two tests and declared that jurisdiction should be determined by
considering not only the status or relationship of the parties, but also the nature of the question
under controversy.23 This two-tier test was adopted in the recent case of Speed Distribution, Inc.
v. Court of Appeals:24

To determine whether a case involves an intra-corporate controversy, and is to be heard

and decided by the branches of the RTC specifically designated by the Court to try and
decide such cases, two elements must concur: (a) the status or relationship of the parties;
and (2) the nature of the question that is the subject of their controversy.

The first element requires that the controversy must arise out of intra-corporate or
partnership relations between any or all of the parties and the corporation, partnership, or
association of which they are 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 franchises. The second
element requires that the dispute among the parties be intrinsically connected with the
regulation of the corporation. If the nature of the controversy involves matters that are
purely civil in character, necessarily, the case does not involve an intra-corporate
controversy.

Given these standards, we now tackle the question posed for our determination under the specific
circumstances of this case:

Application of the Relationship Test

Is there an intra-corporate relationship between the parties that would characterize the case as
an intra-corporate dispute?

We point out at the outset that while Rodrigo holds shares of stock in Zenith, he holds them in
two capacities: in his own right with respect to the 4,250 shares registered in his name, and as
one of the heirs of Anastacia Reyes with respect to the 136,598 shares registered in her name.
What is material in resolving the issues of this case under the allegations of the complaint is
Rodrigo’s interest as an heir since the subject matter of the present controversy centers on the
shares of stocks belonging to Anastacia, not on Rodrigo’s personally-owned shares nor on his
personality as shareholder owning these shares. In this light, all reference to shares of stocks in
this case shall pertain to the shareholdings of the deceased Anastacia and the parties’ interest
therein as her heirs.

Article 777 of the Civil Code declares that the successional rights are transmitted from the moment
of death of the decedent. Accordingly, upon Anastacia’s death, her children acquired legal title to
her estate (which title includes her shareholdings in Zenith), and they are, prior to the estate’s
partition, deemed co-owners thereof.25 This status as co-owners, however, does not immediately
and necessarily make them stockholders of the corporation. Unless and until there is compliance
with Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not
become registered stockholders of the corporation. Section 63 provides:

Section 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. [Emphasis
supplied.]

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.

Simply stated, the transfer of title by means of succession, though effective and valid between
the parties involved (i.e., between the decedent’s estate and her heirs), does not bind the
corporation and third parties. The transfer must be registered in the books of the corporation to
make the transferee-heir a stockholder entitled to recognition as such both by the corporation and
by third parties.26

We note, in relation with the above statement, that in Abejo v. Dela Cruz27 and TCL Sales
Corporation v. Court of Appeals28 we did not require the registration of the transfer before
considering the transferee a stockholder of the corporation (in effect upholding the existence of
an intra-corporate relation between the parties and bringing the case within the jurisdiction of the
SEC as an intra-corporate controversy). A marked difference, however, exists between these
cases and the present one.

In Abejo and TCL Sales, the transferees held definite and uncontested titles to a specific
number of shares of the corporation; after the transferee had established prima
facie ownership over the shares of stocks in question, registration became a mere formality in
confirming their status as stockholders. In the present case, each of Anastacia’s heirs holds only
an undivided interest in the shares. This interest, at this point, is still inchoate and subject to the
outcome of a settlement proceeding; the right of the heirs to specific, distributive shares of
inheritance will not be determined until all the debts of the estate of the decedent are paid. In
short, the heirs are only entitled to what remains after payment of the decedent’s debts;29 whether
there will be residue remains to be seen. Justice Jurado aptly puts it as follows:

No succession shall be declared unless and until a liquidation of the assets and debts left
by the decedent shall have been made and all his creditors are fully paid. Until a final
liquidation is made and all the debts are paid, the right of the heirs to inherit remains
inchoate. This is so because under our rules of procedure, liquidation is necessary in
order to determine whether or not the decedent has left any liquid assets which may
be transmitted to his heirs.30 [Emphasis supplied.]

Rodrigo must, therefore, hurdle two obstacles before he can be considered a stockholder of
Zenith with respect to the shareholdings originally belonging to Anastacia. First, he must prove
that there are shareholdings that will be left to him and his co-heirs, and this can be determined
only in a settlement of the decedent’s estate. No such proceeding has been commenced to
date. Second, he must register the transfer of the shares allotted to him to make it binding against
the corporation. He cannot demand that this be done unless and until he has established his
specific allotment (and prima facie ownership) of the shares. Without the settlement of
Anastacia’s estate, there can be no definite partition and distribution of the estate to the heirs.
Without the partition and distribution, there can be no registration of the transfer. And without the
registration, we cannot consider the transferee-heir a stockholder who may invoke the existence
of an intra-corporate relationship as premise for an intra-corporate controversy within the
jurisdiction of a special commercial court.

In sum, we find that – insofar as the subject shares of stock (i.e., Anastacia’s shares) are
concerned – Rodrigo cannot be considered a stockholder of Zenith. Consequently, we cannot
declare that an intra-corporate relationship exists that would serve as basis to bring this case
within the special commercial court’s jurisdiction under Section 5(b) of PD 902-A, as amended.
Rodrigo’s complaint, therefore, fails the relationship test.

Application of the Nature of Controversy Test

The body rather than the title of the complaint determines the nature of an action. 31 Our
examination of the complaint yields the conclusion that, more than anything else, the complaint
is about the protection and enforcement of successional rights. The controversy it presents is
purely civil rather than corporate, although it is denominated as a "complaint for accounting of all
corporate funds and assets."

Contrary to the findings of both the trial and appellate courts, we read only one cause of action
alleged in the complaint. The "derivative suit for accounting of the funds and assets of the
corporation which are in the control, custody, and/or possession of the respondent [herein
petitioner Oscar]" does not constitute a separate cause of action but is, as correctly claimed by
Oscar, only an incident to the "action for determination of the shares of stock of deceased spouses
Pedro and Anastacia Reyes allegedly taken by respondent, its accounting and the corresponding
delivery of these shares to the parties’ brothers and sisters." There can be no mistake of the
relationship between the "accounting" mentioned in the complaint and the objective of partition
and distribution when Rodrigo claimed in paragraph 10.1 of the complaint that:

10.1 By refusal of the respondent to account of [sic] his shareholdings in the company, he
illegally and fraudulently transferred solely in his name wherein [sic] the shares of stock of
the deceased Anastacia C. Reyes [which] must be properly collated and/or distributed
equally amongst the children including the complainant Rodrigo C. Reyes herein to their
damage and prejudice.

We particularly note that the complaint contained no sufficient allegation that justified the need for
an accounting other than to determine the extent of Anastacia’s shareholdings for purposes of
distribution.

Another significant indicator that points us to the real nature of the complaint are Rodrigo’s
repeated claims of illegal and fraudulent transfers of Anastacia’s shares by Oscar to the prejudice
of the other heirs of the decedent; he cited these allegedly fraudulent acts as basis for his demand
for the collation and distribution of Anastacia’s shares to the heirs. These claims tell us
unequivocally that the present controversy arose from the parties’ relationship as heirs of
Anastacia and not as shareholders of Zenith. Rodrigo, in filing the complaint, is enforcing his rights
as a co-heir and not as a stockholder of Zenith. The injury he seeks to remedy is one suffered by
an heir (for the impairment of his successional rights) and not by the corporation nor by Rodrigo
as a shareholder on record.

More than the matters of injury and redress, what Rodrigo clearly aims to accomplish through his
allegations of illegal acquisition by Oscar is the distribution of Anastacia’s shareholdings without
a prior settlement of her estate – an objective that, by law and established jurisprudence, cannot
be done. The RTC of Makati, acting as a special commercial court, has no jurisdiction to settle,
partition, and distribute the estate of a deceased. A relevant provision – Section 2 of Rule 90 of
the Revised Rules of Court – that contemplates properties of the decedent held by one of the
heirs declares:
 Questions as to advancement made or alleged to have been made by the deceased to
any heir may be heard and determined by the court having jurisdiction of the estate
proceedings; and the final order of the court thereon shall be binding on the person
raising the questions and on the heir. [Emphasis supplied.]

Worth noting are this Court’s statements in the case of Natcher v. Court of Appeals:32

Matters which involve settlement and distribution of the estate of the decedent fall
within the exclusive province of the probate court in the exercise of its limited
jurisdiction.

xxxx

It is clear that trial courts trying an ordinary action cannot resolve to perform acts
pertaining to a special proceeding because it is subject to specific prescribed rules.
[Emphasis supplied.]

That an accounting of the funds and assets of Zenith to determine the extent and value of
Anastacia’s shareholdings will be undertaken by a probate court and not by a special commercial
court is completely consistent with the probate court’s limited jurisdiction. It has the power to
enforce an accounting as a necessary means to its authority to determine the properties included
in the inventory of the estate to be administered, divided up, and distributed. Beyond this, the
determination of title or ownership over the subject shares (whether belonging to Anastacia or
Oscar) may be conclusively settled by the probate court as a question of collation or
advancement. We had occasion to recognize the court’s authority to act on questions of title or
ownership in a collation or advancement situation in Coca v. Pangilinan33 where we ruled:

It should be clarified that whether a particular matter should be resolved by the Court of
First Instance in the exercise of its general jurisdiction or of its limited probate jurisdiction
is in reality not a jurisdictional question. In essence, it is a procedural question involving a
mode of practice "which may be waived."

As a general rule, the question as to title to property should not be passed upon in the
testate or intestate proceeding. That question should be ventilated in a separate action.
That general rule has qualifications or exceptions justified by expediency and
convenience.

Thus, the probate court may provisionally pass upon in an intestate or testate proceeding
the question of inclusion in, or exclusion from, the inventory of a piece of property without
prejudice to its final determination in a separate action.

Although generally, a probate court may not decide a question of title or ownership,
yet if the interested parties are all heirs, or the question is one of collation or
advancement, or the parties consent to the assumption of jurisdiction by the probate court
and the rights of third parties are not impaired, the probate court is competent to decide
the question of ownership. [Citations omitted. Emphasis supplied.]

In sum, we hold that the nature of the present controversy is not one which may be classified as
an intra-corporate dispute and is beyond the jurisdiction of the special commercial court to
resolve. In short, Rodrigo’s complaint also fails the nature of the controversy test.

DERIVATIVE SUIT

Rodrigo’s bare claim that the complaint is a derivative suit will not suffice to confer jurisdiction on
the RTC (as a special commercial court) if he cannot comply with the requisites for the existence
of a derivative suit. These requisites are:

a. the party bringing suit should be a shareholder during the time of the act or transaction
complained of, the number of shares not being material;
 b. the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief, but the latter has failed or refused to heed his
plea; and

c. the cause of action actually devolves on the corporation; the wrongdoing or harm having
been or being caused to the corporation and not to the particular stockholder bringing the
suit.34

Based on these standards, we hold that the allegations of the present complaint do not amount
to a derivative suit.

First, as already discussed above, Rodrigo is not a shareholder with respect to the shareholdings
originally belonging to Anastacia; he only stands as a transferee-heir whose rights to the share
are inchoate and unrecorded. With respect to his own individually-held shareholdings, Rodrigo
has not alleged any individual cause or basis as a shareholder on record to proceed against
Oscar.

Second, in order that a stockholder may show a right to sue on behalf of the corporation, he must
allege with some particularity in his complaint that he has exhausted his remedies within the
corporation by making a sufficient demand upon the directors or other officers for appropriate
relief with the expressed intent to sue if relief is denied.35 Paragraph 8 of the complaint hardly
satisfies this requirement since what the rule contemplates is the exhaustion of
remedies within the corporate setting:

8. As members of the same family, complainant Rodrigo C. Reyes has resorted [to] and
exhausted all legal means of resolving the dispute with the end view of amicably settling
the case, but the dispute between them ensued.

Lastly, we find no injury, actual or threatened, alleged to have been done to the corporation due
to Oscar’s acts. If indeed he illegally and fraudulently transferred Anastacia’s shares in his own
name, then the damage is not to the corporation but to his co-heirs; the wrongful transfer did not
affect the capital stock or the assets of Zenith. As already mentioned, neither has Rodrigo alleged
any particular cause or wrongdoing against the corporation that he can champion in his capacity
as a shareholder on record.36

In summary, whether as an individual or as a derivative suit, the RTC – sitting as special

commercial court – has no jurisdiction to hear Rodrigo’s complaint since what is involved is the
determination and distribution of successional rights to the shareholdings of Anastacia Reyes.
Rodrigo’s proper remedy, under the circumstances, is to institute a special proceeding for the
settlement of the estate of the deceased Anastacia Reyes, a move that is not foreclosed by the
dismissal of his present complaint.

WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the Court of
Appeals dated May 26, 2004 in CA-G.R. SP No. 74970. The complaint before the Regional Trial
Court, Branch 142, Makati, docketed as Civil Case No. 00-1553, is ordered DISMISSED for lack
of jurisdiction.

SO ORDERED.

Nationality of Corporations

1. People vs. Quashsa, 93 Phil. 333

G.R. No. L-6055 June 12, 1953

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
WILLIAM H. QUASHA, defendant-appellant.

Jose P. Laurel for appellant and William H. Quasha in his own behalf.
Office of the Solicitor General Juan R. Liwag and Assistant Solicitor General Francisco Carreon
for appellee.

REYES, J.:

William H. Quasha, a member of the Philippine bar, was charged in the Court of First Instance of
Manila with the crime of falsification of a public and commercial document in that, having been
entrusted with the preparation and registration of the article of incorporation of the Pacific Airways
Corporation, a domestic corporation organized for the purpose of engaging in business as a
common carrier, he caused it to appear in said article of incorporation that one Arsenio Baylon, a
Filipino citizen, had subscribed to and was the owner of 60.005 per cent of the subscribed capital
stock of the corporation when in reality, as the accused well knew, such was not the case, the
truth being that the owner of the portion of the capital stock subscribed to by Baylon and the
money paid thereon were American citizen whose name did not appear in the article of
incorporation, and that the purpose for making this false statement was to circumvent the
constitutional mandate that no corporation shall be authorize to operate as a public utility in the
Philippines unless 60 per cent of its capital stock is owned by Filipinos.

Found guilty after trial and sentenced to a term of imprisonment and a fine, the accused has
appealed to this Court.

The essential facts are not in dispute. On November 4,1946, the Pacific Airways Corporation
registered its articles of incorporation with the Securities and Exchanged Commission. The article
were prepared and the registration was effected by the accused, who was in fact the organizer of
the corporation. The article stated that the primary purpose of the corporation was to carry on the
business of a common carrier by air, land or water; that its capital stock was P1,000,000,
represented by 9,000 preferred and 100,000 common shares, each preferred share being of the
par value of p100 and entitled to 1/3 vote and each common share, of the par value of P1 and
entitled to one vote; that the amount capital stock actually subscribed was P200,000, and the
names of the subscribers were Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott, James
O'Bannon, Denzel J. Cavin, and William H. Quasha, the first being a Filipino and the other five all
Americans; that Baylon's subscription was for 1,145 preferred shares, of the total value of
P114,500, and for 6,500 common shares, of the total par value of P6,500, while the aggregate
subscriptions of the American subscribers were for 200 preferred shares, of the total par value of
P20,000, and 59,000 common shares, of the total par value of P59,000; and that Baylon and the
American subscribers had already paid 25 per cent of their respective subscriptions. Ostensibly
the owner of, or subscriber to, 60.005 per cent of the subscribed capital stock of the corporation,
Baylon nevertheless did not have the controlling vote because of the difference in voting power
between the preferred shares and the common shares. Still, with the capital structure as it was,
the article of incorporation were accepted for registration and a certificate of incorporation was
issued by the Securities and Exchange Commission.

There is no question that Baylon actually subscribed to 60.005 per cent of the subscribed capital
stock of the corporation. But it is admitted that the money paid on his subscription did not belong
to him but to the Americans subscribers to the corporate stock. In explanation, the accused
testified, without contradiction, that in the process of organization Baylon was made a trustee for
the American incorporators, and that the reason for making Baylon such trustee was as follows:

Q. According to this article of incorporation Arsenio Baylon subscribed to 1,135 preferred

shares with a total value of P1,135. Do you know how that came to be?

A. Yes.

The people who were desirous of forming the corporation, whose names are listed on page 7 of
this certified copy came to my house, Messrs. Shannahan, Onstott, O'Bannon, Caven, Perry and
Anastasakas one evening. There was considerable difficulty to get them all together at one time
because they were pilots. They had difficulty in deciding what their respective share holdings
would be. Onstott had invested a certain amount of money in airplane surplus property and they
had obtained a considerable amount of money on those planes and as I recall they were desirous
of getting a corporation formed right away. And they wanted to have their respective shares
holdings resolved at a latter date. They stated that they could get together that they feel that they
had no time to settle their respective share holdings. We discussed the matter and finally it was
decided that the best way to handle the things was not to put the shares in the name of anyone
of the interested parties and to have someone act as trustee for their respective shares holdings.
So we looked around for a trustee. And he said "There are a lot of people whom I trust." He said,
"Is there someone around whom we could get right away?" I said, "There is Arsenio. He was my
boy during the liberation and he cared for me when i was sick and i said i consider him my friend."
I said. They all knew Arsenio. He is a very kind man and that was what was done. That is how it
came about.

Defendant is accused under article 172 paragraph 1, in connection with article 171, paragraph 4,
of the Revised Penal Code, which read:

ART. 171. Falsification by public officer, employee, or notary or ecclesiastic minister. —

The penalty of prision mayor and a fine not to exceed 5,000 pesos shall be imposed upon
any public officer, employee, or notary who, taking advantage of his official position, shall
falsify a document by committing any of the following acts:

xxx xxx xxx

4. Making untruthful statements in a narration of facts.

ART. 172. Falsification by private individuals and use of falsified documents. — The
penalty of prision correccional in its medium and maximum period and a fine of not more
than 5,000 pesos shall be imposed upon:

xxx xxx xxx

1. Any private individual who shall commit any of the falsifications enumerated in the next
preceding article in any public or official document or letter of exchange or any other kind
of commercial document.

Commenting on the above provision, Justice Albert, in his well-known work on the Revised Penal
Code ( new edition, pp. 407-408), observes, on the authority of U.S. vs. Reyes, (1 Phil., 341), that
the perversion of truth in the narration of facts must be made with the wrongful intent of injuring a
third person; and on the authority of U.S. vs. Lopez (15 Phil., 515), the same author further
maintains that even if such wrongful intent is proven, still the untruthful statement will not
constitute the crime of falsification if there is no legal obligation on the part of the narrator to
disclose the truth. Wrongful intent to injure a third person and obligation on the part of the narrator
to disclose the truth are thus essential to a conviction for a crime of falsification under the above
article of the Revised Penal Code.

Now, as we see it, the falsification imputed in the accused in the present case consists in not
disclosing in the articles of incorporation that Baylon was a mere trustee ( or dummy as the
prosecution chooses to call him) of his American co-incorporators, thus giving the impression that
Baylon was the owner of the shares subscribed to by him which, as above stated, amount to
60.005 per cent of the sub-scribed capital stock. This, in the opinion of the trial court, is a malicious
perversion of the truth made with the wrongful intent circumventing section 8, Article XIV of the
Constitution, which provides that " no franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the Philippines or to
corporation or other entities organized under the law of the Philippines, sixty per centum of the
capital of which is owned by citizens of the Philippines . . . ." Plausible though it may appear at
first glance, this opinion loses validity once it is noted that it is predicated on the erroneous
assumption that the constitutional provision just quoted was meant to prohibit the
mere formation of a public utility corporation without 60 per cent of its capital being owned by the
Filipinos, a mistaken belief which has induced the lower court to that the accused was under
obligation to disclose the whole truth about the nationality of the subscribed capital stock of the
corporation by revealing that Baylon was a mere trustee or dummy of his American co-
incorporators, and that in not making such disclosure defendant's intention was to circumvent the
Constitution to the detriment of the public interests. Contrary to the lower court's assumption, the
Constitution does not prohibit the mere formation of a public utility corporation without the required
formation of Filipino capital. What it does prohibit is the granting of a franchise or other form of
authorization for the operation of a public utility to a corporation already in existence but without
the requisite proportion of Filipino capital. This is obvious from the context, for the constitutional
provision in question qualifies the terms " franchise", "certificate", or "any other form of
authorization" with the phrase "for the operation of a public utility," thereby making it clear that the
franchise meant is not the "primary franchise" that invest a body of men with corporate existence
but the "secondary franchise" or the privilege to operate as a public utility after the corporation
has already come into being.

If the Constitution does not prohibit the mere formation of a public utility corporation with the alien
capital, then how can the accused be charged with having wrongfully intended to circumvent that
fundamental law by not revealing in the articles of incorporation that Baylon was a mere trustee
of his American co-incorporation and that for that reason the subscribed capital stock of the
corporation was wholly American? For the mere formation of the corporation such revelation was
not essential, and the Corporation Law does not require it. Defendant was, therefore, under no
obligation to make it. In the absence of such obligation and of the allege wrongful intent, defendant
cannot be legally convicted of the crime with which he is charged.

It is urged, however, that the formation of the corporation with 60 per cent of its subscribed capital
stock appearing in the name of Baylon was an indispensable preparatory step to the subversion
of the constitutional prohibition and the laws implementing the policy expressed therein. This view
is not correct. For a corporation to be entitled to operate a public utility it is not necessary that it
be organized with 60 per cent of its capital owned by Filipinos from the start. A corporation formed
with capital that is entirely alien may subsequently change the nationality of its capital through
transfer of shares to Filipino citizens. conversely, a corporation originally formed with Filipino
capital may subsequently change the national status of said capital through transfer of shares to
foreigners. What need is there then for a corporation that intends to operate a public utility to
have, at the time of its formation, 60 per cent of its capital owned by Filipinos alone? That condition
may anytime be attained thru the necessary transfer of stocks. The moment for determining
whether a corporation is entitled to operate as a public utility is when it applies for a franchise,
certificate, or any other form of authorization for that purpose. And that can be done after the
corporation has already come into being and not while it is still being formed. And at that moment,
the corporation must show that it has complied not only with the requirement of the Constitution
as to the nationality of its capital, but also with the requirements of the Civil Aviation Law if it is a
common carrier by air, the Revised Administrative Code if it is a common carrier by water, and
the Public Service Law if it is a common carrier by land or other kind of public service.

Equally untenable is the suggestion that defendant should at least be held guilty of an "impossible
crime" under article 59 of the Revised Penal Code. It not being possible to suppose that defendant
had intended to commit a crime for the simple reason that the alleged constitutional prohibition
which he is charged for having tried to circumvent does not exist, conviction under that article is
out of the question.

The foregoing consideration can not but lead to the conclusion that the defendant can not be held
guilty of the crime charged. The majority of the court, however, are also of the opinion that, even
supposing that the act imputed to the defendant constituted falsification at the time it was
perpetrated, still with the approval of the Party Amendment to the Constitution in March, 1947,
which placed Americans on the same footing as Filipino citizens with respect to the right to operate
public utilities in the Philippines, thus doing away with the prohibition in section 8, Article XIV of
the Constitution in so far as American citizens are concerned, the said act has ceased to be an
offense within the meaning of the law, so that defendant can no longer be held criminally liable
therefor.

In view of the foregoing, the judgment appealed from is reversed and the defendant William H.
Quasha acquitted, with costs de oficio.
2. Gamboa vs. Teves, G.R. No. 176579, June 28, 2011

G.R. No. 176579 June 28, 2011

WILSON P. GAMBOA, Petitioner,

vs.
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY JOHN P.
SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION
ON GOOD GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS,
RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF
FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST
PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES EXCHANGE
COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-Intervention.

DECISION

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of
the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by
the government of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH),
an affiliate of First Pacific Company Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance
Telephone Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a
franchise and the right to engage in telecommunications business. In 1969, General Telephone
and Electronics Corporation (GTE), an American company and a major PLDT stockholder, sold
26 percent of the outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc.
(PHI) was incorporated by several persons, including Roland Gapud and Jose Campos, Jr.
Subsequently, PHI became the owner of 111,415 shares of stock of PTIC by virtue of three Deeds
of Assignment executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986,
the 111,415 shares of stock of PTIC held by PHI were sequestered by the Presidential
Commission on Good Government (PCGG). The 111,415 PTIC shares, which represent about
46.125 percent of the outstanding capital stock of PTIC, were later declared by this Court to be
owned by the Republic of the Philippines.2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the
remaining 54 percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-
Agency Privatization Council (IPC) of the Philippine Government announced that it would sell the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, through a public
bidding to be conducted on 4 December 2006. Subsequently, the public bidding was reset to 8
December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia
Presidio Capital, submitted their bids. Parallax won with a bid of ₱25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC
stockholder and buy the 111,415 PTIC shares by matching the bid price of Parallax. However,
First Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded its
right to PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC shares. On
14 February 2007, First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale
and Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding
capital stock of PTIC, with the Philippine Government for the price of ₱25,217,556,000 or
US$510,580,189. The sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of
PTIC shares is actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding
common shares of PLDT. With the sale, First Pacific’s common shareholdings in PLDT
increased from 30.7 percent to 37 percent, thereby increasing the common shareholdings
of foreigners in PLDT to about 81.47 percent. This violates Section 11, Article XII of the 1987
Philippine Constitution which limits foreign ownership of the capital of a public utility to not more
than 40 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary
John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business of
investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total
PLDT outstanding common shares. PHI, on the other hand, was incorporated in 1977, and
became the owner of 111,415 PTIC shares or 46.125 percent of the outstanding capital stock of
PTIC by virtue of three Deeds of Assignment executed by Ramon Cojuangco and Luis Tirso
Rivilla. In 1986, the 111,415 PTIC shares held by PHI were sequestered by the PCGG, and
subsequently declared by this Court as part of the ill-gotten wealth of former President Ferdinand
Marcos. The sequestered PTIC shares were reconveyed to the Republic of the Philippines in
accordance with this Court’s decision4 which became final and executory on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent
of the outstanding common shares of stock of PLDT, and designated the Inter-Agency
Privatization Council (IPC), composed of the Department of Finance and the PCGG, as the
disposing entity. An invitation to bid was published in seven different newspapers from 13 to 24
November 2006. On 20 November 2006, a pre-bid conference was held, and the original deadline
for bidding scheduled on 4 December 2006 was reset to 8 December 2006. The extension was
published in nine different newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest
bidder with a bid of ₱25,217,556,000. The government notified First Pacific, the majority owner of
PTIC shares, of the bidding results and gave First Pacific until 1 February 2007 to exercise its
right of first refusal in accordance with PTIC’s Articles of Incorporation. First Pacific announced
its intention to match Parallax’s bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good Government

conducted a public hearing on the particulars of the then impending sale of the 111,415 PTIC
shares. Respondents Teves and Sevilla were among those who attended the public hearing. The
HR Committee Report No. 2270 concluded that: (a) the auction of the government’s 111,415 PTIC
shares bore due diligence, transparency and conformity with existing legal procedures; and
(b) First Pacific’s intended acquisition of the government’s 111,415 PTIC shares resulting
in First Pacific’s 100% ownership of PTIC will not violate the 40 percent constitutional limit
on foreign ownership of a public utility since PTIC holds only 13.847 percent of the total
outstanding common shares of PLDT.5 On 28 February 2007, First Pacific completed the
acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public
bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC
(the remaining 54 percent of PTIC shares was already owned by First Pacific and its affiliates);
(b) Parallax offered the highest bid amounting to ₱25,217,556,000; (c) pursuant to the right of first
refusal in favor of PTIC and its shareholders granted in PTIC’s Articles of Incorporation, MPAH,
a First Pacific affiliate, exercised its right of first refusal by matching the highest bid offered for
PTIC shares on 13 February 2007; and (d) on 28 February 2007, the sale was consummated
when MPAH paid IPC ₱25,217,556,000 and the government delivered the certificates for the
111,415 PTIC shares. Respondent Pangilinan denies the other allegations of facts of petitioner.
On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory
relief, and declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among
others, that the sale of the 111,415 PTIC shares would result in an increase in First Pacific’s
common shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined with
Japanese NTT DoCoMo’s common shareholdings in PLDT, would result to a total foreign
common shareholdings in PLDT of 51.56 percent which is over the 40 percent constitutional
limit.6 Petitioner asserts:

If and when the sale is completed, First Pacific’s equity in PLDT will go up from 30.7 percent to
37.0 percent of its common – or voting- stockholdings, x x x. Hence, the consummation of the
sale will put the two largest foreign investors in PLDT – First Pacific and Japan’s NTT DoCoMo,
which is the world’s largest wireless telecommunications firm, owning 51.56 percent of PLDT
common equity. x x x With the completion of the sale, data culled from the official website of the
New York Stock Exchange (www.nyse.com) showed that those foreign entities, which own at
least five percent of common equity, will collectively own 81.47 percent of PLDT’s common equity.
xxx

x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which PLDT
submitted to the New York Stock Exchange for the period 2003-2005, revealed that First Pacific
and several other foreign entities breached the constitutional limit of 40 percent ownership as
early as 2003. x x x"7

Petitioner raises the following issues: (1) whether the consummation of the then impending sale
of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of a
public utility; (2) whether public respondents committed grave abuse of discretion in allowing the
sale of the 111,415 PTIC shares to First Pacific; and (3) whether the sale of common shares to
foreigners in excess of 40 percent of the entire subscribed common capital stock violates the
constitutional limit on foreign ownership of a public utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene
and Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the Court
granted the motion and noted the Petition-in-Intervention.

Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin

and/or nullify the sale by respondents of the 111,415 PTIC shares to First Pacific or assignee."
Petitioners-in-intervention claim that, as PLDT subscribers, they have a "stake in the outcome of
the controversy x x x where the Philippine Government is completing the sale of government
owned assets in [PLDT], unquestionably a public utility, in violation of the nationality restrictions
of the Philippine Constitution."

The Issue

This Court is not a trier of facts. Factual questions such as those raised by petitioner,9 which
indisputably demand a thorough examination of the evidence of the parties, are generally beyond
this Court’s jurisdiction. Adhering to this well-settled principle, the Court shall confine the
resolution of the instant controversy solely on the threshold and purely legal issue of whether
the term "capital" in Section 11, Article XII of the Constitution refers to the total common shares
only or to the total outstanding capital stock (combined total of common and non-voting preferred
shares) of PLDT, a public utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks,
only the petition for prohibition is within the original jurisdiction of this court, which however is not
exclusive but is concurrent with the Regional Trial Court and the Court of Appeals. The actions
for declaratory relief,10 injunction, and annulment of sale are not embraced within the original
jurisdiction of the Supreme Court. On this ground alone, the petition could have been dismissed
outright.

While direct resort to this Court may be justified in a petition for prohibition, 11 the Court shall
nevertheless refrain from discussing the grounds in support of the petition for prohibition since on
28 February 2007, the questioned sale was consummated when MPAH paid IPC
₱25,217,556,000 and the government delivered the certificates for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term "capital" in
Section 11, Article XII of the Constitution has far-reaching implications to the national economy,
the Court treats the petition for declaratory relief as one for mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for declaratory
relief as one for mandamus considering the grave injustice that would result in the interpretation
of a banking law. In that case, which involved the crime of rape committed by a foreign tourist
against a Filipino minor and the execution of the final judgment in the civil case for damages on
the tourist’s dollar deposit with a local bank, the Court declared Section 113 of Central Bank
Circular No. 960, exempting foreign currency deposits from attachment, garnishment or any other
order or process of any court, inapplicable due to the peculiar circumstances of the case. The
Court held that "injustice would result especially to a citizen aggrieved by a foreign guest like
accused x x x" that would "negate Article 10 of the Civil Code which provides that ‘in case of doubt
in the interpretation or application of laws, it is presumed that the lawmaking body intended right
and justice to prevail.’" The Court therefore required respondents Central Bank of the Philippines,
the local bank, and the accused to comply with the writ of execution issued in the civil case for
damages and to release the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside the
procedural infirmity of the petition for declaratory relief and treated the same as one for
mandamus. In Alliance, the issue was whether the government unlawfully excluded petitioners,
who were government employees, from the enjoyment of rights to which they were entitled under
the law. Specifically, the question was: "Are the branches, agencies, subdivisions, and
instrumentalities of the Government, including government owned or controlled corporations
included among the four ‘employers’ under Presidential Decree No. 851 which are required to pay
their employees x x x a thirteenth (13th) month pay x x x ?" The Constitutional principle involved
therein affected all government employees, clearly justifying a relaxation of the technical rules of
procedure, and certainly requiring the interpretation of the assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as one for
mandamus if the issue involved has far-reaching implications. As this Court held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for declaratory relief. However,
exceptions to this rule have been recognized. Thus, where the petition has far-reaching
implications and raises questions that should be resolved, it may be treated as one for
mandamus.15 (Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term "capital" in Section
11, Article XII of the Constitution. He prays that this Court declare that the term "capital" refers to
common shares only, and that such shares constitute "the sole basis in determining foreign equity
in a public utility." Petitioner further asks this Court to declare any ruling inconsistent with such
interpretation unconstitutional.

The interpretation of the term "capital" in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy. In fact, a resolution of this issue will determine whether
Filipinos are masters, or second class citizens, in their own country. What is at stake here is
whether Filipinos or foreigners will have effective control of the national economy. Indeed, if ever
there is a legal issue that has far-reaching implications to the entire nation, and to future
generations of Filipinos, it is the threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term "capital" in Section 11, Article
XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No.
157360.16 That case involved the same public utility (PLDT) and substantially the same private
respondents. Despite the importance and novelty of the constitutional issue raised therein and
despite the fact that the petition involved a purely legal question, the Court declined to resolve the
case on the merits, and instead denied the same for disregarding the hierarchy of courts.17 There,
petitioner Fernandez assailed on a pure question of law the Regional Trial Court’s Decision of 21
February 2003 via a petition for review under Rule 45. The Court’s Resolution, denying the
petition, became final on 21 December 2004.

The instant petition therefore presents the Court with another opportunity to finally settle
this purely legal issue which is of transcendental importance to the national economy and a
fundamental requirement to a faithful adherence to our Constitution. The Court must forthwith
seize such opportunity, not only for the benefit of the litigants, but more significantly for the benefit
of the entire Filipino people, to ensure, in the words of the Constitution, "a self-reliant and
independent national economy effectively controlled by Filipinos."18 Besides, in the light of
vague and confusing positions taken by government agencies on this purely legal issue, present
and future foreign investors in this country deserve, as a matter of basic fairness, a categorical
ruling from this Court on the extent of their participation in the capital of public utilities and other
nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue has remained
unresolved for over 75 years since the 1935 Constitution. There is no reason for this Court to
evade this ever recurring fundamental issue and delay again defining the term "capital," which
appears not only in Section 11, Article XII of the Constitution, but also in Section 2, Article XII on
co-production and joint venture agreements for the development of our natural resources, 19 in
Section 7, Article XII on ownership of private lands,20 in Section 10, Article XII on the reservation
of certain investments to Filipino citizens,21 in Section 4(2), Article XIV on the ownership of
educational institutions,22 and in Section 11(2), Article XVI on the ownership of advertising
companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question
the subject sale, which he claims to violate the nationality requirement prescribed in Section 11,
Article XII of the Constitution. If the sale indeed violates the Constitution, then there is a possibility
that PLDT’s franchise could be revoked, a dire consequence directly affecting petitioner’s interest
as a stockholder.

More importantly, there is no question that the instant petition raises matters of transcendental
importance to the public. The fundamental and threshold legal issue in this case, involving the
national economy and the economic welfare of the Filipino people, far outweighs any perceived
impediment in the legal personality of the petitioner to bring this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of
transcendental importance to the public, thus:

In Tañada v. Tuvera, the Court asserted that when the issue concerns a public right and the
object of mandamus is to obtain the enforcement of a public duty, the people are regarded
as the real parties in interest; and because it is sufficient that petitioner is a citizen and as
such is interested in the execution of the laws, he need not show that he has any legal or
special interest in the result of the action. In the aforesaid case, the petitioners sought to
enforce their right to be informed on matters of public concern, a right then recognized in Section
6, Article IV of the 1973 Constitution, in connection with the rule that laws in order to be valid and
enforceable must be published in the Official Gazette or otherwise effectively promulgated. In
ruling for the petitioners’ legal standing, the Court declared that the right they sought to be
enforced ‘is a public right recognized by no less than the fundamental law of the land.’

Legaspi v. Civil Service Commission, while reiterating Tañada, further declared that ‘when a
mandamus proceeding involves the assertion of a public right, the requirement of personal
interest is satisfied by the mere fact that petitioner is a citizen and, therefore, part of the
general ‘public’ which possesses the right.’
Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been
involved under the questioned contract for the development, management and operation of the
Manila International Container Terminal, ‘public interest [was] definitely involved considering
the important role [of the subject contract] . . . in the economic development of the country
and the magnitude of the financial consideration involved.’ We concluded that, as a
consequence, the disclosure provision in the Constitution would constitute sufficient authority for
upholding the petitioner’s standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public
importance, the petitioner has the requisite locus standi.

Definition of the Term "Capital" in

Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:

Section 11. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years. Neither shall any such franchise
or right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or association must be
citizens of the Philippines. (Emphasis supplied)

The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:

Section 5. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of the
capital of which is owned by such citizens, nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years. Neither shall any such franchise
or right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the National Assembly when the public interest so requires. The State shall encourage
equity participation in public utilities by the general public. The participation of foreign investors in
the governing body of any public utility enterprise shall be limited to their proportionate share in
the capital thereof. (Emphasis supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935
Constitution, viz:

Section 8. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
other entities organized under the laws of the Philippines sixty per centum of the capital
of which is owned by citizens of the Philippines, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty years. No franchise or right
shall be granted to any individual, firm, or corporation, except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the public interest so requires.
(Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission,
reminds us that the Filipinization provision in the 1987 Constitution is one of the products of the
spirit of nationalism which gripped the 1935 Constitutional Convention.25 The 1987 Constitution
"provides for the Filipinization of public utilities by requiring that any form of authorization for the
operation of public utilities should be granted only to ‘citizens of the Philippines or to corporations
or associations organized under the laws of the Philippines at least sixty per centum of whose
capital is owned by such citizens.’ The provision is [an express] recognition of the sensitive
and vital position of public utilities both in the national economy and for national
security."26 The evident purpose of the citizenship requirement is to prevent aliens from
assuming control of public utilities, which may be inimical to the national interest. 27 This specific
provision explicitly reserves to Filipino citizens control of public utilities, pursuant to an overriding
economic goal of the 1987 Constitution: to "conserve and develop our patrimony" 28 and ensure
"a self-reliant and independent national economy effectively controlled by Filipinos."29

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum
nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a
corporation to be granted authority to operate a public utility, at least 60 percent of its "capital"
must be owned by Filipino citizens.

The crux of the controversy is the definition of the term "capital." Does the term "capital" in Section
11, Article XII of the Constitution refer to common shares or to the total outstanding capital stock
(combined total of common and non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers
only to common shares because such shares are entitled to vote and it is through voting that
control over a corporation is exercised. Petitioner posits that the term "capital" in Section 11,
Article XII of the Constitution refers to "the ownership of common capital stock subscribed and
outstanding, which class of shares alone, under the corporate set-up of PLDT, can vote and elect
members of the board of directors." It is undisputed that PLDT’s non-voting preferred shares are
held mostly by Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on 16
June 1973 by then President Ferdinand Marcos, requiring every applicant of a PLDT telephone
line to subscribe to non-voting preferred shares to pay for the investment cost of installing the
telephone line.32

Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s

definition of the term "capital."33 Petitioners-in-intervention allege that "the approximate foreign
ownership of common capital stock of PLDT x x x already amounts to at least 63.54% of the total
outstanding common stock," which means that foreigners exercise significant control over PLDT,
patently violating the 40 percent foreign equity limitation in public utilities prescribed by the
Constitution.

Respondents, on the other hand, do not offer any definition of the term "capital" in Section 11,
Article XII of the Constitution. More importantly, private respondents Nazareno and Pangilinan of
PLDT do not dispute that more than 40 percent of the common shares of PLDT are held by
foreigners.

In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly on the

procedural infirmities of the petition and the supposed violation of the due process rights of the
"affected foreign common shareholders." Respondent Nazareno does not deny petitioner’s
allegation of foreigners’ dominating the common shareholdings of PLDT. Nazareno stressed
mainly that the petition "seeks to divest foreign common shareholders purportedly
exceeding 40% of the total common shareholdings in PLDT of their ownership over their
shares." Thus, "the foreign natural and juridical PLDT shareholders must be impleaded in this
suit so that they can be heard."34 Essentially, Nazareno invokes denial of due process on behalf
of the foreign common shareholders.

While Nazareno does not introduce any definition of the term "capital," he states that "among the
factual assertions that need to be established to counter petitioner’s allegations is the
uniform interpretation by government agencies (such as the SEC), institutions and
corporations (such as the Philippine National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both preferred shares and common shares in
"controlling interest" in view of testing compliance with the 40% constitutional limitation
on foreign ownership in public utilities."35

Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in Section 11, Article
XII of the Constitution. Neither does he refute petitioner’s claim of foreigners holding more than
40 percent of PLDT’s common shares. Instead, respondent Pangilinan focuses on the procedural
flaws of the petition and the alleged violation of the due process rights of foreigners. Respondent
Pangilinan emphasizes in his Memorandum (1) the absence of this Court’s jurisdiction over the
petition; (2) petitioner’s lack of standing; (3) mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights. Moreover, respondent Pangilinan
alleges that the issue should be whether "owners of shares in PLDT as well as owners of shares
in companies holding shares in PLDT may be required to relinquish their shares in PLDT and in
those companies without any law requiring them to surrender their shares and also without notice
and trial."

Respondent Pangilinan further asserts that "Section 11, [Article XII of the Constitution]
imposes no nationality requirement on the shareholders of the utility company as a
condition for keeping their shares in the utility company." According to him, "Section 11 does
not authorize taking one person’s property (the shareholder’s stock in the utility company) on the
basis of another party’s alleged failure to satisfy a requirement that is a condition only for that
other party’s retention of another piece of property (the utility company being at least 60% Filipino-
owned to keep its franchise)."36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P.
Sevilla, Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the definition
of the term "capital." In its Memorandum37 dated 24 September 2007, the OSG also limits its
discussion on the supposed procedural defects of the petition, i.e. lack of standing, lack of
jurisdiction, non-inclusion of interested parties, and lack of basis for injunction. The OSG does not
present any definition or interpretation of the term "capital" in Section 11, Article XII of the
Constitution. The OSG contends that "the petition actually partakes of a collateral attack on
PLDT’s franchise as a public utility," which in effect requires a "full-blown trial where all the parties
in interest are given their day in court."38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the
Philippine Stock Exchange (PSE), does not also define the term "capital" and seeks the dismissal
of the petition on the following grounds: (1) failure to state a cause of action against Lim; (2) the
PSE allegedly implemented its rules and required all listed companies, including PLDT, to make
proper and timely disclosures; and (3) the reliefs prayed for in the petition would adversely impact
the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a

stockholder of record of PLDT, contended that the term "capital" in the 1987 Constitution refers
to shares entitled to vote or the common shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution
refers to ownership of shares of stock entitled to vote, i.e., common shares, considering that it is
through voting that control is being exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on
fully nationalized and partially nationalized activities is for Filipino nationals to be always in control
of the corporation undertaking said activities. Otherwise, if the Trial Court’s ruling upholding
respondents’ arguments were to be given credence, it would be possible for the ownership
structure of a public utility corporation to be divided into one percent (1%) common stocks and
ninety-nine percent (99%) preferred stocks. Following the Trial Court’s ruling adopting
respondents’ arguments, the common shares can be owned entirely by foreigners thus creating
an absurd situation wherein foreigners, who are supposed to be minority shareholders, control
the public utility corporation.

xxxx

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial
ownership and the controlling interest.

xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by
the Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares.
Furthermore, ownership of record of shares will not suffice but it must be shown that the legal and
beneficial ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner
PLDT, since it is already admitted that the voting interests of foreigners which would gain entry to
petitioner PLDT by the acquisition of SMART shares through the Questioned Transactions is
equivalent to 82.99%, and the nominee arrangements between the foreign principals and the
Filipino owners is likewise admitted, there is, therefore, a violation of Section 11, Article XII of the
Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court
to support the proposition that the meaning of the word "capital" as used in Section 11, Article XII
of the Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the
shareholder and it allegedly is immaterial how the stock is classified, whether as common or
preferred, cannot stand in the face of a clear legislative policy as stated in the FIA which took
effect in 1991 or way after said opinions were rendered, and as clarified by the above-quoted
Amendments. In this regard, suffice it to state that as between the law and an opinion rendered
by an administrative agency, the law indubitably prevails. Moreover, said Opinions are merely
advisory and cannot prevail over the clear intent of the framers of the Constitution.

In the same vein, the SEC’s construction of Section 11, Article XII of the Constitution is at best
merely advisory for it is the courts that finally determine what a law means.39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A.
Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres,
Ray C. Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that
the term "capital" in Section 11, Article XII of the Constitution includes preferred shares since the
Constitution does not distinguish among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporation’s "capital," without
distinction as to classes of shares. x x x

In this connection, the Corporation Code – which was already in force at the time the present
(1987) Constitution was drafted – defined outstanding capital stock as follows:

Section 137. Outstanding capital stock defined. – The term "outstanding capital stock", as used
in this Code, means the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid, except treasury shares.

Section 137 of the Corporation Code also does not distinguish between common and preferred
shares, nor exclude either class of shares, in determining the outstanding capital stock (the
"capital") of a corporation. Consequently, petitioner’s suggestion to reckon PLDT’s foreign equity
only on the basis of PLDT’s outstanding common shares is without legal basis. The language of
the Constitution should be understood in the sense it has in common use.

xxxx

17. But even assuming that resort to the proceedings of the Constitutional Commission is
necessary, there is nothing in the Record of the Constitutional Commission (Vol. III) – which
petitioner misleadingly cited in the Petition x x x – which supports petitioner’s view that only
common shares should form the basis for computing a public utility’s foreign equity.

xxxx

18. In addition, the SEC – the government agency primarily responsible for implementing the
Corporation Code, and which also has the responsibility of ensuring compliance with the
Constitution’s foreign equity restrictions as regards nationalized activities x x x – has categorically
ruled that both common and preferred shares are properly considered in determining outstanding
capital stock and the nationality composition thereof.40

We agree with petitioner and petitioners-in-intervention. The term "capital" in Section 11, Article
XII of the Constitution refers only to shares of stock entitled to vote in the election of directors,
and thus in the present case only to common shares,41 and not to the total outstanding capital
stock comprising both common and non-voting preferred shares.
The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such
rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That
no share may be deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of shares which have complete voting rights.
Any or all of the shares or series of shares may have a par value or have no par value as may be
provided for in the articles of incorporation: Provided, however, That banks, trust companies,
insurance companies, public utilities, and building and loan associations shall not be permitted to
issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution
of the assets of the corporation in case of liquidation and in the distribution of dividends, or such
other preferences as may be stated in the articles of incorporation which are not violative of the
provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated
par value. The Board of Directors, where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms
and conditions shall be effective upon the filing of a certificate thereof with the Securities and
Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable to the corporation or to its creditors in respect
thereto: Provided; That shares without par value may not be issued for a consideration less than
the value of five (₱5.00) pesos per share: Provided, further, That the entire consideration received
by the corporation for its no-par value shares shall be treated as capital and shall not be available
for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this
Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all
of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other

corporations;

7. Investment of corporate funds in another corporation or business in accordance with

this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with
voting rights.
Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation.43 This is exercised through his vote in the election of directors
because it is the board of directors that controls or manages the corporation.44 In the absence of
provisions in the articles of incorporation denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares. However, preferred shareholders are
often excluded from any control, that is, deprived of the right to vote in the election of directors
and on other matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders.45 In fact, under the Corporation Code
only preferred or redeemable shares can be deprived of the right to vote.46 Common shares
cannot be deprived of the right to vote in any corporate meeting, and any provision in the articles
of incorporation restricting the right of common shareholders to vote is invalid.47

Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term "capital" in Section 11, Article XII
of the Constitution refers only to common shares. However, if the preferred shares also have the
right to vote in the election of directors, then the term "capital" shall include such preferred shares
because the right to participate in the control or management of the corporation is exercised
through the right to vote in the election of directors. In short, the term "capital" in Section 11,
Article XII of the Constitution refers only to shares of stock that can vote in the election of
directors.

This interpretation is consistent with the intent of the framers of the Constitution to place in the
hands of Filipino citizens the control and management of public utilities. As revealed in the
deliberations of the Constitutional Commission, "capital" refers to the voting stock or controlling
interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation"? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP
Law Center who provided us a draft. The phrase that is contained here which we adopted
from the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with
60-40 percent equity invests in another corporation which is permitted by the Corporation Code,
does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.48

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting
stock or controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to
be owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let
us say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the
Filipinos own the nonvoting shares. So we can have a situation where the corporation is
controlled by foreigners despite being the minority because they have the voting capital.
That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and
1935 Constitutions is that according to Commissioner Rodrigo, there are associations that
do not have stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied)

Thus, 60 percent of the "capital" assumes, or should result in, "controlling interest" in the
corporation. Reinforcing this interpretation of the term "capital," as referring to controlling interest
or shares entitled to vote, is the definition of a "Philippine national" in the Foreign Investments Act
of 1991,50 to wit:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership
or association wholly owned by citizens of the Philippines; or a corporation organized under
the laws of the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
corporation organized abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital stock outstanding and
entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where
a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both corporations must be owned and held by citizens
of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of
each of both corporations must be citizens of the Philippines, in order that the corporation, shall
be considered a "Philippine national." (Emphasis supplied)

In explaining the definition of a "Philippine national," the Implementing Rules and Regulations of
the Foreign Investments Act of 1991 provide:

b. "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or

association wholly owned by the citizens of the Philippines; or a corporation organized under
the laws of the Philippines of which at least sixty percent [60%] of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
trustee of funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent [60%] of the fund will accrue to the benefit of the
Philippine nationals; Provided, that where a corporation its non-Filipino stockholders own stocks
in a Securities and Exchange Commission [SEC] registered enterprise, at least sixty percent
[60%] of the capital stock outstanding and entitled to vote of both corporations must be owned
and held by citizens of the Philippines and at least sixty percent [60%] of the members of the
Board of Directors of each of both corporation must be citizens of the Philippines, in order that
the corporation shall be considered a Philippine national. The control test shall be applied for this
purpose.

Compliance with the required Filipino ownership of a corporation shall be determined on

the basis of outstanding capital stock whether fully paid or not, but only such stocks which
are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership
of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting
rights of which have been assigned or transferred to aliens cannot be considered held by
Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are

considered as non-Philippine nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of
the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]."

Under Section 10, Article XII of the Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is owned
by such citizens, or such higher percentage as Congress may prescribe, certain areas of
investments." Thus, in numerous laws Congress has reserved certain areas of investments to
Filipino citizens or to corporations at least sixty percent of the "capital" of which is owned by
Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or
R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro,
Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development
Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6)
Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or
P.D. No. 1521. Hence, the term "capital" in Section 11, Article XII of the Constitution is also
used in the same context in numerous laws reserving certain areas of investments to Filipino
citizens.

To construe broadly the term "capital" as the total outstanding capital stock, including both
common and non-voting preferred shares, grossly contravenes the intent and letter of the
Constitution that the "State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos." A broad definition unjustifiably disregards who
owns the all-important voting stock, which necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term "capital." Let us
assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-
voting preferred shares owned by Filipinos, with both classes of share having a par value of one
peso (₱1.00) per share. Under the broad definition of the term "capital," such corporation would
be considered compliant with the 40 percent constitutional limit on foreign equity of public utilities
since the overwhelming majority, or more than 99.999 percent, of the total outstanding capital
stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of
less than 0.001 percent, exercise control over the public utility. On the other hand, the Filipinos,
holding more than 99.999 percent of the equity, cannot vote in the election of directors and hence,
have no control over the public utility. This starkly circumvents the intent of the framers of the
Constitution, as well as the clear language of the Constitution, to place the control of public utilities
in the hands of Filipinos. It also renders illusory the State policy of an independent national
economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in fact exists in the
present case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of
directors. PLDT’s Articles of Incorporation expressly state that "the holders of Serial Preferred
Stock shall not be entitled to vote at any meeting of the stockholders for the election of
directors or for any other purpose or otherwise participate in any action taken by the
corporation or its stockholders, or to receive notice of any meeting of stockholders." 51

On the other hand, holders of common shares are granted the exclusive right to vote in the
election of directors. PLDT’s Articles of Incorporation52 state that "each holder of Common Capital
Stock shall have one vote in respect of each share of such stock held by him on all matters voted
upon by the stockholders, and the holders of Common Capital Stock shall have the exclusive
right to vote for the election of directors and for all other purposes."53

In short, only holders of common shares can vote in the election of directors, meaning only
common shareholders exercise control over PLDT. Conversely, holders of preferred shares, who
have no voting rights in the election of directors, do not have any control over PLDT. In fact, under
PLDT’s Articles of Incorporation, holders of common shares have voting rights for all purposes,
while holders of preferred shares have no voting right for any purpose whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority of the
common shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet
(GIS),54 which is a document required to be submitted annually to the Securities and Exchange
Commission,55 foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only
66,750,622 common shares.56 In other words, foreigners hold 64.27% of the total number of
PLDT’s common shares, while Filipinos hold only 35.73%. Since holding a majority of the common
shares equates to control, it is clear that foreigners exercise control over PLDT. Such amount of
control unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities
expressly mandated in Section 11, Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that
per share the SIP58 preferred shares earn a pittance in dividends compared to the common
shares. PLDT declared dividends for the common shares at ₱70.00 per share, while the declared
dividends for the preferred shares amounted to a measly ₱1.00 per share.59 So the preferred
shares not only cannot vote in the election of directors, they also have very little and obviously
negligible dividend earning capacity compared to common shares.

As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT common shares
is ₱5.00 per share, whereas the par value of preferred shares is ₱10.00 per share. In other words,
preferred shares have twice the par value of common shares but cannot elect directors and have
only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are
owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares.61 Worse,
preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares
constitute only 22.15%.62 This undeniably shows that beneficial interest in PLDT is not with the
non-voting preferred shares but with the common shares, blatantly violating the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
constitutionally required for the State’s grant of authority to operate a public utility. The undisputed
fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and earn only
1/70 of the dividends that PLDT common shares earn, grossly violates the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership of a public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60
percent of the dividends, of PLDT. This directly contravenes the express command in Section
11, Article XII of the Constitution that "[n]o franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to x x x corporations x x x organized
under the laws of the Philippines, at least sixty per centum of whose capital is owned by such
citizens x x x."

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the election of directors, and thus exercise control over PLDT;
(2) Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the voting
stock, and thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned by
Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends that common
shares earn;63 (5) preferred shares have twice the par value of common shares; and (6) preferred
shares constitute 77.85% of the authorized capital stock of PLDT and common shares only
22.15%. This kind of ownership and control of a public utility is a mockery of the Constitution.

Incidentally, the fact that PLDT common shares with a par value of ₱5.00 have a current stock
market value of ₱2,328.00 per share,64 while PLDT preferred shares with a par value of ₱10.00
per share have a current stock market value ranging from only ₱10.92 to ₱11.06 per share, 65 is
a glaring confirmation by the market that control and beneficial ownership of PLDT rest with the
common shares, not with the preferred shares.

Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution to include
both voting and non-voting shares will result in the abject surrender of our telecommunications
industry to foreigners, amounting to a clear abdication of the State’s constitutional duty to limit
control of public utilities to Filipino citizens. Such an interpretation certainly runs counter to the
constitutional provision reserving certain areas of investment to Filipino citizens, such as the
exploitation of natural resources as well as the ownership of land, educational institutions and
advertising businesses. The Court should never open to foreign control what the Constitution has
expressly reserved to Filipinos for that would be a betrayal of the Constitution and of the national
interest. The Court must perform its solemn duty to defend and uphold the intent and letter of the
Constitution to ensure, in the words of the Constitution, "a self-reliant and independent national
economy effectively controlled by Filipinos."

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly
reserving to Filipinos specific areas of investment, such as the development of natural resources
and ownership of land, educational institutions and advertising business, is self-executing. There
is no need for legislation to implement these self-executing provisions of the Constitution. The
rationale why these constitutional provisions are self-executing was explained in Manila Prince
Hotel v. GSIS,66 thus:

x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a

constitutional mandate, the presumption now is that all provisions of the constitution are self-
executing. If the constitutional provisions are treated as requiring legislation instead of self-
executing, the legislature would have the power to ignore and practically nullify the mandate of
the fundamental law. This can be cataclysmic. That is why the prevailing view is, as it has always
been, that —

. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-
executing. . . . Unless the contrary is clearly intended, the provisions of the Constitution
should be considered self-executing, as a contrary rule would give the legislature
discretion to determine when, or whether, they shall be effective. These provisions would be
subordinated to the will of the lawmaking body, which could make them entirely meaningless by
simply refusing to pass the needed implementing statute. (Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno,
later Chief Justice, agreed that constitutional provisions are presumed to be self-executing.
Justice Puno stated:

Courts as a rule consider the provisions of the Constitution as self-executing, rather than as
requiring future legislation for their enforcement. The reason is not difficult to discern. For if they
are not treated as self-executing, the mandate of the fundamental law ratified by the
sovereign people can be easily ignored and nullified by Congress. Suffused with wisdom
of the ages is the unyielding rule that legislative actions may give breath to constitutional
rights but congressional inaction should not suffocate them.
Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches
and seizures, the rights of a person under custodial investigation, the rights of an accused, and
the privilege against self-incrimination. It is recognized that legislation is unnecessary to enable
courts to effectuate constitutional provisions guaranteeing the fundamental rights of life, liberty
and the protection of property. The same treatment is accorded to constitutional provisions
forbidding the taking or damaging of property for public use without just compensation. (Emphasis
supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing legislation, applied
directly the provisions of the 1935, 1973 and 1987 Constitutions limiting land ownership to
Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of his

land to an alien, and as both the citizen and the alien have violated the law, none of them should
have a recourse against the other, and it should only be the State that should be allowed to
intervene and determine what is to be done with the property subject of the violation. We have
said that what the State should do or could do in such matters is a matter of public policy, entirely
beyond the scope of judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-
5996, June 27, 1956.) While the legislature has not definitely decided what policy should be
followed in cases of violations against the constitutional prohibition, courts of justice
cannot go beyond by declaring the disposition to be null and void as violative of the
Constitution. x x x (Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the
1935 Constitution, or over the last 75 years, not one of the constitutional provisions expressly
reserving specific areas of investments to corporations, at least 60 percent of the "capital" of which
is owned by Filipinos, was enforceable. In short, the framers of the 1935, 1973 and 1987
Constitutions miserably failed to effectively reserve to Filipinos specific areas of investment, like
the operation by corporations of public utilities, the exploitation by corporations of mineral
resources, the ownership by corporations of real estate, and the ownership of educational
institutions. All the legislatures that convened since 1935 also miserably failed to enact
legislations to implement these vital constitutional provisions that determine who will effectively
control the national economy, Filipinos or foreigners. This Court cannot allow such an absurd
interpretation of the Constitution.

This Court has held that the SEC "has both regulatory and adjudicative functions."69 Under its
regulatory functions, the SEC can be compelled by mandamus to perform its statutory duty when
it unlawfully neglects to perform the same. Under its adjudicative or quasi-judicial functions, the
SEC can be also be compelled by mandamus to hear and decide a possible violation of any law
it administers or enforces when it is mandated by law to investigate such violation.1awphi1

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject or
disapprove the Articles of Incorporation of any corporation where "the required percentage of
ownership of the capital stock to be owned by citizens of the Philippines has not been
complied with as required by existing laws or the Constitution." Thus, the SEC is the
government agency tasked with the statutory duty to enforce the nationality requirement
prescribed in Section 11, Article XII of the Constitution on the ownership of public utilities. This
Court, in a petition for declaratory relief that is treated as a petition for mandamus as in the present
case, can direct the SEC to perform its statutory duty under the law, a duty that the SEC has
apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT submitted to
the SEC.

Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the "power and
function" to "suspend or revoke, after proper notice and hearing, the franchise or certificate
of registration of corporations, partnerships or associations, upon any of the grounds
provided by law." The SEC is mandated under Section 5(d) of the same Code with the "power
and function" to "investigate x x x the activities of persons to ensure compliance" with the
laws and regulations that SEC administers or enforces. The GIS that all corporations are required
to submit to SEC annually should put the SEC on guard against violations of the nationality
requirement prescribed in the Constitution and existing laws. This Court can compel the SEC, in
a petition for declaratory relief that is treated as a petition for mandamus as in the present case,
to hear and decide a possible violation of Section 11, Article XII of the Constitution in view of the
ownership structure of PLDT’s voting shares, as admitted by respondents and as stated in PLDT’s
2010 GIS that PLDT submitted to SEC.

WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section 11,
Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common shares, and not to the total outstanding
capital stock (common and non-voting preferred shares). Respondent Chairperson of the
Securities and Exchange Commission is DIRECTED to apply this definition of the term "capital"
in determining the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to
impose the appropriate sanctions under the law.

SO ORDERED.

3. Gamboa vs. Teves, G.R. No. 176579, October 9, 2012

G.R. No. 176579 October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners,

vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P.
SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION
ON GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS,
RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF
FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST
PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES AND
EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
EXCHANGE, Respondents.

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.

RESOLUTION

CARPIO, J.:

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the
Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3)
Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities and Exchange Commission
(SEC)4 (collectively, movants ).

The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfofthe
SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed a Consolidated
Comment on behalf of the State,6 declaring expressly that it agrees with the Court's definition of
the term "capital" in Section 11, Article XII of the Constitution. During the Oral Arguments on 26
June 2012, the OSG reiterated its position consistent with the Court's 28 June 2011 Decision.

We deny the motions for reconsideration.

I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital" in
Section 11, Article XII of the Constitution has far-reaching implications to the national economy.
In fact, a resolution of this issue will determine whether Filipinos are masters, or second-class
citizens, in their own country. What is at stake here is whether Filipinos or foreigners will
have effective control of the Philippine national economy. Indeed, if ever there is a legal issue
that has far-reaching implications to the entire nation, and to future generations of Filipinos, it is
the threshold legal issue presented in this case.

Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in the
interpretation of the term "capital" in Section 11, Article XII of the Constitution undoubtedly
demand an immediate adjudication of this issue. Simply put, the far-reaching implications of
this issue justify the treatment of the petition as one for mandamus.7

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient to
resolve the case although the petition for declaratory relief could be outrightly dismissed for being
procedurally defective. There, appellant admittedly had already committed a breach of the Public
Service Act in relation to the Anti-Dummy Law since it had been employing non- American aliens
long before the decision in a prior similar case. However, the main issue in Luzon
Stevedoring was of transcendental importance, involving the exercise or enjoyment of rights,
franchises, privileges, properties and businesses which only Filipinos and qualified corporations
could exercise or enjoy under the Constitution and the statutes. Moreover, the same issue could
be raised by appellant in an appropriate action. Thus, in Luzon Stevedoring the Court deemed it
necessary to finally dispose of the case for the guidance of all concerned, despite the apparent
procedural flaw in the petition.

The circumstances surrounding the present case, such as the supposed procedural defect of the
petition and the pivotal legal issue involved, resemble those in Luzon Stevedoring. Consequently,
in the interest of substantial justice and faithful adherence to the Constitution, we opted to resolve
this case for the guidance of the public and all concerned parties.

II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."

Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long been
settled and defined to refer to the total outstanding shares of stock, whether voting or non-voting.
In fact, movants claim that the SEC, which is the administrative agency tasked to enforce the 60-
40 ownership requirement in favor of Filipino citizens in the Constitution and various statutes, has
consistently adopted this particular definition in its numerous opinions. Movants point out that with
the 28 June 2011 Decision, the Court in effect introduced a "new" definition or "midstream
redefinition"9 of the term "capital" in Section 11, Article XII of the Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the
term "capital" found in various economic provisions of the 1935, 1973 and 1987 Constitutions.
There has never been a judicial precedent interpreting the term "capital" in the 1935, 1973 and
1987 Constitutions, until now. Hence, it is patently wrong and utterly baseless to claim that the
Court in defining the term "capital" in its 28 June 2011 Decision modified, reversed, or set aside
the purported long-standing definition of the term "capital," which supposedly refers to the total
outstanding shares of stock, whether voting or non-voting. To repeat, until the present case there
has never been a Court ruling categorically defining the term "capital" found in the various
economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the
term "capital" as referring to both voting and non-voting shares (combined total of common and
preferred shares) are, in the first place, conflicting and inconsistent. There is no basis whatsoever
to the claim that the SEC and the DOJ have consistently and uniformly adopted a definition of the
term "capital" contrary to the definition that this Court adopted in its 28 June 2011 Decision.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in
Section 9, Article XIV of the 1973 Constitution was raised, that is, whether the term "capital"
includes "both preferred and common stocks." The issue was raised in relation to a stock-swap
transaction between a Filipino and a Japanese corporation, both stockholders of a domestic
corporation that owned lands in the Philippines. Then Minister of Justice Estelito P. Mendoza
ruled that the resulting ownership structure of the corporation would
be unconstitutional because 60% of the voting stock would be owned by Japanese while
Filipinos would own only 40% of the voting stock, although when the non-voting stock is added,
Filipinos would own 60% of the combined voting and non-voting stock. This ownership structure
is remarkably similar to the current ownership structure of PLDT. Minister Mendoza ruled:

xxxx

Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common and
preferred) while the Japanese investors control sixty percent (60%) of the common (voting)
shares.

It is your position that x x x since Section 9, Article XIV of the Constitution uses the word
"capital," which is construed "to include both preferred and common shares" and "that
where the law does not distinguish, the courts shall not distinguish."

xxxx

In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in

question may not be constitutionally upheld. While it may be ordinary corporate practice to
classify corporate shares into common voting shares and preferred non-voting shares, any
arrangement which attempts to defeat the constitutional purpose should be eschewed. Thus, the
resultant equity arrangement which would place ownership of 60%11 of the common
(voting) shares in the Japanese group, while retaining 60% of the total percentage of
common and preferred shares in Filipino hands would amount to circumvention of the
principle of control by Philippine stockholders that is implicit in the 60% Philippine
nationality requirement in the Constitution. (Emphasis supplied)

In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9,
Article XIV of the 1973 Constitution includes "both preferred and common stocks" treated as the
same class of shares regardless of differences in voting rights and privileges. Minister Mendoza
stressed that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution is
not complied with unless the corporation "satisfies the criterion of beneficial ownership" and
that in applying the same "the primordial consideration is situs of control."

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan
Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied the Voting
Control Test, that is, using only the voting stock to determine whether a corporation is a Philippine
national. The Opinion states:

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine national
because: (1) sixty percent (60%) of its outstanding capital stock entitled to vote is owned by
a Philippine national, the Trustee; and (2) at least sixty percent (60%) of the ERF will accrue to
the benefit of Philippine nationals. Still pursuant to the Control Test, MLRC’s investment in
60% of BFDC’s outstanding capital stock entitled to vote shall be deemed as of Philippine
nationality, thereby qualifying BFDC to own private land.

Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals,
considering that: (1) sixty percent (60%) of their respective outstanding capital stock entitled
to vote is owned by a Philippine national (i.e., by the Trustee, in the case of MLRC; and by MLRC,
in the case of BFDC); and (2) at least 60% of their respective board of directors are Filipino
citizens. (Boldfacing and italicization supplied)

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the 60-40
ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. At the same time, these opinions highlight the conflicting, contradictory, and
inconsistent positions taken by the DOJ and the SEC on the definition of the term "capital" found
in the economic provisions of the Constitution.
The opinions issued by SEC legal officers do not have the force and effect of SEC rules and
regulations because only the SEC en banc can adopt rules and regulations. As expressly
provided in Section 4.6 of the Securities Regulation Code,12 the SEC cannot delegate to any of
its individual Commissioner or staff the power to adopt any rule or regulation. Further, under
Section 5.1 of the same Code, it is the SEC as a collegial body, and not any of its legal
officers, that is empowered to issue opinions and approve rules and regulations. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any
department or office of the Commission, an individual Commissioner or staff member of the
Commission except its review or appellate authority and its power to adopt, alter and
supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of any interested party
any action of any department or office, individual Commissioner, or staff member of the
Commission.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with
transparency and shall have the powers and functions provided by this Code, Presidential Decree
No. 902-A, the Corporation Code, the Investment Houses Law, the Financing Company Act and
other existing laws. Pursuant thereto the Commission shall have, among others, the following
powers and functions:

xxxx

(g) Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with such rules,
regulations and orders;

x x x x (Emphasis supplied)

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions that
have the effect of SEC rules or regulations is ultra vires. Under Sections 4.6 and 5.1(g) of the
Code, only the SEC en banc can "issue opinions" that have the force and effect of rules or
regulations. Section 4.6 of the Code bars the SEC en banc from delegating to any individual
Commissioner or staff the power to adopt rules or regulations. In short, any opinion of
individual Commissioners or SEC legal officers does not constitute a rule or regulation of
the SEC.

The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its
individual commissioners or legal staff, is empowered to issue opinions which have the same
binding effect as SEC rules and regulations, thus:

JUSTICE CARPIO:

So, under the law, it is the Commission En Banc that can issue an

SEC Opinion, correct?

COMMISSIONER GAITE:13

That’s correct, Your Honor.

JUSTICE CARPIO:

Can the Commission En Banc delegate this function to an SEC officer?

COMMISSIONER GAITE:

Yes, Your Honor, we have delegated it to the General Counsel.

JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the Commission En Banc to a

commissioner or an individual employee of the Commission?

COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc...

JUSTICE CARPIO:

What cannot be delegated, among others, is the power to adopt or amend rules
and regulations, correct?

COMMISSIONER GAITE:

That’s correct, Your Honor.

JUSTICE CARPIO:

So, you combine the two (2), the SEC officer, if delegated that power, can
issue an opinion but that opinion does not constitute a rule or regulation,
correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, all of these opinions that you mentioned they are not rules and
regulations, correct?

COMMISSIONER GAITE:

They are not rules and regulations.

JUSTICE CARPIO:

If they are not rules and regulations, they apply only to that particular situation and
will not constitute a precedent, correct?

COMMISSIONER GAITE:

Yes, Your Honor.14 (Emphasis supplied)

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules
and opinions on behalf of the SEC, has adopted even the Grandfather Rule in determining
compliance with the 60-40 ownership requirement in favor of Filipino citizens mandated by the
Constitution for certain economic activities. This prevailing SEC ruling, which the SEC correctly
adopted to thwart any circumvention of the required Filipino "ownership and control," is laid
down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v.
McArthur Mining, Inc., et al.,15 to wit:

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our
natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision
should not diminish that right through the legal fiction of corporate ownership and control.
But the constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored
foreigners contrary to the command of the Constitution. Hence, the Grandfather Rule must be
applied to accurately determine the actual participation, both direct and indirect, of
foreigners in a corporation engaged in a nationalized activity or business.

Compliance with the constitutional limitation(s) on engaging in nationalized activities must be

determined by ascertaining if 60% of the investing corporation’s outstanding capital stock is
owned by "Filipino citizens", or as interpreted, by natural or individual Filipino citizens. If such
investing corporation is in turn owned to some extent by another investing corporation, the same
process must be observed. One must not stop until the citizenships of the individual or natural
stockholders of layer after layer of investing corporations have been established, the very essence
of the Grandfather Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather
Rule. In one of the discussions on what is now Article XII of the present Constitution, the framers
made the following exchange:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with the question: ‘Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation’? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP
Law Center who provided us a draft. The phrase that is contained here which we adopted from
the UP draft is ‘60 percent of voting stock.’

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution to engage in certain economic activities
applies not only to voting control of the corporation, but also to the beneficial ownership of the
corporation. Thus, in our 28 June 2011 Decision we stated:

Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership
of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in
accordance with the constitutional mandate. Otherwise, the corporation is "considered as non-
Philippine national[s]." (Emphasis supplied)

Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine
whether a corporation is a "Philippine national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions
which respondents relied upon, is merely preliminary and an opinion only of such officers. To
repeat, any such opinion does not constitute an SEC rule or regulation. In fact, many of these
opinions contain a disclaimer which expressly states: "x x x the foregoing opinion is based
solely on facts disclosed in your query and relevant only to the particular issue raised therein
and shall not be used in the nature of a standing rule binding upon the Commission in
other cases whether of similar or dissimilar circumstances."16 Thus, the opinions clearly
make a caveat that they do not constitute binding precedents on any one, not even on the SEC
itself.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are neither
conclusive nor controlling and thus, do not bind the Court. It is hornbook doctrine that any
interpretation of the law that administrative or quasi-judicial agencies make is only preliminary,
never conclusive on the Court. The power to make a final interpretation of the law, in this case
the term "capital" in Section 11, Article XII of the 1987 Constitution, lies with this Court, not with
any other government entity.

In his motion for reconsideration, the PSE President cites the cases of National
Telecommunications Commission v. Court of Appeals17 and Philippine Long Distance Telephone
Company v. National Telecommunications Commission18 in arguing that the Court has already
defined the term "capital" in Section 11, Article XII of the 1987 Constitution.19

The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court
of Appeals20 and Philippine Long Distance Telephone Company v. National Telecommunications
Commission,21 the Court did not define the term "capital" as found in Section 11, Article XII of the
1987 Constitution. In fact, these two cases never mentioned, discussed or cited Section 11,
Article XII of the Constitution or any of its economic provisions, and thus cannot serve as
precedent in the interpretation of Section 11, Article XII of the Constitution. These two cases
dealt solely with the determination of the correct regulatory fees under Section 40(e) and (f) of the
Public Service Act, to wit:

(e) For annual reimbursement of the expenses incurred by the Commission in the supervision of
other public services and/or in the regulation or fixing of their rates, twenty centavos for each one
hundred pesos or fraction thereof, of the capital stock subscribed or paid, or if no shares have
been issued, of the capital invested, or of the property and equipment whichever is higher.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or
fraction thereof, of the increased capital. (Emphasis supplied)

The Court’s interpretation in these two cases of the terms "capital stock subscribed or paid,"
"capital stock" and "capital" does not pertain to, and cannot control, the definition of the term
"capital" as used in Section 11, Article XII of the Constitution, or any of the economic provisions
of the Constitution where the term "capital" is found. The definition of the term "capital" found in
the Constitution must not be taken out of context. A careful reading of these two cases reveals
that the terms "capital stock subscribed or paid," "capital stock" and "capital" were defined solely
to determine the basis for computing the supervision and regulation fees under Section 40(e) and
(f) of the Public Service Act.

III.
Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodies
the ideals that the Constitution intends to achieve.22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and
humane society, and establish a Government that shall embody our ideals and aspirations,
promote the common good, conserve and develop our patrimony, and secure to ourselves and
our posterity, the blessings of independence and democracy under the rule of law and a regime
of truth, justice, freedom, love, equality, and peace, do ordain and promulgate this Constitution.
(Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy
the development of a national economy "effectively controlled" by Filipinos:
Section 19. The State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning agency,
when the national interest dictates, reserve to citizens of the Philippines or to corporations or
associations at least sixty per centum of whose capital is owned by such citizens, or such higher
percentage as Congress may prescribe, certain areas of investments. The Congress shall enact
measures that will encourage the formation and operation of enterprises whose capital is wholly
owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and patrimony,
the State shall give preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its national
jurisdiction and in accordance with its national goals and priorities.23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is owned
by such citizens, or such higher percentage as Congress may prescribe, certain areas of
investments." Thus, in numerous laws Congress has reserved certain areas of investments to
Filipino citizens or to corporations at least sixty percent of the "capital" of which is owned by
Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or
R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro,
Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development
Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6)
Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or
P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

Section 11. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years. Neither shall any such franchise
or right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or association must be
citizens of the Philippines. (Emphasis supplied)

This provision, which mandates the Filipinization of public utilities, requires that any form of
authorization for the operation of public utilities shall be granted only to "citizens of the Philippines
or to corporations or associations organized under the laws of the Philippines at least sixty per
centum of whose capital is owned by such citizens." "The provision is [an express] recognition
of the sensitive and vital position of public utilities both in the national economy and for
national security."24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1)
Filipino citizens, or (2) corporations or associations at least 60 percent of whose "capital" is owned
by Filipino citizens. Hence, in the case of individuals, only Filipino citizens can validly own and
operate a public utility. In the case of corporations or associations, at least 60 percent of their
"capital" must be owned by Filipino citizens. In other words, under Section 11, Article XII of
the 1987 Constitution, to own and operate a public utility a corporation’s capital must at
least be 60 percent owned by Philippine nationals.

IV.
Definition of "Philippine National"
Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress
enacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended, which
defined a "Philippine national" as follows:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership
or association wholly owned by citizens of the Philippines; or a corporation organized under
the laws of the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
corporation organized abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital stock outstanding and
entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where
a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both corporations must be owned and held by citizens
of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of
each of both corporations must be citizens of the Philippines, in order that the corporation, shall
be considered a "Philippine national." (Boldfacing, italicization and underscoring supplied)

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen,
or a domestic corporation at least "60% of the capital stock outstanding and entitled to vote"
is owned by Philippine citizens.

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided
in its predecessor statute, Executive Order No. 226 or the Omnibus Investments Code of
1987,25 which was issued by then President Corazon C. Aquino. Article 15 of this Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership
or association wholly-owned by citizens of the Philippines; or a corporation organized under
the laws of the Philippines of which at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
trustee of funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own
stock in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and
entitled to vote of both corporations must be owned and held by the citizens of the Philippines
and at least sixty per cent (60%) of the members of the Board of Directors of both corporations
must be citizens of the Philippines in order that the corporation shall be considered a Philippine
national. (Boldfacing, italicization and underscoring supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is
not a ‘Philippine national’ x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a written
certificate to the effect that such business or economic activity x x x would not conflict with the
Constitution or laws of the Philippines."27 Thus, a "non-Philippine national" cannot own and
operate a reserved economic activity like a public utility. This means, of course, that only a
"Philippine national" can own and operate a public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code
of 1987 was a reiteration of the meaning of such term as provided in Article 14 of the Omnibus
Investments Code of 1981,28 to wit:

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership
or association wholly owned by citizens of the Philippines; or a corporation organized under
the laws of the Philippines of which at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
trustee of funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own
stock in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and
entitled to vote of both corporations must be owned and held by the citizens of the Philippines
and at least sixty per cent (60%) of the members of the Board of Directors of both corporations
must be citizens of the Philippines in order that the corporation shall be considered a Philippine
national. (Boldfacing, italicization and underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not
a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x without first securing a
written certificate from the Board of Investments to the effect that such business or economic
activity x x x would not conflict with the Constitution or laws of the Philippines."29 Thus, a "non-
Philippine national" cannot own and operate a reserved economic activity like a public utility.
Again, this means that only a "Philippine national" can own and operate a public utility.

Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or the Investment
Incentives Act, which took effect on 16 September 1967, contained a similar definition of a
"Philippine national," to wit:

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association
wholly owned by citizens of the Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty per cent of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine National and at least
sixty per cent of the fund will accrue to the benefit of Philippine Nationals: Provided, That where
a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty
per cent of the capital stock outstanding and entitled to vote of both corporations must be owned
and held by the citizens of the Philippines and at least sixty per cent of the members of the Board
of Directors of both corporations must be citizens of the Philippines in order that the corporation
shall be considered a Philippine National. (Boldfacing, italicization and underscoring supplied)

Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took
effect on 30 September 1968, if the investment in a domestic enterprise by non-Philippine
nationals exceeds 30% of its outstanding capital stock, such enterprise must obtain prior approval
from the Board of Investments before accepting such investment. Such approval shall not be
granted if the investment "would conflict with existing constitutional provisions and laws regulating
the degree of required ownership by Philippine nationals in the enterprise." 31 A "non-Philippine
national" cannot own and operate a reserved economic activity like a public utility. Again, this
means that only a "Philippine national" can own and operate a public utility.

The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino
citizen, or a domestic corporation "at least sixty percent (60%) of the capital stock
outstanding and entitled to vote" is owned by Filipino citizens. A domestic corporation is a
"Philippine national" only if at least 60% of its voting stock is owned by Filipino citizens. This
definition of a "Philippine national" is crucial in the present case because the FIA reiterates and
clarifies Section 11, Article XII of the 1987 Constitution, which limits the ownership and operation
of public utilities to Filipino citizens or to corporations or associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of the
nature of business and area of investment. The FIA spells out the procedures by which non-
Philippine nationals can invest in the Philippines. Among the key features of this law is the concept
of a negative list or the Foreign Investments Negative List.32 Section 8 of the law states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment

Negative List]. - The Foreign Investment Negative List shall have two 2 component lists: A and B:

a. List A shall enumerate the areas of activities reserved to Philippine nationals by

mandate of the Constitution and specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:
1. which are defense-related activities, requiring prior clearance and authorization from the
Department of National Defense [DND] to engage in such activity, such as the manufacture,
repair, storage and/or distribution of firearms, ammunition, lethal weapons, military ordinance,
explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is
specifically authorized, with a substantial export component, to a non-Philippine national by the
Secretary of National Defense; or

2. which have implications on public health and morals, such as the manufacture and distribution
of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses, dance halls, sauna and
steam bathhouses and massage clinics. (Boldfacing, underscoring and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." Foreign
Investment Negative List A consists of "areas of activities reserved to Philippine nationals
by mandate of the Constitution and specific laws," where foreign equity participation in
any enterprise shall be limited to the maximum percentage expressly prescribed by the
Constitution and other specific laws. In short, to own and operate a public utility in the
Philippines one must be a "Philippine national" as defined in the FIA. The FIA is abundant
notice to foreign investors to what extent they can invest in public utilities in the
Philippines.

To repeat, among the areas of investment covered by the Foreign Investment Negative List A is
the ownership and operation of public utilities, which the Constitution expressly reserves to
Filipino citizens and to corporations at least 60% owned by Filipino citizens. In other words,
Negative List A of the FIA reserves the ownership and operation of public utilities only to
"Philippine nationals," defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x
x x or (3) a corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; or (4) a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code of which one hundred percent (100%) of
the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds
for pension or other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the
Omnibus Investments Code of 1981, to the enactment of the Omnibus Investments Code of 1987,
and to the passage of the present Foreign Investments Act of 1991, or for more than four
decades, the statutory definition of the term "Philippine national" has been uniform and
consistent: it means a Filipino citizen, or a domestic corporation at least 60% of the voting
stock is owned by Filipinos. Likewise, these same statutes have uniformly and
consistently required that only "Philippine nationals" could own and operate public
utilities in the Philippines. The following exchange during the Oral Arguments is revealing:

JUSTICE CARPIO:

Counsel, I have some questions. You are aware of the Foreign Investments Act of
1991, x x x? And the FIA of 1991 took effect in 1991, correct? That’s over twenty
(20) years ago, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine
nationals can own and operate public utilities[], correct?

COMMISSIONER GAITE:

Yes, Your Honor.

JUSTICE CARPIO:

And the same Foreign Investments Act of 1991 defines a "Philippine national"
either as a citizen of the Philippines, or if it is a corporation at least sixty percent
(60%) of the voting stock is owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And, you are also aware that under the predecessor law of the Foreign
Investments Act of 1991, the Omnibus Investments Act of 1987, the same
provisions apply: x x x only Philippine nationals can own and operate a public utility
and the Philippine national, if it is a corporation, x x x sixty percent (60%) of the
capital stock of that corporation must be owned by citizens of the Philippines,
correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to the Omnibus Investments Act of 1987, under the Omnibus
Investments Act of 1981, the same rules apply: x x x only a Philippine national can
own and operate a public utility and a Philippine national, if it is a corporation, sixty
percent (60%) of its x x x voting stock, must be owned by citizens of the Philippines,
correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments Incentives Act and the Foreign
Company Act of 1968, the same rules applied, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, for the last four (4) decades, x x x, the law has been very consistent –
only a Philippine national can own and operate a public utility, and a
Philippine national, if it is a corporation, x x x at least sixty percent (60%) of
the voting stock must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which
categorically prescribe that certain economic activities, like the ownership and operation of public
utilities, are reserved to corporations "at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines." Foreign
Investment Negative List A refers to "activities reserved to Philippine nationals by mandate of the
Constitution and specific laws." The FIA is the basic statute regulating foreign investments
in the Philippines. Government agencies tasked with regulating or monitoring foreign
investments, as well as counsels of foreign investors, should start with the FIA in determining to
what extent a particular foreign investment is allowed in the Philippines. Foreign investors and
their counsels who ignore the FIA do so at their own peril. Foreign investors and their counsels
who rely on opinions of SEC legal officers that obviously contradict the FIA do so also at their own
peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately
raise a red flag. There are already numerous opinions of SEC legal officers that cite the definition
of a "Philippine national" in Section 3(a) of the FIA in determining whether a particular corporation
is qualified to own and operate a nationalized or partially nationalized business in the Philippines.
This shows that SEC legal officers are not only aware of, but also rely on and invoke, the
provisions of the FIA in ascertaining the eligibility of a corporation to engage in partially
nationalized industries. The following are some of such opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine

Overseas Employment Administration;

3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato

S. Calma;

4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos & Jardeleza;

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De Los
Angeles;

6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S.
Arbolado.

The SEC legal officers’ occasional but blatant disregard of the definition of the term "Philippine
national" in the FIA signifies their lack of integrity and competence in resolving issues on the 60-
40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be limited
and interpreted to refer to corporations seeking to avail of tax and fiscal incentives under
investment incentives laws and cannot be equated with the term "capital" in Section 11, Article
XII of the 1987 Constitution. Pangilinan similarly contends that the FIA and its predecessor
statutes do not apply to "companies which have not registered and obtained special incentives
under the schemes established by those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any
enterprise. Tax and fiscal incentives to investments are granted separately under the Omnibus
Investments Code of 1987, not under the FIA. In fact, the FIA expressly repealed Articles 44 to
56 of Book II of the Omnibus Investments Code of 1987, which articles previously regulated
foreign investments in nationalized or partially nationalized industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially
nationalized industries. There is nothing in the FIA, or even in the Omnibus Investments Code of
1987 or its predecessor statutes, that states, expressly or impliedly, that the FIA or its predecessor
statutes do not apply to enterprises not availing of tax and fiscal incentives under the Code. The
FIA and its predecessor statutes apply to investments in all domestic enterprises, whether or not
such enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of 1987 or
its predecessor statutes. The reason is quite obvious – mere non-availment of tax and fiscal
incentives by a non-Philippine national cannot exempt it from Section 11, Article XII of the
Constitution regulating foreign investments in public utilities. In fact, the Board of
Investments’ Primer on Investment Policies in the Philippines,34 which is given out to foreign
investors, provides:

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

Investors who do not seek incentives and/or whose chosen activities do not qualify for incentives,
(i.e., the activity is not listed in the IPP, and they are not exporting at least 70% of their production)
may go ahead and make the investments without seeking incentives. They only have to be
guided by the Foreign Investments Negative List (FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other
areas outside of this list are fully open to foreign investors. (Emphasis supplied)

V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the
Constitution to engage in certain economic activities applies not only to voting control of the
corporation, but also to the beneficial ownership of the corporation. To repeat, we held:

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership
of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in
accordance with the constitutional mandate. Otherwise, the corporation is "considered as non-
Philippine national[s]." (Emphasis supplied)

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock
is held by "a trustee of funds for pension or other employee retirement or separation benefits," the
trustee is a Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit
of Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that
"for stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to
voting control of the corporation but also to the beneficial ownership of the corporation, it is
therefore imperative that such requirement apply uniformly and across the board to all classes of
shares, regardless of nomenclature and category, comprising the capital of a corporation. Under
the Corporation Code, capital stock35 consists of all classes of shares issued to stockholders, that
is, common shares as well as preferred shares, which may have different rights, privileges or
restrictions as stated in the articles of incorporation.36

The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but
disallows denial of the right to vote in specific corporate matters. Thus, common shares have the
right to vote in the election of directors, while preferred shares may be denied such right.
Nonetheless, preferred shares, even if denied the right to vote in the election of directors, are
entitled to vote on the following corporate matters: (1) amendment of articles of incorporation; (2)
increase and decrease of capital stock; (3) incurring, creating or increasing bonded indebtedness;
(4) sale, lease, mortgage or other disposition of substantially all corporate assets; (5) investment
of funds in another business or corporation or for a purpose other than the primary purpose for
which the corporation was organized; (6) adoption, amendment and repeal of by-laws; (7) merger
and consolidation; and (8) dissolution of corporation.37

Since a specific class of shares may have rights and privileges or restrictions different from the
rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution must apply not only to shares with voting rights but also
to shares without voting rights. Preferred shares, denied the right to vote in the election of
directors, are anyway still entitled to vote on the eight specific corporate matters mentioned
above. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture
of common and preferred non-voting shares, at least 60 percent of the common shares
and at least 60 percent of the preferred non-voting shares must be owned by Filipinos. Of
course, if a corporation issues only a single class of shares, at least 60 percent of such shares
must necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in favor of
Filipino citizens must apply separately to each class of shares, whether common, preferred
non-voting, preferred voting or any other class of shares. This uniform application of the 60-
40 ownership requirement in favor of Filipino citizens clearly breathes life to the constitutional
command that the ownership and operation of public utilities shall be reserved exclusively to
corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40
ownership requirement in favor of Filipino citizens to each class of shares, regardless of
differences in voting rights, privileges and restrictions, guarantees effective Filipino control of
public utilities, as mandated by the Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling interest"
in public utilities always lies in the hands of Filipino citizens. This addresses and extinguishes
Pangilinan’s worry that foreigners, owning most of the non-voting shares, will exercise greater
control over fundamental corporate matters requiring two-thirds or majority vote of all
shareholders.

VI.
Intent of the framers of the Constitution

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of the
Constitutional Commission to support his claim that the term "capital" refers to the total
outstanding shares of stock, whether voting or non-voting, the following excerpts of the
deliberations reveal otherwise. It is clear from the following exchange that the term "capital" refers
to controlling interest of a corporation, thus:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation"? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP
Law Center who provided us a draft. The phrase that is contained here which we adopted
from the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with
60-40 percent equity invests in another corporation which is permitted by the Corporation Code,
does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.39

xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting
stock or controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to
be owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let
us say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the
Filipinos own the nonvoting shares. So we can have a situation where the corporation is
controlled by foreigners despite being the minority because they have the voting capital.
That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and
1935 Constitutions is that according to Commissioner Rodrigo, there are associations that
do not have stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed. 40 (Boldfacing and

underscoring supplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in the
corporation.

The use of the term "capital" was intended to replace the word "stock" because associations
without stocks can operate public utilities as long as they meet the 60-40 ownership requirement
in favor of Filipino citizens prescribed in Section 11, Article XII of the Constitution. However, this
did not change the intent of the framers of the Constitution to reserve exclusively to Philippine
nationals the "controlling interest" in public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of the
nationalists in the Convention."41 The same battle-cry resulted in the nationalization of the public
utilities.42 This is also the same intent of the framers of the 1987 Constitution who adopted the
exact formulation embodied in the 1935 and 1973 Constitutions on foreign equity limitations in
partially nationalized industries.

The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Court’s
interpretation of the term "capital." In its Consolidated Comment, the OSG explains that the
deletion of the phrase "controlling interest" and replacement of the word "stock" with the term
"capital" were intended specifically to extend the scope of the entities qualified to operate public
utilities to include associations without stocks. The framers’ omission of the phrase "controlling
interest" did not mean the inclusion of all shares of stock, whether voting or non-voting. The OSG
reiterated essentially the Court’s declaration that the Constitution reserved exclusively to
Philippine nationals the ownership and operation of public utilities consistent with the State’s
policy to "develop a self-reliant and independent national economy effectively controlled by
Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total
outstanding capital stock, treated as a single class regardless of the actual classification of
shares, grossly contravenes the intent and letter of the Constitution that the "State shall develop
a self-reliant and independent national economy effectively controlled by Filipinos." We
illustrated the glaring anomaly which would result in defining the term "capital" as the total
outstanding capital stock of a corporation, treated as a single class of shares regardless of the
actual classification of shares, to wit:

Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000
non-voting preferred shares owned by Filipinos, with both classes of share having a par value of
one peso (₱ 1.00) per share. Under the broad definition of the term "capital," such corporation
would be considered compliant with the 40 percent constitutional limit on foreign equity of public
utilities since the overwhelming majority, or more than 99.999 percent, of the total outstanding
capital stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of
less than 0.001 percent, exercise control over the public utility. On the other hand, the Filipinos,
holding more than 99.999 percent of the equity, cannot vote in the election of directors and hence,
have no control over the public utility. This starkly circumvents the intent of the framers of the
Constitution, as well as the clear language of the Constitution, to place the control of public utilities
in the hands of Filipinos. x x x

Further, even if foreigners who own more than forty percent of the voting shares elect an all-
Filipino board of directors, this situation does not guarantee Filipino control and does not in any
way cure the violation of the Constitution. The independence of the Filipino board members so
elected by such foreign shareholders is highly doubtful. As the OSG pointed out, quoting Justice
George Sutherland’s words in Humphrey’s Executor v. US,44 "x x x it is quite evident that one who
holds his office only during the pleasure of another cannot be depended upon to maintain an
attitude of independence against the latter’s will." Allowing foreign shareholders to elect a
controlling majority of the board, even if all the directors are Filipinos, grossly circumvents the
letter and intent of the Constitution and defeats the very purpose of our nationalization laws.

VII.
Last sentence of Section 11, Article XII of the Constitution

The last sentence of Section 11, Article XII of the 1987 Constitution reads:

The participation of foreign investors in the governing body of any public utility enterprise shall be
limited to their proportionate share in its capital, and all the executive and managing officers of
such corporation or association must be citizens of the Philippines.

During the Oral Arguments, the OSG emphasized that there was never a question on the intent
of the framers of the Constitution to limit foreign ownership, and assure majority Filipino ownership
and control of public utilities. The OSG argued, "while the delegates disagreed as to the
percentage threshold to adopt, x x x the records show they clearly understood that Filipino control
of the public utility corporation can only be and is obtained only through the election of a majority
of the members of the board."

Indeed, the only point of contention during the deliberations of the Constitutional Commission on
23 August 1986 was the extent of majority Filipino control of public utilities. This is evident from
the following exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the
phrase "two thirds of whose voting stock or controlling interest," and instead substitute the words
"SIXTY PERCENT OF WHOSE CAPITAL" so that the sentence will read: "No franchise,
certificate, or any other form of authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or associations organized under the laws
of the Philippines at least SIXTY PERCENT OF WHOSE CAPITAL is owned by such citizens."

xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previous
sections in which we fixed the Filipino equity to 60 percent as against 40 percent for foreigners. It
is only in this Section 15 with respect to public utilities that the committee proposal was increased
to two-thirds. I think it would be better to harmonize this provision by providing that even in the
case of public utilities, the minimum equity for Filipino citizens should be 60 percent.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the discussions I have had
with representatives of the Filipino majority owners of the international record carriers, and the
subsequent memoranda they submitted to me. x x x

Their second point is that under the Corporation Code, the management and control of a
corporation is vested in the board of directors, not in the officers but in the board of directors. The
officers are only agents of the board. And they believe that with 60 percent of the equity, the
Filipino majority stockholders undeniably control the board. Only on important corporate acts can
the 40-percent foreign equity exercise a veto, x x x.

x x x x45

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a memorandum
by the spokesman of the Philippine Chamber of Communications on why they would like to
maintain the present equity, I am referring to the 66 2/3. They would prefer to have a 75-25 ratio
but would settle for 66 2/3. x x x

xxxx

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of two-
thirds rather than the 60 percent?

MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipino
citizens.

x x x x46

While they had differing views on the percentage of Filipino ownership of capital, it is clear that
the framers of the Constitution intended public utilities to be majority Filipino-owned and
controlled. To ensure that Filipinos control public utilities, the framers of the Constitution
approved, as additional safeguard, the inclusion of the last sentence of Section 11, Article XII of
the Constitution commanding that "[t]he participation of foreign investors in the governing body of
any public utility enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens of the
Philippines." In other words, the last sentence of Section 11, Article XII of the Constitution
mandates that (1) the participation of foreign investors in the governing body of the corporation
or association shall be limited to their proportionate share in the capital of such entity; and (2) all
officers of the corporation or association must be Filipino citizens.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing officers
of the corporation or association to be Filipino citizens specifically to prevent management
contracts, which were designed primarily to circumvent the Filipinization of public utilities, and to
assure Filipino control of public utilities, thus:

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding a
phrase which states: "THE MANAGEMENT BODY OF EVERY CORPORATION OR
ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE
PHILIPPINES." I have with me their position paper.

THE PRESIDENT. The Commissioner may proceed.

MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which
Commissioner Romulo mentioned – Philippine Global Communications, Eastern
Telecommunications, Globe Mackay Cable – are 40-percent owned by foreign multinational
companies and 60-percent owned by their respective Filipino partners. All three, however, also
have management contracts with these foreign companies – Philcom with RCA, ETPI with Cable
and Wireless PLC, and GMCR with ITT. Up to the present time, the general managers of these
carriers are foreigners. While the foreigners in these common carriers are only minority owners,
the foreign multinationals are the ones managing and controlling their operations by virtue of their
management contracts and by virtue of their strength in the governing bodies of these carriers. 47

xxxx

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to propose
an amendment with respect to the operating management of public utilities, and in this
amendment, we are associated with Fr. Bernas, Commissioners Nieva and Rodrigo.
Commissioner Rosario Braid will state this amendment now.

Thank you.

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.

MR. VILLEGAS. Yes, Madam President.

xxxx

MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE MANAGEMENT
BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE
CONTROLLED BY CITIZENS OF THE PHILIPPINES."

This will prevent management contracts and assure control by Filipino citizens. Will the
committee assure us that this amendment will insure that past activities such as management
contracts will no longer be possible under this amendment?

xxxx

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which
reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY
PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN
THE CAPITAL THEREOF AND..."

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH

CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY

OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF..." I do not have the rest of the copy.

MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that
correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept
the amendment. Is that all right with Commissioner Rosario Braid?

MS. ROSARIO BRAID. Yes.

xxxx

MR. DE LOS REYES. The governing body refers to the board of directors and trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

xxxx

The results show 29 votes in favor and none against; so the proposed amendment is approved.

xxxx

THE PRESIDENT. All right. Can we proceed now to vote on Section 15?

MR. RAMA. Yes, Madam President.

THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or any other
form of authorization for the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at least
60 PERCENT OF WHOSE CAPITAL is owned by such citizens." May I request Commissioner
Bengzon to please continue reading.

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING

BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND ALL THE EXECUTIVE AND
MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS
OF THE PHILIPPINES."

MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE

EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE YEARS
RENEWABLE FOR NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any such franchise
or right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by Congress when the common good so requires. The State shall encourage equity
participation in public utilities by the general public."

VOTING

xxxx

The results show 29 votes in favor and 4 against; Section 15, as amended, is
approved.48 (Emphasis supplied)

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision on
the limited participation of foreign investors in the governing body of public utilities, is a reiteration
of the last sentence of Section 5, Article XIV of the 1973 Constitution, 49 signifying its importance
in reserving ownership and control of public utilities to Filipino citizens.

VIII.
The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own 64.27%
of the common shares of PLDT, which class of shares exercises the sole right to vote in the
election of directors, and thus foreigners control PLDT; (2) Filipinos own only 35.73% of PLDT’s
common shares, constituting a minority of the voting stock, and thus Filipinos do not control PLDT;
(3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn
only 1/70 of the dividends that common shares earn;50 (5) preferred shares have twice the par
value of common shares; and (6) preferred shares constitute 77.85% of the authorized capital
stock of PLDT and common shares only 22.15%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the
question of whether PLDT violated the 60-40 ownership requirement in favor of Filipino citizens
in Section 11, Article XII of the 1987 Constitution. Such question indisputably calls for a
presentation and determination of evidence through a hearing, which is generally outside the
province of the Court’s jurisdiction, but well within the SEC’s statutory powers. Thus, for obvious
reasons, the Court limited its decision on the purely legal and threshold issue on the definition of
the term "capital" in Section 11, Article XII of the Constitution and directed the SEC to apply such
definition in determining the exact percentage of foreign ownership in PLDT.

IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.

In his petition, Gamboa prays, among others:

xxxx

5. For the Honorable Court to issue a declaratory relief that ownership of common or voting shares
is the sole basis in determining foreign equity in a public utility and that any other government
rulings, opinions, and regulations inconsistent with this declaratory relief be declared
unconstitutional and a violation of the intent and spirit of the 1987 Constitution;

6. For the Honorable Court to declare null and void all sales of common stocks to foreigners in
excess of 40 percent of the total subscribed common shareholdings; and

7. For the Honorable Court to direct the Securities and Exchange Commission and Philippine
Stock Exchange to require PLDT to make a public disclosure of all of its foreign
shareholdings and their actual and real beneficial owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to perform
its statutory duty to investigate whether "the required percentage of ownership of the capital stock
to be owned by citizens of the Philippines has been complied with [by PLDT] as required by x x x
the Constitution."51 Such plea clearly negates SEC’s argument that it was not impleaded.

Granting that only the SEC Chairman was impleaded in this case, the Court has ample powers to
order the SEC’s compliance with its directive contained in the 28 June 2011 Decision in view of
the far-reaching implications of this case. In Domingo v. Scheer,52 the Court dispensed with the
amendment of the pleadings to implead the Bureau of Customs considering (1) the unique
backdrop of the case; (2) the utmost need to avoid further delays; and (3) the issue of public
interest involved. The Court held:

The Court may be curing the defect in this case by adding the BOC as party-petitioner. The
petition should not be dismissed because the second action would only be a repetition of the first.
In Salvador, et al., v. Court of Appeals, et al., we held that this Court has full powers, apart from
that power and authority which is inherent, to amend the processes, pleadings, proceedings and
decisions by substituting as party-plaintiff the real party-in-interest. The Court has the power to
avoid delay in the disposition of this case, to order its amendment as to implead the BOC
as party-respondent. Indeed, it may no longer be necessary to do so taking into account
the unique backdrop in this case, involving as it does an issue of public interest. After all,
the Office of the Solicitor General has represented the petitioner in the instant proceedings, as
well as in the appellate court, and maintained the validity of the deportation order and of the BOC’s
Omnibus Resolution. It cannot, thus, be claimed by the State that the BOC was not afforded its
day in court, simply because only the petitioner, the Chairperson of the BOC, was the respondent
in the CA, and the petitioner in the instant recourse. In Alonso v. Villamor, we had the occasion
to state:

There is nothing sacred about processes or pleadings, their forms or contents. Their sole
purpose is to facilitate the application of justice to the rival claims of contending
parties. They were created, not to hinder and delay, but to facilitate and promote, the
administration of justice. They do not constitute the thing itself, which courts are always striving
to secure to litigants. They are designed as the means best adapted to obtain that thing. In other
words, they are a means to an end. When they lose the character of the one and become the
other, the administration of justice is at fault and courts are correspondingly remiss in the
performance of their obvious duty.53 (Emphasis supplied)

In any event, the SEC has expressly manifested54 that it will abide by the Court’s decision
and defer to the Court’s definition of the term "capital" in Section 11, Article XII of the
Constitution. Further, the SEC entered its special appearance in this case and argued
during the Oral Arguments, indicating its submission to the Court’s jurisdiction. It is clear,
therefore, that there exists no legal impediment against the proper and immediate
implementation of the Court’s directive to the SEC.

PLDT is an indispensable party only insofar as the other issues, particularly the factual questions,
are concerned. In other words, PLDT must be impleaded in order to fully resolve the issues on
(1) whether the sale of 111,415 PTIC shares to First Pacific violates the constitutional limit on
foreign ownership of PLDT; (2) whether the sale of common shares to foreigners exceeded the
40 percent limit on foreign equity in PLDT; and (3) whether the total percentage of the PLDT
common shares with voting rights complies with the 60-40 ownership requirement in favor of
Filipino citizens under the Constitution for the ownership and operation of PLDT. These issues
indisputably call for an examination of the parties’ respective evidence, and thus are clearly within
the jurisdiction of the SEC. In short, PLDT must be impleaded, and must necessarily be heard, in
the proceedings before the SEC where the factual issues will be thoroughly threshed out and
resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not rule on
the factual issues raised by Gamboa, except the single and purely legal issue on the definition of
the term "capital" in Section 11, Article XII of the Constitution. The Court confined the resolution
of the instant case to this threshold legal issue in deference to the fact-finding power of the SEC.

Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal issue
in this case even without the participation of PLDT since defining the term "capital" in Section 11,
Article XII of the Constitution does not, in any way, depend on whether PLDT was impleaded.
Simply put, PLDT is not indispensable for a complete resolution of the purely legal question in
this case.55 In fact, the Court, by treating the petition as one for mandamus,56 merely directed the
SEC to apply the Court’s definition of the term "capital" in Section 11, Article XII of the Constitution
in determining whether PLDT committed any violation of the said constitutional provision. The
dispositive portion of the Court’s ruling is addressed not to PLDT but solely to the SEC,
which is the administrative agency tasked to enforce the 60-40 ownership requirement in
favor of Filipino citizens in Section 11, Article XII of the Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the term "capital"
in Section 11, Article XII of the 1987 Constitution, and directed the SEC to investigate any violation
by PLDT of the 60-40 ownership requirement in favor of Filipino citizens under the
Constitution,57 there is no deprivation of PLDT’s property or denial of PLDT’s right to due process,
contrary to Pangilinan and Nazareno’s misimpression. Due process will be afforded to PLDT when
it presents proof to the SEC that it complies, as it claims here, with Section 11, Article XII of the
Constitution.

X.
Foreign Investments in the Philippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may result
in a sudden flight of existing foreign investors to "friendlier" countries and simultaneously deterring
new foreign investors to our country. In particular, the PSE claims that the 28 June 2011 Decision
may result in the following: (1) loss of more than ₱ 630 billion in foreign investments in PSE-listed
shares; (2) massive decrease in foreign trading transactions; (3) lower PSE Composite Index;
and (4) local investors not investing in PSE-listed shares.58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants’
apprehension. Without providing specific details, he pointed out the depressing state of the
Philippine economy compared to our neighboring countries which boast of growing economies.
Further, Dr. Villegas explained that the solution to our economic woes is for the government to
"take-over" strategic industries, such as the public utilities sector, thus:

JUSTICE CARPIO:

I would like also to get from you Dr. Villegas if you have additional information on whether this
high FDI59 countries in East Asia have allowed foreigners x x x control [of] their public utilities, so
that we can compare apples with apples.

DR. VILLEGAS:

Correct, but let me just make a comment. When these neighbors of ours find an industry strategic,
their solution is not to "Filipinize" or "Vietnamize" or "Singaporize." Their solution is to make
sure that those industries are in the hands of state enterprises. So, in these countries,
nationalization means the government takes over. And because their governments are
competent and honest enough to the public, that is the solution. x x x 60 (Emphasis supplied)

If government ownership of public utilities is the solution, then foreign investments in our public
utilities serve no purpose. Obviously, there can never be foreign investments in public utilities if,
as Dr. Villegas claims, the "solution is to make sure that those industries are in the hands of state
enterprises." Dr. Villegas’s argument that foreign investments in telecommunication companies
like PLDT are badly needed to save our ailing economy contradicts his own theory that the
solution is for government to take over these companies. Dr. Villegas is barking up the wrong tree
since State ownership of public utilities and foreign investments in such industries are
diametrically opposed concepts, which cannot possibly be reconciled.

In any event, the experience of our neighboring countries cannot be used as argument to decide
the present case differently for two reasons. First, the governments of our neighboring countries
have, as claimed by Dr. Villegas, taken over ownership and control of their strategic public utilities
like the telecommunications industry. Second, our Constitution has specific provisions limiting
foreign ownership in public utilities which the Court is sworn to uphold regardless of the
experience of our neighboring countries.
In our jurisdiction, the Constitution expressly reserves the ownership and operation of public
utilities to Filipino citizens, or corporations or associations at least 60 percent of whose capital
belongs to Filipinos. Following Dr. Villegas’s claim, the Philippines appears to be more liberal in
allowing foreign investors to own 40 percent of public utilities, unlike in other Asian countries
whose governments own and operate such industries.

XI.
Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the
application and imposition of appropriate sanctions against PLDT if found violating Section 11,
Article XII of the Constitution.1avvphi1

As discussed, the Court has directed the SEC to investigate and determine whether PLDT
violated Section 11, Article XII of the Constitution. Thus, there is no dispute that it is only after the
SEC has determined PLDT’s violation, if any exists at the time of the commencement of the
administrative case or investigation, that the SEC may impose the statutory sanctions against
PLDT. In other words, once the 28 June 2011 Decision becomes final, the SEC shall impose the
appropriate sanctions only if it finds after due hearing that, at the start of the administrative case
or investigation, there is an existing violation of Section 11, Article XII of the Constitution. Under
prevailing jurisprudence, public utilities that fail to comply with the nationality requirement under
Section 11, Article XII and the FIA can cure their deficiencies prior to the start of the administrative
case or investigation.61

XII.
Final Word

The Constitution expressly declares as State policy the development of an economy "effectively
controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves the
ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of
whose capital with voting rights belongs to Filipinos. The FIA’s implementing rules explain that
"[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere
legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is essential." In effect, the FIA clarifies,
reiterates and confirms the interpretation that the term "capital" in Section 11, Article XII of the
1987 Constitution refers to shares with voting rights, as well as with full beneficial
ownership. This is precisely because the right to vote in the election of directors, coupled with
full beneficial ownership of stocks, translates to effective control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution
contravenes the letter and intent of the Constitution. Any other meaning of the term "capital"
openly invites alien domination of economic activities reserved exclusively to Philippine nationals.
Therefore, respondents’ interpretation will ultimately result in handing over effective control of our
national economy to foreigners in patent violation of the Constitution, making Filipinos second-
class citizens in their own country.

Filipinos have only to remind themselves of how this country was exploited under the Parity
Amendment, which gave Americans the same rights as Filipinos in the exploitation of natural
resources, and in the ownership and control of public utilities, in the Philippines. To do this the
1935 Constitution, which contained the same 60 percent Filipino ownership and control
requirement as the present 1987 Constitution, had to be amended to give Americans parity rights
with Filipinos. There was bitter opposition to the Parity Amendment62 and many Filipinos eagerly
awaited its expiration. In late 1968, PLDT was one of the American-controlled public utilities that
became Filipino-controlled when the controlling American stockholders divested in anticipation of
the expiration of the Parity Amendment on 3 July 1974.63 No economic suicide happened when
control of public utilities and mining corporations passed to Filipinos’ hands upon expiration of the
Parity Amendment.

Movants’ interpretation of the term "capital" would bring us back to the same evils spawned by
the Parity Amendment, effectively giving foreigners parity rights with Filipinos, but this time
even without any amendment to the present Constitution. Worse, movants’ interpretation
opens up our national economy to effective control not only by Americans but also by all
foreigners, be they Indonesians, Malaysians or Chinese, even in the absence of reciprocal
treaty arrangements. At least the Parity Amendment, as implemented by the Laurel-Langley
Agreement, gave the capital-starved Filipinos theoretical parity – the same rights as Americans
to exploit natural resources, and to own and control public utilities, in the United States of America.
Here, movants’ interpretation would effectively mean a unilateral opening up of our national
economy to all foreigners, without any reciprocal arrangements. That would mean that
Indonesians, Malaysians and Chinese nationals could effectively control our mining companies
and public utilities while Filipinos, even if they have the capital, could not control similar
corporations in these countries.

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and control
requirement for public utilities like PLOT. Any deviation from this requirement necessitates an
amendment to the Constitution as exemplified by the Parity Amendment. This Court has no power
to amend the Constitution for its power and duty is only to faithfully apply and interpret the
Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings
shall be entertained.

SO ORDERED.

New Test: SEC - MC No. 8, Series of 2013, “Guidelines on Compliance with Filipino-Foreign
Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations
Engaged in Nationalized and Partly Nationalized Activities”

4. Jose Roy, III, vs. Chairperson Teresita Herbosa, et. Al., G.R. No. 207246, Nov. 22, 2016

G.R. No. 207246

JOSE M. ROY III, Petitioner

vs.
CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND EXCHANGE COMMISSION,
and PHILIPPINE LONG DISTANCE TELEPHONE COMP ANY,, Respondents

x-----------------------x

WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE,

ANTONIO V. PESINA, JR., MODESTO MARTINY. MAMON III, and GERARDO C.
EREBAREN, Petitioners-in-Intervention,

x-----------------------x

PHILIPPINE STOCK EXCHANGE, INC. Respondent-in-Intervention,

x-----------------------x

SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-Intervention.

RESOLUTION

CAGUIOA, J.:

Before the Court is the Motion for Reconsideration dated January 19, 20171 (the Motion) filed by
petitioner Jose M. Roy III (movant) seeking the reversal and setting aside of the Decision dated
November 22, 20162 (the Decision) which denied the movant's petition, and declared that the
Securities and Exchange Commission (SEC) did not commit grave abuse of discretion in issuing
Memorandum Circular No. 8, Series of 2013 (SEC-MC No. 8) as the same was in compliance
with, and in fealty to, the decision of the Court in Gamboa v. Finance Secretary
Teves,3 (Gamboa Decision) and the resolution4 denying the Motion for Reconsideration
therein (Gamboa Resolution).

The Motion presents no compelling and new arguments to justify the reconsideration of the
Decision.

The grounds raised by movant are: (1) He has the requisite standing because this case is one of
transcendental importance; (2) The Court has the constitutional duty to exercise judicial review
over any grave abuse of discretion by any instrumentality of government; (3) He did not rely on
an obiter dictum; and (4) The Court should have treated the petition as the appropriate device to
explain the Gamboa Decision.

The Decision has already exhaustively discussed and directly passed upon these grounds.
Movant's petition was dismissed based on both procedural and substantive grounds.

Regarding the procedural grounds, the Court ruled that petitioners (movant and petitioners-in-
intervention) failed to sufficiently allege and establish the existence of a case or controversy
and locus standi on their part to warrant the Court's exercise of judicial review; the rule on the
hierarchy of courts was violated; and petitioners failed to implead indispensable parties such as
the Philippine Stock Exchange, Inc. and Shareholders' Association of the Philippines, Inc. 5

In connection with the failure to implead indispensable parties, the Court's Decision held:

Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-interest without
whom there can be no final determination of an action. Indispensable parties are those with such
a material and direct interest in the controversy that a final decree would necessarily affect their
rights, so that the court cannot proceed without their presence. The interests of such
indispensable parties in the subject matter of the suit and the relief are so bound with those of the
other parties that their legal presence as parties to the proceeding is an absolute necessity and a
complete and efficient determination of the equities and rights of the parties is not possible if they
are not joined.

Other than PLDT, the petitions failed to join or implead other public utility corporations subject to
the same restriction imposed by Section 11, Article XII of the Constitution. These corporations are
in danger of losing their franchise and property if they are found not compliant with the restrictive
interpretation of the constitutional provision under review which is being espoused by petitioners.
They should be afforded due notice and opportunity to be heard, lest they be deprived of their
property without due process.

Not only are public utility corporations other than PLDT directly and materially affected by the
outcome of the petitions, their shareholders also stand to suffer in case they will be forced to
divest their shareholdings to ensure compliance with the said restrictive interpretation of the term
"capital". As explained by SHAREPHIL, in five corporations alone, more than Php158 Billion worth
of shares must be divested by foreign shareholders and absorbed by Filipino investors if
petitioners' position is upheld.

Petitioners' disregard of the rights of these other corporations and numerous shareholders
constitutes another fatal procedural flaw, justifying the dismissal of their petitions. Without giving
all of them their day in court, they will definitely be deprived of their property without due
process of law. 6

This is highlighted to clear any misimpression that the Gamboa Decision and Gamboa Resolution
made a categorical ruling on the meaning of the word "capital" under Section 11, Article XII of the
Constitution only in respect of, or only confined to, respondent Philippine Long Distance
Telephone Company (PLDT). Nothing is further from the truth. Indeed, a fair reading of
the Gamboa Decision and Gamboa Resolution shows that the Court's pronouncements therein
would affect all public utilities, and not just respondent PLDT.
On the substantive grounds, the Court disposed of the issue on whether the SEC gravely abused
its discretion in ruling that respondent PLDT is compliant with the limitation on foreign ownership
under the Constitution and other relevant laws as without merit. The Court reasoned that "in the
absence of a definitive ruling by the SEC on PLDT's compliance with the capital requirement
pursuant to the Gamboa Decision and Resolution, any question relative to the inexistent ruling is
premature."7

In resolving the other substantive issue raised by petitioners, the Court held that:

[E]ven if the resolution of the procedural issues were conceded in favor of petitioners, the
petitions, being anchored on Rule 65, must nonetheless fail because the SEC did not commit
grave abuse of discretion amounting to lack or excess of jurisdiction when it issued SEC-MC No.
8. To the contrary, the Court finds SEC-MC No. 8 to have been issued in fealty to the Gamboa
Decision and Resolution.8

To belabor the point, movant's petition is not a continuation of the Gamboa case as
the Gamboa Decision attained finality on October 18, 2012, and thereafter Entry of Judgment was
issued on December 11, 2012.9

As regards movant's repeated invocation of the transcendental importance of the Gamboa case,
this does not ipso facto accord locus standi to movant. Being a new petition, movant had the
burden to justify his locus standi in his own petition. The Court, however, was not persuaded by
his justification.

Pursuant to the Court's constitutional duty to exercise judicial review, the Court has conclusively
found no grave abuse of discretion on the part of SEC in issuing SEC-MC No. 8.

The Decision has painstakingly explained why it considered as obiter dictum that pronouncement
in the Gamboa Resolution that the constitutional requirement on Filipino ownership should "apply
uniformly and across the board to all classes of shares, regardless of nomenclature and category,
comprising the capital of a corporation."[[9-a]] The Court stated that:

[T]he fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are
definite, clear and unequivocal. While there is a passage in the body of the Gamboa Resolution
that might have appeared contrary to the fallo of the Gamboa Decision x x x the definiteness and
clarity of the fallo of the Gamboa Decision must control over the obiter dictum in
the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign ownership
requirement to "each class of shares, regardless of differences in voting rights, privileges and
restrictions." 10

To the Court's mind and, as exhaustively demonstrated in the Decision, the dispositive portion of
the Gamboa Decision was in no way modified by the Gamboa Resolution.

The heart of the controversy is the interpretation of Section 11, Article XII of the Constitution,
which provides: "No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of whose capital is owned
by such citizens x x x."

The Gamboa Decision already held, in no uncertain terms, that what the Constitution requires is
"[fJull [and legal] beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights x x x must rest in the hands of Filipino nationals x x x." 11 And,
precisely that is what SEC-MC No. 8 provides, viz.: "x x x For purposes of determining
compliance [with the constitutional or statutory ownership], the required percentage of Filipino
ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled
to vote in the election of directors; AND (b) the total number of outstanding shares of stock,
whether or not entitled to vote x x x." 12

In construing "full beneficial ownership," the Implementing Rules and Regulations of the Foreign
Investments Act of 1991 (FIA-IRR) provides:
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have
been assigned or transferred to aliens cannot be considered held by Philippine citizens or
Philippine nationals. 13

In turn, "beneficial owner" or "beneficial ownership" is defined in the Implementing Rules and
Regulations of the Securities Regulation Code (SRC-IRR) as:

[A]ny person who, directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares voting power (which includes the power to vote or direct
the voting of such security) and/or investment returns or power (which includes the power to
dispose of, or direct the disposition of such security) x x x. 14

Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-IRR, which is in
consonance with the concept of "full beneficial ownership" in the FIA-IRR, is, as stressed in the
Decision, relevant in resolving only the question of who is the beneficial owner or has beneficial
ownership of each "specific stock" of the public utility company whose stocks are under
review. If the Filipino has the voting power of the "specific stock", i.e., he can vote the stock or
direct another to vote for him, or the Filipino has the investment power over the "specific
stock", i.e., he can dispose of the stock or direct another to dispose of it for him, or both, i.e., he
can vote and dispose of that "specific stock" or direct another to vote or dispose it for
him, then such Filipino is the "beneficial owner" of that "specific stock." Being considered Filipino,
that "specific stock" is then to be counted as part of the 60% Filipino ownership requirement under
the Constitution. The right to the dividends, jus fruendi - a right emanating from ownership of that
"specific stock" necessarily accrues to its Filipino "beneficial owner."

Once more, this is emphasized anew to disabuse any notion that the dividends accruing to any
particular stock are determinative of that stock's "beneficial ownership." Dividend declaration is
dictated by the corporation's unrestricted retained earnings. On the other hand, the corporation's
need of capital for expansion programs and special reserve for probable contingencies may limit
retained earnings available for dividend declaration. 15 It bears repeating here that the Court in
the Gamboa Decision adopted the foregoing definition of the term "capital" in Section 11, Article
XII of the 1987 Constitution in express recognition of the sensitive and vital position of public
utilities both in the national economy and for national security, so that the evident purpose of the
citizenship requirement is to prevent aliens from assuming control of public utilities, which may be
inimical to the national interest. 16 This purpose prescinds from the "benefits"/dividends that are
derived from or accorded to the particular stocks held by Filipinos vis-a-vis the stocks held by
aliens. So long as Filipinos have controlling interest of a public utility corporation, their decision to
declare more dividends for a particular stock over other kinds of stock is their sole prerogative -
an act of ownership that would presumably be for the benefit of the public utility corporation itself.
Thus, as explained in the Decision:

In this regard, it would be apropos to state that since Filipinos own at least 60% of the outstanding
shares of stock entitled to vote directors, which is what the Constitution precisely requires, then
the Filipino stockholders control the corporation, i.e., they dictate corporate actions and
decisions, and they have all the rights of ownership including, but not limited to, offering certain
preferred shares that may have greater economic interest to foreign investors - as the need for
capital for corporate pursuits (such as expansion), may be good for the corporation that they own.
Surely, these "true owners" will not allow any dilution of their ownership and control if such move
will not be beneficial to them. 17

Finally, as to how the SEC will classify or treat certain stocks with voting rights held by a trust fund
that is created by the public entity whose compliance with the limitation on foreign ownership
under the Constitution is under scrutiny, and how the SEC will determine if such public utility does,
in fact, control how the said stocks will be voted, and whether, resultantly, the trust fund would be
considered as Philippine national or not - lengthily discussed in the dissenting opinion of Justice
Carpio - is speculative at this juncture. The Court cannot engage in guesswork. Thus, there is
need of an actual case or controversy before the Court may exercise its power of judicial review.
The movant's petition is not that actual case or controversy.
Thus, the discussion of Justice Carpio' s dissenting opinion as to the voting preferred shares
created by respondent PLDT, their acquisition by BTF Holdings, Inc., which appears to be a
wholly-owned company of the PLDT Beneficial Trust Fund (BTF), and whether or not it is
respondent PLDT's management that controls BTF and BTF Holdings, Inc. - all these are factual
matters that are outside the ambit of this Court's review which, as stated in the beginning, is
confined to determining whether or not the SEC committed grave abuse of discretion in issuing
SEC-MC No. 8; that is, whether or not SEC-MC No. 8 violated the ruling of the Court in Gamboa
v. Finance Secretary Teves, 18 and the resolution in Heirs of Wilson P. Gamboa v. Finance Sec.
Teves19denying the Motion for Reconsideration therein as to the proper understanding of "capital".

To be sure, it would be more prudent and advisable for the Court to await the SEC's prior
determination of the citizenship of specific shares of stock held in trust - based on proven facts -
before the Court proceeds to pass upon the legality of such determination.

As to whether respondent PLDT is currently in compliance with the Constitutional provision

regarding public utility entities, the Court must likewise await the SEC's determination thereof
applying SEC-MC No. 8. After all, as stated in the Decision, it is the SEC which is the government
agency with the competent expertise and the mandate of law to make such determination.

In conclusion, the basic issues raised in the Motion having been duly considered and passed
upon by the Court in the Decision and no substantial argument having been adduced to warrant
the reconsideration sought, the Court resolves to DENY the Motion with FINALITY.

WHEREFORE, the subject Motion for Reconsideration is hereby DENIED WITH FINALITY. No
further pleadings or motions shall be entertained in this case. Let entry of final judgment be issued
immediately.

SO ORDERED.

5. Narra Nickel Mining and Development Corp. Vs. Redmont Consilidated Mines, G.R. No.
195580, April 2, 2014

G.R. No. 195580 April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND

DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.

DECISION

VELASCO, JR., J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and
Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur
Mining Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision1 and the February
15, 2011 Resolution of the Court of Appeals (CA).

The Facts

Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a

domestic corporation organized and existing under Philippine laws, took interest in mining and
exploring certain areas of the province of Palawan. After inquiring with the Department of
Environment and Natural Resources (DENR), it learned that the areas where it wanted to
undertake exploration and mining activities where already covered by Mineral Production Sharing
Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an
application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau
(MGB), Region IV-B, Office of the Department of Environment and Natural Resources (DENR).

Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares
in Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which
includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and
EP were then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006,
assigned to petitioner McArthur.2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and
Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an application
for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Through the said application,
the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in barangays Calategas and
San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC conveyed, transferred and/or
assigned its rights and interests over the MPSA application in favor of Narra.

Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-
AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa
Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently conveyed, transferred
and assigned its rights and interest over the said MPSA application to Tesoro.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3)
separate petitions for the denial of petitioners’ applications for MPSA designated as AMA-IVB-
153, AMA-IVB-154 and MPSA IV-1-12.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and
Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation.
Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it was the driving
force behind petitioners’ filing of the MPSAs over the areas covered by applications since it knows
that it can only participate in mining activities through corporations which are deemed Filipino
citizens. Redmont argued that given that petitioners’ capital stocks were mostly owned by MBMI,
they were likewise disqualified from engaging in mining activities through MPSAs, which are
reserved only for Filipino citizens.

In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of
Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which provided:

Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether
in singular or plural, shall mean:

xxxx

(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a
corporation, partnership, association, or cooperative organized or authorized for the purpose of
engaging in mining, with technical and financial capability to undertake mineral resources
development and duly registered in accordance with law at least sixty per cent (60%) of the capital
of which is owned by citizens of the Philippines: Provided, That a legally organized foreign-owned
corporation shall be deemed a qualified person for purposes of granting an exploration permit,
financial or technical assistance agreement or mineral processing permit.

Additionally, they stated that their nationality as applicants is immaterial because they also applied
for Financial or Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for
McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to foreign-
owned corporations. Nevertheless, they claimed that the issue on nationality should not be raised
since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their capital is owned
by citizens of the Philippines. They asserted that though MBMI owns 40% of the shares of PLMC
(which owns 5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997 shares of
McArthur)4 and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro), 5 the
shares of MBMI will not make it the owner of at least 60% of the capital stock of each of petitioners.
They added that the best tool used in determining the nationality of a corporation is the "control
test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991. They also claimed
that the POA of DENR did not have jurisdiction over the issues in Redmont’s petition since they
are not enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no personality
to sue them because it has no pending claim or application over the areas applied for by
petitioners.

On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining
MPSAs. It held:

[I]t is clearly established that respondents are not qualified applicants to engage in mining
activities. On the other hand, [Redmont] having filed its own applications for an EPA over the
areas earlier covered by the MPSA application of respondents may be considered if and when
they are qualified under the law. The violation of the requirements for the issuance and/or grant
of permits over mining areas is clearly established thus, there is reason to believe that the
cancellation and/or revocation of permits already issued under the premises is in order and open
the areas covered to other qualified applicants.

xxxx

WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro
Mining and Development, Inc., and Narra Nickel Mining and Development Corp. as,
DISQUALIFIED for being considered as Foreign Corporations. Their Mineral Production Sharing
Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID.6

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a
100% Canadian company and declared their MPSAs null and void. In the same Resolution, it
gave due course to Redmont’s EPAs. Thereafter, on February 7, 2008, the POA issued an
Order7 denying the Motion for Reconsideration filed by petitioners.

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of
Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra
separately filed its Notice of Appeal10 and Memorandum of Appeal.11

In their respective memorandum, petitioners emphasized that they are qualified persons under
the law. Also, through a letter, they informed the MAB that they had their individual MPSA
applications converted to FTAAs. McArthur’s FTAA was denominated as AFTA-IVB-0912 on May
2007, while Tesoro’s MPSA application was converted to AFTA-IVB-0813 on May 28, 2007, and
Narra’s FTAA was converted to AFTA-IVB-0714 on March 30, 2006.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a
Complaint15 with the Securities and Exchange Commission (SEC), seeking the revocation of the
certificates for registration of petitioners on the ground that they are foreign-owned or controlled
corporations engaged in mining in violation of Philippine laws. Thereafter, Redmont filed on
September 1, 2008 a Manifestation and Motion to Suspend Proceeding before the MAB praying
for the suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.

Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon
City, Branch 92 (RTC) a Complaint16 for injunction with application for issuance of a temporary
restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 08-63379.
Redmont prayed for the deferral of the MAB proceedings pending the resolution of the Complaint
before the SEC.

But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the
MAB issued an Order on September 10, 2008, finding the appeal meritorious. It held:

WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and
SETS ASIDE the Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B
(MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07
February 2008 denying the Motions for Reconsideration of the Appellants. The Petition filed by
Redmont Consolidated Mines Corporation on 02 January 2007 is hereby ordered DISMISSED.17
Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmont’s application for
a TRO and setting the case for hearing the prayer for the issuance of a writ of preliminary
injunction on September 19, 2008.

Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration19 of the
September 10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for
Reconsideration20 on September 29, 2008.

Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion
for Reconsideration, Redmont filed before the RTC a Supplemental Complaint21 in Civil Case No.
08-63379.

On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary
injunction enjoining the MAB from finally disposing of the appeals of petitioners and from resolving
Redmont’s Motion for Reconsideration and Supplement Motion for Reconsideration of the MAB’s
September 10, 2008 Resolution.

On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for
Reconsideration and Supplemental Motion for Reconsideration and resolving the appeals filed by
petitioners.

Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the
MAB. On October 1, 2010, the CA rendered a Decision, the dispositive of which reads:

WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September
10, 2008 and July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The
findings of the Panel of Arbitrators of the Department of Environment and Natural Resources that
respondents McArthur, Tesoro and Narra are foreign corporations is upheld and, therefore, the
rejection of their applications for Mineral Product Sharing Agreement should be recommended to
the Secretary of the DENR.

With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or
Technical Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA, the
matter for its rejection or approval is left for determination by the Secretary of the DENR and the
President of the Republic of the Philippines.

SO ORDERED.23

In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by
petitioners.

After a careful review of the records, the CA found that there was doubt as to the nationality of
petitioners when it realized that petitioners had a common major investor, MBMI, a corporation
composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of Department of
Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented
the requirement of the Constitution and other laws pertaining to the exploitation of natural
resources, the CA used the "grandfather rule" to determine the nationality of petitioners. It
provided:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital stock
or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be
recorded as belonging to aliens.24 (emphasis supplied)

In determining the nationality of petitioners, the CA looked into their corporate structures and their
corresponding common shareholders. Using the grandfather rule, the CA discovered that MBMI
in effect owned majority of the common stocks of the petitioners as well as at least 60% equity
interest of other majority shareholders of petitioners through joint venture agreements. The CA
found that through a "web of corporate layering, it is clear that one common controlling investor
in all mining corporations involved x x x is MBMI."25 Thus, it concluded that petitioners McArthur,
Tesoro and Narra are also in partnership with, or privies-in-interest of, MBMI.

Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA
applications suspicious in nature and, as a consequence, it recommended the rejection of
petitioners’ MPSA applications by the Secretary of the DENR.

With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the
POA has jurisdiction over them and that it also has the power to determine the of nationality of
petitioners as a prerequisite of the Constitution prior the conferring of rights to "co-production,
joint venture or production-sharing agreements" of the state to mining rights. However, it also
stated that the POA’s jurisdiction is limited only to the resolution of the dispute and not on the
approval or rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested
with the power to approve or reject applications for MPSA.

Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which
considered petitioners McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA
determined that the POA’s declaration that the MPSAs of McArthur, Tesoro and Narra are void is
highly improper.

While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a
petition dated May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a
Decision26 on April 6, 2011, wherein it canceled and revoked petitioners’ FTAAs for violating and
circumventing the "Constitution x x x[,] the Small Scale Mining Law and Environmental
Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O.
584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with Redmont stating
that petitioners committed violations against the abovementioned laws and failed to submit
evidence to negate them. The Decision further quoted the December 14, 2007 Order of the POA
focusing on the alleged misrepresentation and claims made by petitioners of being domestic or
Filipino corporations and the admitted continued mining operation of PMDC using their locally
secured Small Scale Mining Permit inside the area earlier applied for an MPSA application which
was eventually transferred to Narra. It also agreed with the POA’s estimation that the filing of the
FTAA applications by petitioners is a clear admission that they are "not capable of conducting a
large scale mining operation and that they need the financial and technical assistance of a foreign
entity in their operation, that is why they sought the participation of MBMI Resources, Inc." 28 The
Decision further quoted:

The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage in
mining. The filing of the FTAA application conversion which is allowed foreign corporation of the
earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are conducting
operation only through their local counterparts.29

The Motion for Reconsideration of the Decision was further denied by the OP in a
Resolution30 dated July 6, 2011. Petitioners then filed a Petition for Review on Certiorari of the
OP’s Decision and Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the CA
Decision dated February 29, 2012, the CA affirmed the Decision and Resolution of the OP.
Thereafter, petitioners appealed the same CA decision to this Court which is now pending with a
different division.

Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners
put forth the following errors of the CA:

I.
 The Court of Appeals erred when it did not dismiss the case for mootness despite the fact
that the subject matter of the controversy, the MPSA Applications, have already been
converted into FTAA applications and that the same have already been granted.

II.

The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction
considering that the Panel of Arbitrators has no jurisdiction to determine the nationality of
Narra, Tesoro and McArthur.

III.

The Court of Appeals erred when it did not dismiss the case on account of Redmont’s
willful forum shopping.

IV.

The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations
based on the "Grandfather Rule" is contrary to law, particularly the express mandate of
the Foreign Investments Act of 1991, as amended, and the FIA Rules.

V.

The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.

VI.

The Court of Appeals erred when it concluded that the conversion of the MPSA
Applications into FTAA Applications were of "suspicious nature" as the same is based on
mere conjectures and surmises without any shred of evidence to show the same.31

We find the petition to be without merit.

This case not moot and academic

The claim of petitioners that the CA erred in not rendering the instant case as moot is without
merit.

Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable
controversy by virtue of supervening events, so that a declaration thereon would be of no practical
use or value."32 Thus, the courts "generally decline jurisdiction over the case or dismiss it on the
ground of mootness."33

The "mootness" principle, however, does accept certain exceptions and the mere raising of an
issue of "mootness" will not deter the courts from trying a case when there is a valid reason to do
so. In David v. Macapagal-Arroyo (David), the Court provided four instances where courts can
decide an otherwise moot case, thus:

1.) There is a grave violation of the Constitution;

2.) The exceptional character of the situation and paramount public interest is involved;

3.) When constitutional issue raised requires formulation of controlling principles to guide
the bench, the bar, and the public; and

4.) The case is capable of repetition yet evading review.34

All of the exceptions stated above are present in the instant case. We of this Court note that a
grave violation of the Constitution, specifically Section 2 of Article XII, is being committed by a
foreign corporation right under our country’s nose through a myriad of corporate layering under
different, allegedly, Filipino corporations. The intricate corporate layering utilized by the Canadian
company, MBMI, is of exceptional character and involves paramount public interest since it
undeniably affects the exploitation of our Country’s natural resources. The corresponding actions
of petitioners during the lifetime and existence of the instant case raise questions as what principle
is to be applied to cases with similar issues. No definite ruling on such principle has been
pronounced by the Court; hence, the disposition of the issues or errors in the instant case will
serve as a guide "to the bench, the bar and the public."35 Finally, the instant case is capable of
repetition yet evading review, since the Canadian company, MBMI, can keep on utilizing dummy
Filipino corporations through various schemes of corporate layering and conversion of
applications to skirt the constitutional prohibition against foreign mining in Philippine soil.

Conversion of MPSA applications to FTAA applications

We shall discuss the first error in conjunction with the sixth error presented by petitioners since
both involve the conversion of MPSA applications to FTAA applications. Petitioners propound that
the CA erred in ruling against them since the questioned MPSA applications were already
converted into FTAA applications; thus, the issue on the prohibition relating to MPSA applications
of foreign mining corporations is academic. Also, petitioners would want us to correct the CA’s
finding which deemed the aforementioned conversions of applications as suspicious in nature,
since it is based on mere conjectures and surmises and not supported with evidence.

We disagree.

The CA’s analysis of the actions of petitioners after the case was filed against them by respondent
is on point. The changing of applications by petitioners from one type to another just because a
case was filed against them, in truth, would raise not a few sceptics’ eyebrows. What is the reason
for such conversion? Did the said conversion not stem from the case challenging their citizenship
and to have the case dismissed against them for being "moot"? It is quite obvious that it is
petitioners’ strategy to have the case dismissed against them for being "moot."

Consider the history of this case and how petitioners responded to every action done by the court
or appropriate government agency: on January 2, 2007, Redmont filed three separate petitions
for denial of the MPSA applications of petitioners before the POA. On June 15, 2007, petitioners
filed a conversion of their MPSA applications to FTAAs. The POA, in its December 14, 2007
Resolution, observed this suspect change of applications while the case was pending before it
and held:

The filing of the Financial or Technical Assistance Agreement application is a clear admission that
the respondents are not capable of conducting a large scale mining operation and that they need
the financial and technical assistance of a foreign entity in their operation that is why they sought
the participation of MBMI Resources, Inc. The participation of MBMI in the corporation only proves
the fact that it is the Canadian company that will provide the finances and the resources to operate
the mining areas for the greater benefit and interest of the same and not the Filipino stockholders
who only have a less substantial financial stake in the corporation.

xxxx

x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage in
mining. The filing of the FTAA application conversion which is allowed foreign corporation of the
earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are conducting
operation only through their local counterparts.36

On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing
and setting aside the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said
Decision, the CA upheld the findings of the POA of the DENR that the herein petitioners are in
fact foreign corporations thus a recommendation of the rejection of their MPSA applications were
recommended to the Secretary of the DENR. With respect to the FTAA applications or conversion
of the MPSA applications to FTAAs, the CA deferred the matter for the determination of the
Secretary of the DENR and the President of the Republic of the Philippines.37

In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal
of the petition asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed and
issued in their favor FTAA No. 05-2010-IVB, which rendered the petition moot and academic.
However, the CA, in a Resolution dated February 15, 2011 denied their motion for being a mere
"rehash of their claims and defenses."38 Standing firm on its Decision, the CA affirmed the ruling
that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners elevated the case
to us via a Petition for Review on Certiorari under Rule 45, questioning the Decision of the CA.
Interestingly, the OP rendered a Decision dated April 6, 2011, a day after this petition for review
was filed, cancelling and revoking the FTAAs, quoting the Order of the POA and stating that
petitioners are foreign corporations since they needed the financial strength of MBMI, Inc. in order
to conduct large scale mining operations. The OP Decision also based the cancellation on the
misrepresentation of facts and the violation of the "Small Scale Mining Law and Environmental
Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O.
584."39 On July 6, 2011, the OP issued a Resolution, denying the Motion for Reconsideration filed
by the petitioners.

Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact
of the OP’s Decision and Resolution. In their Reply, petitioners chose to ignore the OP Decision
and continued to reuse their old arguments claiming that they were granted FTAAs and, thus, the
case was moot. Petitioners filed a Manifestation and Submission dated October 19,
2012,40 wherein they asserted that the present petition is moot since, in a remarkable turn of
events, MBMI was able to sell/assign all its shares/interest in the "holding companies" to DMCI
Mining Corporation (DMCI), a Filipino corporation and, in effect, making their respective
corporations fully-Filipino owned.

Again, it is quite evident that petitioners have been trying to have this case dismissed for being
"moot." Their final act, wherein MBMI was able to allegedly sell/assign all its shares and interest
in the petitioner "holding companies" to DMCI, only proves that they were in fact not Filipino
corporations from the start. The recent divesting of interest by MBMI will not change the stand of
this Court with respect to the nationality of petitioners prior the suspicious change in their
corporate structures. The new documents filed by petitioners are factual evidence that this Court
has no power to verify.

The only thing clear and proved in this Court is the fact that the OP declared that petitioner
corporations have violated several mining laws and made misrepresentations and falsehood in
their applications for FTAA which lead to the revocation of the said FTAAs, demonstrating that
petitioners are not beyond going against or around the law using shifty actions and strategies.
Thus, in this instance, we can say that their claim of mootness is moot in itself because their
defense of conversion of MPSAs to FTAAs has been discredited by the OP Decision.

Grandfather test

The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or
foreign. In their previous petitions, they had been adamant in insisting that they were Filipino
corporations, until they submitted their Manifestation and Submission dated October 19, 2012
where they stated the alleged change of corporate ownership to reflect their Filipino ownership.
Thus, there is a need to determine the nationality of petitioner corporations.

Basically, there are two acknowledged tests in determining the nationality of a corporation: the
control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005,
adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other
laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural
resources owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital stock
or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be
counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the
second part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent
grandfather rule.

Prior to this recent change of events, petitioners were constant in advocating the application of
the "control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign
Investments Act (FIA), rather than using the stricter grandfather rule. The pertinent provision
under Sec. 3 of the FIA provides:

SECTION 3. Definitions. - As used in this Act:

a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership
or association wholly owned by the citizens of the Philippines; a corporation organized under the
laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and
entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That were a
corporation and its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both corporations must be owned and held by citizens
of the Philippines and at least sixty percent (60%) of the members of the Board of Directors, in
order that the corporation shall be considered a Philippine national. (emphasis supplied)

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the
definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further
claim that the grandfather rule "has been abandoned and is no longer the applicable rule."41 They
also opined that the last portion of Sec. 3 of the FIA admits the application of a "corporate layering"
scheme of corporations. Petitioners claim that the clear and unambiguous wordings of the statute
preclude the court from construing it and prevent the court’s use of discretion in applying the law.
They said that the plain, literal meaning of the statute meant the application of the control test is
obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent
the Constitution and pertinent laws, then it becomes illegal. Further, the pronouncement of
petitioners that the grandfather rule has already been abandoned must be discredited for lack of
basis.

Art. XII, Sec. 2 of the Constitution provides:

Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils,
all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural
resources are owned by the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and utilization of natural
resources shall be under the full control and supervision of the State. The State may directly
undertake such activities, or it may enter into co-production, joint venture or production-sharing
agreements with Filipino citizens, or corporations or associations at least sixty per centum of
whose capital is owned by such citizens. Such agreements may be for a period not exceeding
twenty-five years, renewable for not more than twenty-five years, and under such terms and
conditions as may be provided by law.

xxxx
The President may enter into agreements with Foreign-owned corporations involving either
technical or financial assistance for large-scale exploration, development, and utilization of
minerals, petroleum, and other mineral oils according to the general terms and conditions
provided by law, based on real contributions to the economic growth and general welfare of the
country. In such agreements, the State shall promote the development and use of local scientific
and technical resources. (emphasis supplied)

The emphasized portion of Sec. 2 which focuses on the State entering into different types of
agreements for the exploration, development, and utilization of natural resources with entities who
are deemed Filipino due to 60 percent ownership of capital is pertinent to this case, since the
issues are centered on the utilization of our country’s natural resources or specifically, mining.
Thus, there is a need to ascertain the nationality of petitioners since, as the Constitution so
provides, such agreements are only allowed corporations or associations "at least 60 percent of
such capital is owned by such citizens." The deliberations in the Records of the 1986
Constitutional Commission shed light on how a citizenship of a corporation will be determined:

Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national
economy is freedom from undue foreign control? What is the meaning of undue foreign control?

MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and
the welfare of the Filipino in the economic sphere.

MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply
freedom from foreign control? I think that is the meaning of independence, because as phrased,
it still allows for foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the
60/40 possibility in the cultivation of natural resources, 40 percent involves some control; not total
control, but some control.

MR. BENNAGEN: In any case, I think in due time we will propose some amendments.

MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.

Mr. BENNAGEN: Yes.

Thank you, Mr. Vice-President.

xxxx

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation’? Will the Committee please enlighten me on this?

MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP
Law Center who provided us with a draft. The phrase that is contained here which we adopted
from the UP draft is ‘60 percent of the voting stock.’

MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with
60-40 percent equity invests in another corporation which is permitted by the Corporation Code,
does the Committee adopt the grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

MR. NOLLEDO: Therefore, we need additional Filipino capital?

MR. VILLEGAS: Yes.42 (emphasis supplied)

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule
in cases where corporate layering is present.

Elementary in statutory construction is when there is conflict between the Constitution and a
statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions under
Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no
place of application. As decreed by the honorable framers of our Constitution, the grandfather
rule prevails and must be applied.

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a
corporation for purposes, among others, of determining compliance with nationality requirements
(the ‘Investee Corporation’). Such manner of computation is necessary since the shares in the
Investee Corporation may be owned both by individual stockholders (‘Investing Individuals’) and
by corporations and partnerships (‘Investing Corporation’). The said rules thus provide for the
determination of nationality depending on the ownership of the Investee Corporation and, in
certain instances, the Investing Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the
Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control
Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC
Rules which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the capital
of which is owned by Filipino citizens shall be considered as of Philippine nationality.’ Under the
liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-
owned is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in
said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership
in the corporation or partnership is less than 60%, only the number of shares corresponding to
such percentage shall be counted as of Philippine nationality." Under the Strict Rule or
Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee
Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino
ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the
Investing Corporation and added to the shares directly owned in the Investee Corporation x x x.

xxxx

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second
part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt
(i.e., in cases where the joint venture corporation with Filipino and foreign stockholders with less
than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either
60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign
equity ownership is not in doubt, the Grandfather Rule will not apply. (emphasis supplied)

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the
application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt
prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt is
present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since
their common investor, the 100% Canadian corporation––MBMI, funded them. However,
petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less than
60%.43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60%
fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only
made an example of an instance where "doubt" as to the ownership of the corporation exists. It
would be ludicrous to limit the application of the said word only to the instances where the
stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a
corporation. The corporations interested in circumventing our laws would clearly strive to have
"60% Filipino Ownership" at face value. It would be senseless for these applying corporations to
state in their respective articles of incorporation that they have less than 60% Filipino stockholders
since the applications will be denied instantly. Thus, various corporate schemes and layerings are
utilized to circumvent the application of the Constitution.

Obviously, the instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To determine,
therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule must be used.

McArthur Mining, Inc.

To establish the actual ownership, interest or participation of MBMI in each of petitioners’

corporate structure, they have to be "grandfathered."

As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its
application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided
into 10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed to by the
following:44

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Corporation
MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
Inc.
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP PhP 2,708,174.60
10,000,000.00 (emphasis supplied)

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure
and composition as McArthur. In fact, it would seem that MBMI is also a major investor and
"controls"45 MBMI and also, similar nominal shareholders were present, i.e. Fernando B. Esguerra
(Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell
(Cawkell):

Madridejos Mining Corporation

Name Nationality Number of Amount Amount Paid

Shares Subscribed
 Olympic Mines Filipino 6,663 PhP 6,663,000.00 PhP 0
&

Development

Corp.
MBMI Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00
Resources,

Inc.
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando
Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Cawkell
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with
respect to the number of shares they subscribed to in the corporation, which is quite absurd since
Olympic is the major stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why
Olympic failed to pay any amount with respect to the number of shares it subscribed to. It states
that Olympic entered into joint venture agreements with several Philippine companies, wherein it
holds directly and indirectly a 60% effective equity interest in the Olympic Properties. 46 Quoting
the said Annual report:

On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic")
entered into a series of agreements including a Property Purchase and Development Agreement
(the Transaction Documents) with respect to three nickel laterite properties in Palawan,
Philippines (the "Olympic Properties"). The Transaction Documents effectively establish a joint
venture between the Company and Olympic for purposes of developing the Olympic Properties.
The Company holds directly and indirectly an initial 60% interest in the joint venture. Under certain
circumstances and upon achieving certain milestones, the Company may earn up to a 100%
interest, subject to a 2.5% net revenue royalty.47 (emphasis supplied)

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company

layering was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more
than 60% or more equity interest in McArthur, making the latter a foreign corporation.

Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos
(PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share, as
demonstrated below:

[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]
 Name Nationality Number of Amount Amount Paid

Shares Subscribed

Sara Marie Filipino 5,997 PhP PhP 825,000.00

5,997,000.00
Mining, Inc.

MBMI Canadian 3,998 PhP PhP 1,878,174.60

3,998,000.00
Resources, Inc.

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP 2,708,174.60

10,000,000.00
(emphasis
supplied)

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures
as the corporate structure of petitioner McArthur, down to the last centavo. All the other
shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures
under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly
the same. Delving deeper, we scrutinize SMMI’s corporate structure:

Sara Marie Mining, Inc.

[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Olympic Mines & Filipino 6,663 PhP PhP 0

6,663,000.00
Development

Corp.

MBMI Resources, Canadian 3,331 PhP PhP 2,794,000.00

3,331,000.00
Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

 Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP 2,809,900.00

10,000,000.00
(emphasis
supplied)

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the
glaring similarity between SMMI and MMC’s corporate structure. Again, the presence of identical
stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando,
Mason and Cawkell. The figures under the headings "Nationality," "Number of Shares," "Amount
Subscribed," and "Amount Paid" are exactly the same except for the amount paid by MBMI which
now reflects the amount of two million seven hundred ninety four thousand pesos (PhP
2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine thousand
nine hundred pesos (PhP 2,809,900).

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in

SMMI’s corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more
equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus,
disqualifies it to participate in the exploitation, utilization and development of our natural
resources.

Narra Nickel Mining and Development Corporation

Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA
application, whose corporate structure’s arrangement is similar to that of the first two petitioners
discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is divided into
ten thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share, shown as
follows:

[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Patricia Louise Filipino 5,997 PhP PhP 1,677,000.00

5,997,000.00
Mining &

Development

Corp.

MBMI Canadian 3,998 PhP PhP 1,116,000.00

3,996,000.00
Resources, Inc.
 Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

Mendoza, Jr.

Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernandez

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Bocalan

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Robert L. American 1 PhP 1,000.00 PhP 1,000.00

McCurdy

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP 2,800,000.00

10,000,000.00 (emphasis
supplied)

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is
present in this corporate structure.

Patricia Louise Mining & Development Corporation

Using the grandfather method, we further look and examine PLMDC’s corporate structure:

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Palawan Alpha South Filipino 6,596 PhP PhP 0
Resources Development 6,596,000.00
Corporation
MBMI Resources, Canadian 3,396 PhP PhP
3,396,000.00 2,796,000.00
Inc.
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
 (emphasis
supplied)

Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount
of money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources
and Development Corp. (PASRDC), is zero.

Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains
the reason behind the intricate corporate layering that MBMI immersed itself in:

JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in
the acquisition, exploration and development of mineral properties in the Philippines is described
as follows:

(a) Olympic Group

The Philippine companies holding the Olympic Property, and the ownership and interests therein,
are as follows:

Olympic- Philippines (the "Olympic Group")

Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an
effective equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement,
the Company exercises joint control over the companies in the Olympic Group.

(b) Alpha Group

The Philippine companies holding the Alpha Property, and the ownership interests therein, are as
follows:

Alpha- Philippines (the "Alpha Group")

Patricia Louise Mining Development Inc. ("Patricia") 34.0%

Narra Nickel Mining & Development Corporation (Narra) 60.4%

Under a joint venture agreement the Company holds directly and indirectly an effective equity
interest in the Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company
exercises joint control over the companies in the Alpha Group.48 (emphasis supplied)

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro
and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their
equity interests. Such conclusion is derived from grandfathering petitioners’ corporate owners,
namely: MMI, SMMI and PLMDC. Going further and adding to the picture, MBMI’s Summary of
Significant Accounting Policies statement– –regarding the "joint venture" agreements that it
entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra.
Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or
corporations under the "Alpha" group wherein MBMI has joint venture agreements with, practically
exercising majority control over the corporations mentioned. In effect, whether looking at the
capital structure or the underlying relationships between and among the corporations, petitioners
are NOT Filipino nationals and must be considered foreign since 60% or more of their capital
stocks or equity interests are owned by MBMI.

Application of the res inter alios acta rule

Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by
co-partner or agent" rule and "admission by privies" under the Rules of Court in the instant case,
by pointing out that statements made by MBMI should not be admitted in this case since it is not
a party to the case and that it is not a "partner" of petitioners.

Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:

Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the
party within the scope of his authority and during the existence of the partnership or agency, may
be given in evidence against such party after the partnership or agency is shown by evidence
other than such act or declaration itself. The same rule applies to the act or declaration of a joint
owner, joint debtor, or other person jointly interested with the party.

Sec. 31. Admission by privies.- Where one derives title to property from another, the act,
declaration, or omission of the latter, while holding the title, in relation to the property, is evidence
against the former.

Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership
relation must be shown, and that proof of the fact must be made by evidence other than the
admission itself."49 Thus, petitioners assert that the CA erred in finding that a partnership
relationship exists between them and MBMI because, in fact, no such partnership exists.

Partnerships vs. joint venture agreements

Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They
challenged the conclusion of the CA which pertains to the close characteristics of

"partnerships" and "joint venture agreements." Further, they asserted that before this particular
partnership can be formed, it should have been formally reduced into writing since the capital
involved is more than three thousand pesos (PhP 3,000). Being that there is no evidence of written
agreement to form a partnership between petitioners and MBMI, no partnership was created.

We disagree.

A partnership is defined as two or more persons who bind themselves to contribute money,
property, or industry to a common fund with the intention of dividing the profits among
themselves.50 On the other hand, joint ventures have been deemed to be "akin" to partnerships
since it is difficult to distinguish between joint ventures and partnerships. Thus:

[T]he relations of the parties to a joint venture and the nature of their association are so similar
and closely akin to a partnership that it is ordinarily held that their rights, duties, and liabilities are
to be tested by rules which are closely analogous to and substantially the same, if not exactly the
same, as those which govern partnership. In fact, it has been said that the trend in the law has
been to blur the distinctions between a partnership and a joint venture, very little law being found
applicable to one that does not apply to the other.51

Though some claim that partnerships and joint ventures are totally different animals, there are
very few rules that differentiate one from the other; thus, joint ventures are deemed "akin" or
similar to a partnership. In fact, in joint venture agreements, rules and legal incidents governing
partnerships are applied.52

Accordingly, culled from the incidents and records of this case, it can be assumed that the
relationships entered between and among petitioners and MBMI are no simple "joint venture
agreements." As a rule, corporations are prohibited from entering into partnership agreements;
consequently, corporations enter into joint venture agreements with other corporations or
partnerships for certain transactions in order to form "pseudo partnerships."

Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI
was executed to circumvent the legal prohibition against corporations entering into partnerships,
then the relationship created should be deemed as "partnerships," and the laws on partnership
should be applied. Thus, a joint venture agreement between and among corporations may be
seen as similar to partnerships since the elements of partnership are present.

Considering that the relationships found between petitioners and MBMI are considered to be
partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.

Panel of Arbitrators’ jurisdiction

We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The
POA has jurisdiction to settle disputes over rights to mining areas which definitely involve the
petitions filed by Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by filing its
petition against petitioners, is asserting the right of Filipinos over mining areas in the Philippines
against alleged foreign-owned mining corporations. Such claim constitutes a "dispute" found in
Sec. 77 of RA 7942:

Within thirty (30) days, after the submission of the case by the parties for the decision, the panel
shall have exclusive and original jurisdiction to hear and decide the following:

(a) Disputes involving rights to mining areas

(b) Disputes involving mineral agreements or permits

We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or
opposition to an application for mineral agreement. The POA therefore has the jurisdiction to
resolve any adverse claim, protest, or opposition to a pending application for a mineral agreement
filed with the concerned Regional Office of the MGB. This is clear from Secs. 38 and 41 of the
DENR AO 96-40, which provide:

Sec. 38.

xxxx

Within thirty (30) calendar days from the last date of publication/posting/radio announcements,
the authorized officer(s) of the concerned office(s) shall issue a certification(s) that the
publication/posting/radio announcement have been complied with. Any adverse claim, protest,
opposition shall be filed directly, within thirty (30) calendar days from the last date of
publication/posting/radio announcement, with the concerned Regional Office or through any
concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its
resolution by the Panel of Arbitrators pursuant to the provisions of this Act and these implementing
rules and regulations. Upon final resolution of any adverse claim, protest or opposition, the Panel
of Arbitrators shall likewise issue a certification to that effect within five (5) working days from the
date of finality of resolution thereof. Where there is no adverse claim, protest or opposition, the
Panel of Arbitrators shall likewise issue a Certification to that effect within five working days
therefrom.

xxxx

No Mineral Agreement shall be approved unless the requirements under this Section are fully
complied with and any adverse claim/protest/opposition is finally resolved by the Panel of
Arbitrators.

Sec. 41.

xxxx

Within fifteen (15) working days form the receipt of the Certification issued by the Panel of
Arbitrators as provided in Section 38 hereof, the concerned Regional Director shall initially
evaluate the Mineral Agreement applications in areas outside Mineral reservations. He/She shall
thereafter endorse his/her findings to the Bureau for further evaluation by the Director within
fifteen (15) working days from receipt of forwarded documents. Thereafter, the Director shall
endorse the same to the secretary for consideration/approval within fifteen working days from
receipt of such endorsement.

In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15)
working days from receipt of the Certification issued by the Panel of Arbitrators as provided for in
Section 38 hereof, the same shall be evaluated and endorsed by the Director to the Secretary for
consideration/approval within fifteen days from receipt of such endorsement. (emphasis supplied)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining
areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a
mineral agreement or conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right
application is further elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of

Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said sections
may also be filed directly with the Panel of Arbitrators within the concerned periods for filing such
claim, protest or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the proposed
contract area is located once a week for two (2) consecutive weeks in a language generally
understood in the locality. After forty-five (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was filed within the said forty-five (45)
days, the concerned offices shall issue a certification that publication/posting has been made and
that no adverse claim, protest or opposition of whatever nature has been filed. On the other hand,
if there be any adverse claim, protest or opposition, the same shall be filed within forty-five (45)
days from the last date of publication/posting, with the Regional Offices concerned, or through
the Department’s Community Environment and Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional
Office for resolution of the Panel of Arbitrators. However previously published valid and subsisting
mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and
resolved by the Panel of Arbitrators. (Emphasis supplied.)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining
areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a
mineral agreement or conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right
application is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of

Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said sections
may also be filed directly with the Panel of Arbitrators within the concerned periods for filing such
claim, protest or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement Application.-

xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the proposed
contract area is located once a week for two (2) consecutive weeks in a language generally
understood in the locality. After forty-five (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was filed within the said forty-five (45)
days, the concerned offices shall issue a certification that publication/posting has been made and
that no adverse claim, protest or opposition of whatever nature has been filed. On the other hand,
if there be any adverse claim, protest or opposition, the same shall be filed within forty-five (45)
days from the last date of publication/posting, with the Regional offices concerned, or through the
Department’s Community Environment and Natural Resources Officers (CENRO) or Provincial
Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for
resolution of the Panel of Arbitrators. However, previously published valid and subsisting mining
claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and
resolved by the Panel of Arbitrators. (Emphasis supplied.)

These provisions lead us to conclude that the power of the POA to resolve any adverse claim,
opposition, or protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to
adverse claims, conflicts and oppositions relating to applications for the grant of mineral rights.

POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions
and it has no authority to approve or reject said applications. Such power is vested in the DENR
Secretary upon recommendation of the MGB Director. Clearly, POA’s jurisdiction over "disputes
involving rights to mining areas" has nothing to do with the cancellation of existing mineral
agreements. (emphasis ours)

Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve

disputes over MPSA applications subject of Redmont’s petitions. However, said jurisdiction does
not include either the approval or rejection of the MPSA applications, which is vested only upon
the Secretary of the DENR. Thus, the finding of the POA, with respect to the rejection of
petitioners’ MPSA applications being that they are foreign corporation, is valid.

Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the
POA, that has jurisdiction over the MPSA applications of petitioners.

This postulation is incorrect.

It is basic that the jurisdiction of the court is determined by the statute in force at the time of the
commencement of the action.54

Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization

Act of 1980" reads:

Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original
jurisdiction:

1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.

On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:

Section 77. Panel of Arbitrators.—

x x x Within thirty (30) days, after the submission of the case by the parties for the decision,
the panel shall have exclusive and original jurisdiction to hear and decide the following:

(c) Disputes involving rights to mining areas

 (d) Disputes involving mineral agreements or permits

It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights
to mining areas. One such dispute is an MPSA application to which an adverse claim, protest or
opposition is filed by another interested applicant.1âwphi1 In the case at bar, the dispute arose
or originated from MPSA applications where petitioners are asserting their rights to mining areas
subject of their respective MPSA applications. Since respondent filed 3 separate petitions for the
denial of said applications, then a controversy has developed between the parties and it is POA’s
jurisdiction to resolve said disputes.

Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the
DENR Regional Office or any concerned DENRE or CENRO are MPSA applications. Thus POA
has jurisdiction.

Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary
jurisdiction. Euro-med Laboratories v. Province of Batangas55 elucidates:

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the
expertise, specialized training and knowledge of an administrative body, relief must first be
obtained in an administrative proceeding before resort to the courts is had even if the matter may
well be within their proper jurisdiction.

Whatever may be the decision of the POA will eventually reach the court system via a resort to
the CA and to this Court as a last recourse.

Selling of MBMI’s shares to DMCI

As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want
us to declare the instant petition moot and academic due to the transfer and conveyance of all
the shareholdings and interests of MBMI to DMCI, a corporation duly organized and existing under
Philippine laws and is at least 60% Philippine-owned.56 Petitioners reasoned that they now cannot
be considered as foreign-owned; the transfer of their shares supposedly cured the "defect" of their
previous nationality. They claimed that their current FTAA contract with the State should stand
since "even wholly-owned foreign corporations can enter into an FTAA with the
State."57 Petitioners stress that there should no longer be any issue left as regards their
qualification to enter into FTAA contracts since they are qualified to engage in mining activities in
the Philippines. Thus, whether the "grandfather rule" or the "control test" is used, the nationalities
of petitioners cannot be doubted since it would pass both tests.

The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and
said fact should be disregarded. The manifestation can no longer be considered by us since it is
being tackled in G.R. No. 202877 pending before this Court.1âwphi1 Thus, the question of
whether petitioners, allegedly a Philippine-owned corporation due to the sale of MBMI's
shareholdings to DMCI, are allowed to enter into FTAAs with the State is a non-issue in this case.

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation
is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to
undertake the exploration, development and utilization of the natural resources of the Philippines.
When in the mind of the Court there is doubt, based on the attendant facts and circumstances of
the case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the
"grandfather rule."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of
Appeals Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby
AFFIRMED.

SO ORDERED.

6. Strategic Alliance Development Corp. Vs. Radstock Secuirites Limited, 607 SCRA 413
G.R. No. 178158 December 4, 2009

STRATEGIC ALLIANCE DEVELOPMENT CORPORATION, Petitioner,

vs.
RADSTOCK SECURITIES LIMITED and PHILIPPINE NATIONAL CONSTRUCTION
CORPORATION, Respondents.
ASIAVEST MERCHANT BANKERS BERHAD, Intervenor.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 180428

LUIS SISON, Petitioner,

vs.
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION and RADSTOCK SECURITIES
LIMITED, Respondents.

DECISION

CARPIO, J.:

Prologue

This case is an anatomy of a ₱6.185 billion1 pillage of the public coffers that ranks among one of
the most brazen and hideous in the history of this country. This case answers the questions why
our Government perennially runs out of funds to provide basic services to our people, why the
great masses of the Filipino people wallow in poverty, and why a very select few amass
unimaginable wealth at the expense of the Filipino people.

On 1 May 2007, the 30-year old franchise of Philippine National Construction Corporation (PNCC)
under Presidential Decree No. 1113 (PD 1113), as amended by Presidential Decree No. 1894
(PD 1894), expired. During the 13th Congress, PNCC sought to extend its franchise. PNCC won
approval from the House of Representatives, which passed House Bill No. 57492 renewing
PNCC’s franchise for another 25 years. However, PNCC failed to secure approval from the
Senate, dooming the extension of PNCC’s franchise. Led by Senator Franklin M. Drilon, the
Senate opposed PNCC’s plea for extension of its franchise.3 Senator Drilon’s privilege
speech4 explains why the Senate chose not to renew PNCC’s franchise:

I repeat, Mr. President. PNCC has agreed in a compromise agreement dated 17 August 2006 to
transfer to Radstock Securities Limited ₱17,676,063,922, no small money, Mr. President, my dear
colleagues, ₱17.6 billion.

What does it consist of? It consists of the following: 19 pieces of real estate properties with an
appraised value of ₱5,993,689,000. Do we know what is the bulk of this? An almost 13-hectare
property right here in the Financial Center. As we leave the Senate, as we go out of this Hall, as
we drive thru past the GSIS, we will see on the right a vacant lot, that is PNCC property. As we
turn right on Diosdado Macapagal, we see on our right new buildings, these are all PNCC
properties. That is 12.9 hectares of valuable asset right in this Financial Center that is worth
₱5,993,689.000.

What else, Mr. President? The 20% of the outstanding capital stock of PNCC with a par value of
₱2,300,000,000-- I repeat, 20% of the outstanding capital stock of PNCC worth ₱2,300 billion--
was assigned to Radstock.

In addition, Mr. President and my dear colleagues, please hold on to your seats because part of
the agreement is 50% of PNCC’s 6% share in the gross toll revenue of the Manila North Tollways
Corporation for 27 years, from 2008 to 2035, is being assigned to Radstock. How much is this
worth? It is worth ₱9,382,374,922. I repeat, ₱9,382,374,922.
xxxx

Mr. President, ₱17,676,000,000, however, was made to appear in the agreement to be only worth
₱6,196,156,488. How was this achieved? How was an aggregate amount of ₱17,676,000,000
made to appear to be only ₱6,196,156,488? First, the 19 pieces of real estate worth
₱5,993,689,000 were only assigned a value of ₱4,195,000,000 or only 70% of their appraised
value.

Second, the PNCC shares of stock with a par value of ₱2.3 billion were marked to market and
therefore were valued only at ₱713 million.

Third, the share of the toll revenue assigned was given a net present value of only ₱1,287,000,000
because of a 15% discounted rate that was applied.

In other words, Mr. President, the toll collection of ₱9,382,374,922 for 27 years was given a net
present value of only ₱1,287,000,000 so that it is made to appear that the compromise agreement
is only worth ₱6,196,000,000.

Mr. President, my dear colleagues, this agreement will substantially wipe out all the assets of
PNCC. It will be left with nothing else except, probably, the collection for the next 25 years or so
from the North Luzon Expressway. This agreement brought PNCC to the cleaners and literally
cleaned the PNCC of all its assets. They brought PNCC to the cleaners and cleaned it to the tune
of ₱17,676,000,000.

xxxx

Mr. President, are we not entitled, as members of the Committee, to know who is Radstock
Securities Limited?

Radstock Securities Limited was allegedly incorporated under the laws of the British Virgin
Islands. It has no known board of directors, except for its recently appointed attorney-in-fact, Mr.
Carlos Dominguez.

Mr. President, are the members of the Committee not entitled to know why 20 years after the
account to Marubeni Corporation, which gave rise to the compromise agreement 20 years after
the obligation was allegedly incurred, PNCC suddenly recognized this obligation in its books when
in fact this obligation was not found in its books for 20 years?

In other words, Mr. President, for 20 years, the financial statements of PNCC did not show any
obligation to Marubeni, much less, to Radstock. Why suddenly on October 20, 2000, ₱10 billion
in obligation was recognized? Why was it recognized?

During the hearing on December 18, Mr. President, we asked this question to the Asset
Privatization Trust (APT) trustee, Atty. Raymundo Francisco, and he was asked: "What is the
basis of your recommendation to recognize this?" He said: "I based my recommendation on a
legal opinion of Feria and Feria." I asked him: "Who knew of this opinion?" He said: "Only me and
the chairman of PNCC, Atty. Renato Valdecantos." I asked him: "Did you share this opinion with
the members of the board who recognized the obligation of ₱10 billion?" He said: "No." "Can you
produce this opinion now?" He said: "I have no copy."

Mysteriously, Mr. President, an obligation of ₱10 billion based on a legal opinion which, even Mr.
Arthur Aguilar, the chairman of PNCC, is not aware of, none of the members of the PNCC board
on October 20, 2000 who recognized this obligation had seen this opinion. It is mysterious.

Mr. President, are the members of our Committee not entitled to know why Radstock Securities
Limited is given preference over all other creditors notwithstanding the fact that this is an
unsecured obligation? There is no mortgage to secure this obligation.

More importantly, Mr. President, equally recognized is the obligation of PNCC to the Philippine
government to the tune of ₱36 billion. PNCC owes the Philippine government ₱36 billion
recognized in its books, apart from ₱3 billion in taxes. Why in the face of all of these is Radstock
given preference? Why is it that Radstock is given preference to claim ₱17.676 billion of the
assets of PNCC and give it superior status over the claim of the Philippine government, of the
Filipino people to the extent of ₱36 billion and taxes in the amount of P3 billion? Why, Mr.
President? Why is Radstock given preference not only over the Philippine government claims of
₱39 billion but also over other creditors including a certain best merchant banker in Asia, which
has already a final and executory judgment against PNCC for about ₱300 million? Why, Mr.
President? Are we not entitled to know why the compromise agreement assigned ₱17.676 billion
to Radstock? Why was it executed?5 (Emphasis supplied)

Aside from Senator Drilon, Senator Sergio S. Osmeña III also saw irregularities in the transactions
involving the Marubeni loans, thus:

SEN. OSMEÑA. Ah okay. Good.

Now, I'd like to point out to the Committee that – it seems that this was a politically driven deal
like IMPSA. Because the acceptance of the 10 billion or 13 billion debt came in October 2000 and
the Radstock assignment was January 10, 2001. Now, why would Marubeni sell for $2 million
three months after there was a recognition that it was owed ₱10 billion. Can you explain that, Mr.
Dominguez?

MR. DOMINGUEZ. Your Honor, I am not aware of the decision making process of Marubeni. But
my understanding was, the Japanese culture is not a litigious one and they didn't want to get into
a, you know, a court situation here in the Philippines having a lot of other interest, et cetera.

SEN. OSMEÑA. Well, but that is beside the point, Mr. Dominguez. All I am asking is does it stand
to reason that after you get an acceptance by a debtor that he owes you 10 billion, you sell your
note for 100 million.

Now, if that had happened a year before, maybe I would have understood why he sold for such a
low amount. But right after, it seems that this was part of an orchestrated deal wherein with certain
powerful interest would be able to say, "Yes, we will push through. We'll fix the courts. We'll fix
the board. We'll fix the APT. And we will be able to do it, just give us 55 percent of whatever is
recovered," am I correct?

MR. DOMINGUEZ. As I said, Your Honor, I am not familiar with the decision making process of
Marubeni. But my understanding was, as I said, they didn't want to get into a …

SEN. OSMEÑA. All right.

MR. DOMINGUEZ. ...litigious situation.6

xxxx

SEN. OSMEÑA. All of these financial things can be arranged. They can hire a local bank, Filipino,
to be trustee for the real estate. So ...

SEN. DRILON. Well, then, that’s a dummy relationship.

SEN. OSMEÑA. In any case, to me the main point here is that a third party, Radstock, whoever
owns it, bought Marubeni’s right for $2 million or ₱100 million. Then, they are able to go through
all these legal machinations and get awarded with the consent of PNCC of 6 billion. That’s a 100
million to 6 billion. Now, Mr. Aguilar, you have been in the business for such a long time. I mean,
this hedge funds whether it’s Radstock or New Bridge or Texas Pacific Group or Carlyle or Avenue
Capital, they look at their returns. So if Avenue Capital buys something for $2 million and you give
him $4 million in one year, it’s a 100 percent return. They’ll walk away and dance to their
stockholders. So here in this particular case, if you know that Radstock only bought it for $2
million, I would have gotten board approval and say, "Okay, let’s settle this for $4 million." And
Radstock would have jumped up and down. So what looks to me is that this was already a
scheme. Marubeni wrote it off already. Marubeni wrote everything off. They just got a $2 million
and they probably have no more residual rights or maybe there’s a clause there, a secret clause,
that says, "I want 20 percent of whatever you’re able to eventually collect." So $2 million. But
whatever it is, Marubeni practically wrote it off. Radstock’s liability now or exposure is only $2
million plus all the lawyer fees, under-the-table, etcetera. All right. Okay. So it’s pretty obvious to
me that if anybody were using his brain, I would have gone up to Radstock and say, "Here’s $4
million. Here’s P200 million. Okay." They would have walked away. But evidently, the "ninongs"
of Radstock – See, I don’t care who owns Radstock. I want to know who is the ninong here who
stands to make a lot of money by being able to get to courts, the government agencies, OGCC,
or whoever else has been involved in this, to agree to 6 billion or whatever it was. That’s a lot of
money. And believe me, Radstock will probably get one or two billion and four billion will go into
somebody else’s pocket. Or Radstock will turn around, sell that claim for ₱4 billion and let the
new guy just collect the payments over the years.

x x x x7

SEN. OSMEÑA. x x x I just wanted to know is CDCP Mining a 100 percent subsidiary of PNCC?

MR. AGUILAR. Hindi ho. Ah, no.

SEN. OSMEÑA. If they’re not a 100 percent, why would they sign jointly and severally? I just want
to plug the loopholes.

MR. AGUILAR. I think it was – if I may just speculate. It was just common ownership at that time.

SEN. OSMEÑA. Al right. Now – Also, the ...

MR. AGUILAR. Ah, 13 percent daw, Your Honor.

SEN. OSMEÑA. Huh?

MR. AGUILAR. Thirteen percent ho.

SEN. OSMEÑA. What’s 13 percent?

MR. AGUILAR. We owned ...

xxxx

SEN. OSMEÑA. x x x CDCP Mining, how many percent of the equity of CDCP Mining was owned
by PNCC, formerly CDCP?

MS. PASETES. Thirteen percent.

SEN. OSMEÑA. Thirteen. And as a 13 percent owner, they agreed to sign jointly and severally?

MS. PASETES. Yes.

SEN. OSMEÑA. One-three? So poor PNCC and CDCP got taken to the cleaners here. They sign
for a 100 percent and they only own 13 percent.

x x x x8 (Emphasis supplied)

I.
The Case

Before this Court are the consolidated petitions for review9 filed by Strategic Alliance Development
Corporation (STRADEC) and Luis Sison (Sison), with a motion for intervention filed by Asiavest
Merchant Bankers Berhad (Asiavest), challenging the validity of the Compromise Agreement
between PNCC and Radstock. The Court of Appeals approved the Compromise Agreement in its
Decision of 25 January 200710 in CA-G.R. CV No. 87971.
II.
The Antecedents

PNCC was incorporated in 1966 for a term of fifty years under the Corporation Code with the
name Construction Development Corporation of the Philippines (CDCP).11 PD 1113, issued on
31 March 1977, granted CDCP a 30-year franchise to construct, operate and maintain toll facilities
in the North and South Luzon Tollways. PD 1894, issued on 22 December 1983, amended PD
1113 to include in CDCP’s franchise the Metro Manila Expressway, which would "serve as an
additional artery in the transportation of trade and commerce in the Metro Manila area."

Sometime between 1978 and 1981, Basay Mining Corporation (Basay Mining), an affiliate of
CDCP, obtained loans from Marubeni Corporation of Japan (Marubeni) amounting to
5,460,000,000 yen and US$5 million. A CDCP official issued letters of guarantee for the loans,
committing CDCP to pay solidarily for the full amount of the 5,460,000,000 yen loan and to the
extent of ₱20 million for the US$5 million loan. However, there was no CDCP Board Resolution
authorizing the issuance of the letters of guarantee. Later, Basay Mining changed its name to
CDCP Mining Corporation (CDCP Mining). CDCP Mining secured the Marubeni loans when
CDCP and CDCP Mining were still privately owned and managed.

Subsequently in 1983, CDCP changed its corporate name to PNCC to reflect the extent of the
Government's equity investment in the company, which arose when government financial
institutions converted their loans to PNCC into equity following PNCC’s inability to pay the
loans.12 Various government financial institutions held a total of seventy-seven point forty-eight
percent (77.48%) of PNCC’s voting equity, most of which were later transferred to the Asset
Privatization Trust (APT) under Administrative Orders No. 14 and 64, series of 1987 and 1988,
respectively.13 Also, the Presidential Commission on Good Government holds some 13.82% of
PNCC’s voting equity under a writ of sequestration and through the voluntary surrender of certain
PNCC shares. In fine, the Government owns 90.3% of the equity of PNCC and only 9.70% of
PNCC’s voting equity is under private ownership.14

Meanwhile, the Marubeni loans to CDCP Mining remained unpaid. On 20 October 2000, during
the short-lived Estrada Administration, the PNCC Board of Directors15 (PNCC Board) passed
Board Resolution No. BD-092-2000 admitting PNCC’s liability to Marubeni for ₱10,743,103,388
as of 30 September 1999. PNCC Board Resolution No. BD-092-2000 reads as follows:

RESOLUTION NO. BD-092-2000

RESOLVED, That the Board recognizes, acknowledges and confirms PNCC’s obligations as of
September 30, 1999 with the following entities, exclusive of the interests and other charges that
may subsequently accrue and still become due therein, to wit:

a). the Government of the Republic of the Philippines in the amount of

₱36,023,784,751.00; and

b). Marubeni Corporation in the amount of ₱10,743,103,388.00. (Emphasis

supplied)

This was the first PNCC Board Resolution admitting PNCC’s liability for the Marubeni loans.
Previously, for two decades the PNCC Board consistently refused to admit any liability for the
Marubeni loans.

Less than two months later, or on 22 November 2000, the PNCC Board passed Board Resolution
No. BD-099-2000 amending Board Resolution No. BD-092-2000. PNCC Board Resolution No.
BD-099-2000 reads as follows:

RESOLUTION NO. BD-099-2000

RESOLVED, That the Board hereby amends its Resolution No. BD-092-2000 dated October 20,
2000 so as to read as follows:
RESOLVED, That the Board recognizes, acknowledges and confirms its obligations as of
September 30, 1999 with the following entities, exclusive of the interests and other charges that
may subsequently accrue and still due thereon, subject to the final determination by the
Commission on Audit (COA) of the amount of obligation involved, and subject further to the
declaration of the legality of said obligations by the Office of the Government Corporate Counsel
(OGCC), to wit:

a). the Government of the Republic of the Philippines in the amount of

₱36,023,784,751.00; and

b). Marubeni Corporation in the amount of ₱10,743,103,388.00. (Emphasis

supplied)

In January 2001, barely three months after the PNCC Board first admitted liability for the Marubeni
loans, Marubeni assigned its entire credit to Radstock for US$2 million or less than ₱100 million.
In short, Radstock paid Marubeni less than 10% of the ₱10.743 billion admitted amount. Radstock
immediately sent a notice and demand letter to PNCC.

On 15 January 2001, Radstock filed an action for collection and damages against PNCC before
the Regional Trial Court of Mandaluyong City, Branch 213 (trial court). In its order of 23 January
2001, the trial court issued a writ of preliminary attachment against PNCC. The trial court ordered
PNCC’s bank accounts garnished and several of its real properties attached. On 14 February
2001, PNCC moved to set aside the 23 January 2001 Order and to discharge the writ of
attachment. PNCC also filed a motion to dismiss the case. The trial court denied both motions.
PNCC filed motions for reconsideration, which the trial court also denied. PNCC filed a petition
for certiorari before the Court of Appeals, docketed as CA-G.R. SP No. 66654, assailing the denial
of the motion to dismiss. On 30 August 2002, the Court of Appeals denied PNCC’s petition. PNCC
filed a motion for reconsideration, which the Court of Appeals also denied in its 22 January 2003
Resolution. PNCC filed a petition for review before this Court, docketed as G.R. No. 156887.

Meanwhile, on 19 June 2001, at the start of the Arroyo Administration, the PNCC Board, under a
new President and Chairman, revoked Board Resolution No. BD-099-2000.

The trial court continued to hear the main case. On 10 December 2002, the trial court ruled in
favor of Radstock, as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and the
defendant is directed to pay the total amount of Thirteen Billion One Hundred Fifty One Million
Nine Hundred Fifty Six thousand Five Hundred Twenty Eight Pesos (₱13,151,956,528.00) with
interest from October 15, 2001 plus Ten Million Pesos (₱10,000,000.00) as attorney’s fees.

SO ORDERED.16

PNCC appealed the trial court’s decision to the Court of Appeals, docketed as CA-G.R. CV No.
87971.

On 19 March 2003, this Court issued a temporary restraining order in G.R. No. 156887 forbidding
the trial court from implementing the writ of preliminary attachment and ordering the suspension
of the proceedings before the trial court and the Court of Appeals. In its 3 October 2005 Decision,
this Court ruled as follows:

WHEREFORE, the petition is partly GRANTED and insofar as the Motion to Set Aside the Order
and/or Discharge the Writ of Attachment is concerned, the Decision of the Court of Appeals on
August 30, 2002 and its Resolution of January 22, 2003 in CA-G.R. SP No. 66654 are
REVERSED and SET ASIDE. The attachments over the properties by the writ of preliminary
attachment are hereby ordered LIFTED effective upon the finality of this Decision. The Decision
and Resolution of the Court of Appeals are AFFIRMED in all other respects. The Temporary
Restraining Order is DISSOLVED immediately and the Court of Appeals is directed to PROCEED
forthwith with the appeal filed by PNCC.

No costs.
SO ORDERED.17

On 17 August 2006, PNCC and Radstock entered into the Compromise Agreement where they
agreed to reduce PNCC’s liability to Radstock, supposedly from ₱17,040,843,968, to
₱6,185,000,000. PNCC and Radstock submitted the Compromise Agreement to this Court for
approval. In a Resolution dated 4 December 2006 in G.R. No. 156887, this Court referred the
Compromise Agreement to the Commission on Audit (COA) for comment. The COA
recommended approval of the Compromise Agreement. In a Resolution dated 22 November
2006, this Court noted the Compromise Agreement and referred it to the Court of Appeals in CA-
G.R. CV No. 87971. In its 25 January 2007 Decision, the Court of Appeals approved the
Compromise Agreement.

STRADEC moved for reconsideration of the 25 January 2007 Decision. STRADEC alleged that it
has a claim against PNCC as a bidder of the National Government’s shares, receivables,
securities and interests in PNCC. The matter is subject of a complaint filed by STRADEC against
PNCC and the Privatization and Management Office (PMO) for the issuance of a Notice of Award
of Sale to Dong-A Consortium of which STRADEC is a partner. The case, docketed as Civil Case
No. 05-882, is pending before the Regional Trial Court of Makati, Branch 146 (RTC Branch 146).

The Court of Appeals treated STRADEC’s motion for reconsideration as a motion for intervention
and denied it in its 31 May 2007 Resolution. STRADEC filed a petition for review before this Court,
docketed as G.R. No. 178158.

Rodolfo Cuenca (Cuenca), a stockholder and former PNCC President and Board Chairman, filed
an intervention before the Court of Appeals. Cuenca alleged that PNCC had no obligation to pay
Radstock. The Court of Appeals also denied Cuenca’s motion for intervention in its Resolution of
31 May 2007. Cuenca did not appeal the denial of his motion.

On 2 July 2007, this Court issued an order directing PNCC and Radstock, their officers, agents,
representatives, and other persons under their control, to maintain the status quo ante.

Meanwhile, on 20 February 2007, Sison, also a stockholder and former PNCC President and
Board Chairman, filed a Petition for Annulment of Judgment Approving Compromise Agreement
before the Court of Appeals. The case was docketed as CA-G.R. SP No. 97982.

Asiavest, a judgment creditor of PNCC, filed an Urgent Motion for Leave to Intervene and to File
the Attached Opposition and Motion-in-Intervention before the Court of Appeals in CA-G.R. SP
No. 97982.

In a Resolution dated 12 June 2007, the Court of Appeals dismissed Sison’s petition on the ground
that it had no jurisdiction to annul a final and executory judgment also rendered by the Court of
Appeals. In the same resolution, the Court of Appeals also denied Asiavest’s urgent motion.

Asiavest filed its Urgent Motion for Leave to Intervene and to File the Attached Opposition and
Motion-in-Intervention in G.R. No. 178158.18

Sison filed a motion for reconsideration. In its 5 November 2007 Resolution, the Court of Appeals
denied Sison’s motion.

On 26 November 2007, Sison filed a petition for review before this Court, docketed as G.R. No.
180428.

In a Resolution dated 18 February 2008, this Court consolidated G.R. Nos. 178158 and 180428.

On 13 January 2009, the Court held oral arguments on the following issues:

1. Does the Compromise Agreement violate public policy?

2. Does the subject matter involve an assumption by the government of a private entity’s
obligation in violation of the law and/or the Constitution? Is the PNCC Board Resolution of
20 October 2000 defective or illegal?
 3. Is the Compromise Agreement viable in the light of the non-renewal of PNCC’s franchise
by Congress and its inclusion of all or substantially all of PNCC’s assets?

4. Is the Decision of the Court of Appeals annullable even if final and executory on grounds
of fraud and violation of public policy and the Constitution?

III.
Propriety of Actions

The Court of Appeals denied STRADEC’s motion for intervention on the ground that the motion
was filed only after the Court of Appeals and the trial court had promulgated their respective
decisions.

Section 2, Rule 19 of the 1997 Rules of Civil Procedure provides:

SECTION 2. Time to intervene.– The motion to intervene may be filed at any time before rendition
of judgment by the trial court. A copy of the pleading-in-intervention shall be attached to the motion
and served on the original parties.

The rule is not absolute. The rule on intervention, like all other rules of procedure, is intended to
make the powers of the Court completely available for justice. 19 It is aimed to facilitate a
comprehensive adjudication of rival claims, overriding technicalities on the timeliness of the filing
of the claims.20 This Court has ruled:

[A]llowance or disallowance of a motion for intervention rests on the sound discretion of the court
after consideration of the appropriate circumstances. Rule 19 of the Rules of Court is a rule of
procedure whose object is to make the powers of the court fully and completely available for
justice. Its purpose is not to hinder or delay but to facilitate and promote the administration of
justice. Thus, interventions have been allowed even beyond the prescribed period in the Rule in
the higher interest of justice. Interventions have been granted to afford indispensable parties, who
have not been impleaded, the right to be heard even after a decision has been rendered by the
trial court, when the petition for review of the judgment was already submitted for decision before
the Supreme Court, and even where the assailed order has already become final and executory.
In Lim v. Pacquing (310 Phil. 722 (1995)], the motion for intervention filed by the Republic of the
Philippines was allowed by this Court to avoid grave injustice and injury and to settle once and
for all the substantive issues raised by the parties.21

In Collado v. Court of Appeals,22 this Court reiterated that exceptions to Section 2, Rule 12 could
be made in the interest of substantial justice. Citing Mago v. Court of Appeals,23 the Court stated:

It is quite clear and patent that the motions for intervention filed by the movants at this stage of
the proceedings where trial had already been concluded x x x and on appeal x x x the same
affirmed by the Court of Appeals and the instant petition for certiorari to review said judgments is
already submitted for decision by the Supreme Court, are obviously and, manifestly late, beyond
the period prescribed under x x x Section 2, Rule 12 of the Rules of Court.

But Rule 12 of the Rules of Court, like all other Rules therein promulgated, is simply a rule of
procedure, the whole purpose and object of which is to make the powers of the Court fully and
completely available for justice. The purpose of procedure is not to thwart justice. Its proper aim
is to facilitate the application of justice to the rival claims of contending parties. It was created not
to hinder and delay but to facilitate and promote the administration of justice. It does not constitute
the thing itself which courts are always striving to secure to litigants. It is designed as the means
best adopted to obtain that thing. In other words, it is a means to an end.

Concededly, STRADEC has no legal interest in the subject matter of the Compromise Agreement.
Section 1, Rule 19 of the 1997 Rules of Civil Procedure states:

SECTION 1. Who may intervene. - A person who has a legal interest in the matter in litigation, or
in the success of either of the parties, or an interest against both, or is so situated as to be
adversely affected by a distribution or other disposition of property in the custody of the court or
of an officer thereof may, with leave of court, be allowed to intervene in the action. The Court shall
consider whether or not the intervention will unduly delay or prejudice the adjudication of the rights
of the original parties, and whether or not the intervenor’s rights may be fully protected in a
separate proceeding.

STRADEC’s interest is dependent on the outcome of Civil Case No. 05-882. Unless STRADEC
can show that RTC Branch 146 had already decided in its favor, its legal interest is simply
contingent and expectant.

However, Asiavest has a direct and material interest in the approval or disapproval of the
Compromise Agreement. Asiavest is a judgment creditor of PNCC in G.R. No. 110263 and a court
has already issued a writ of execution in its favor. Asiavest’s interest is actual and material, direct
and immediate characterized by either gain or loss from the judgment that this Court may
render.24 Considering that the Compromise Agreement involves the disposition of all or
substantially all of the assets of PNCC, Asiavest, as PNCC’s judgment creditor, will be greatly
prejudiced if the Compromise Agreement is eventually upheld.

Sison has legal standing to challenge the Compromise Agreement. Although there was no
allegation that Sison filed the case as a derivative suit in the name of PNCC, it could be fairly
deduced that Sison was assailing the Compromise Agreement as a stockholder of PNCC. In such
a situation, a stockholder of PNCC can sue on behalf of PNCC to annul the Compromise
Agreement.

A derivative action is a suit by a stockholder to enforce a corporate cause of action. 25 Under the
Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board
of directors or trustees.26 However, an individual stockholder may file a derivative suit on behalf
of the corporation to protect or vindicate corporate rights whenever the officials of the corporation
refuse to sue, or are the ones to be sued, or hold control of the corporation.27 In such actions, the
corporation is the real party-in-interest while the suing stockholder, on behalf of the corporation,
is only a nominal party.28

In this case, the PNCC Board cannot conceivably be expected to attack the validity of the
Compromise Agreement since the PNCC Board itself approved the Compromise Agreement. In
fact, the PNCC Board steadfastly defends the Compromise Agreement for allegedly being
advantageous to PNCC.

Besides, the circumstances in this case are peculiar. Sison, as former PNCC President and
Chairman of the PNCC Board, was responsible for the approval of the Board Resolution issued
on 19 June 2001 revoking the previous Board Resolution admitting PNCC’s liability for the
Marubeni loans.29 Such revocation, however, came after Radstock had filed an action for
collection and damages against PNCC on 15 January 2001. Then, when the trial court rendered
its decision on 10 December 2002 in favor of Radstock, Sison was no longer the PNCC President
and Chairman, although he remains a stockholder of PNCC.

When the case was on appeal before the Court of Appeals, there was no need for Sison to avail
of any remedy, until PNCC and Radstock entered into the Compromise Agreement, which
disposed of all or substantially all of PNCC’s assets. Sison came to know of the Compromise
Agreement only in December 2006. PNCC and Radstock submitted the Compromise Agreement
to the Court of Appeals for approval on 10 January 2007. The Court of Appeals approved the
Compromise Agreement on 25 January 2007. To require Sison at this stage to exhaust all the
remedies within the corporation will render such remedies useless as the Compromise Agreement
had already been approved by the Court of Appeals. PNCC’s assets are in danger of being
dissipated in favor of a private foreign corporation. Thus, Sison had no recourse but to avail of an
extraordinary remedy to protect PNCC’s assets.

Besides, in the interest of substantial justice and for compelling reasons, such as the nature and
importance of the issues raised in this case,30 this Court must take cognizance of Sison’s action.
This Court should exercise its prerogative to set aside technicalities in the Rules, because after
all, the power of this Court to suspend its own rules whenever the interest of justice requires is
well recognized.31 In Solicitor General v. The Metropolitan Manila Authority,32 this Court held:
Unquestionably, the Court has the power to suspend procedural rules in the exercise of its
inherent power, as expressly recognized in the Constitution, to promulgate rules concerning
‘pleading, practice and procedure in all courts.’ In proper cases, procedural rules may be relaxed
or suspended in the interest of substantial justice, which otherwise may be miscarried because of
a rigid and formalistic adherence to such rules. x x x

We have made similar rulings in other cases, thus:

Be it remembered that rules of procedure are but mere tools designed to facilitate the attainment
of justice. Their strict and rigid application, which would result in technicalities that tend to frustrate
rather than promote substantial justice, must always be avoided. x x x Time and again, this Court
has suspended its own rules and excepted a particular case from their operation whenever the
higher interests of justice so require.

IV.
The PNCC Board Acted in Bad Faith and with Gross Negligence

in Directing the Affairs of PNCC

In this jurisdiction, the members of the board of directors have a three-fold duty: duty of obedience,
duty of diligence, and duty of loyalty.33 Accordingly, the members of the board of directors (1) shall
direct the affairs of the corporation only in accordance with the purposes for which it was
organized;34 (2) shall not willfully and knowingly vote for or assent to patently unlawful acts
of the corporation or act in bad faith or with gross negligence in directing the affairs of the
corporation;35 and (3) shall not acquire any personal or pecuniary interest in conflict with their
duty as such directors or trustees.36

In the present case, the PNCC Board blatantly violated its duty of diligence as it miserably failed
to act in good faith in handling the affairs of PNCC.

First. For almost two decades, the PNCC Board had consistently refused to admit liability for the
Marubeni loans because of the absence of a PNCC Board resolution authorizing the issuance of
the letters of guarantee.

There is no dispute that between 1978 and 1980, Marubeni Corporation extended two loans to
Basay Mining (later renamed CDCP Mining): (1) US$5 million to finance the purchase of copper
concentrates by Basay Mining; and (2) Y5.46 billion to finance the completion of the expansion
project of Basay Mining including working capital.

There is also no dispute that it was only on 20 October 2000 when the PNCC Board approved a
resolution expressly admitting PNCC’s liability for the Marubeni loans. This was the first Board
Resolution admitting liability for the Marubeni loans, for PNCC never admitted liability for these
debts in the past. Even Radstock admitted that PNCC’s 1994 Financial Statements did not reflect
the Marubeni loans.37 Also, former PNCC Chairman Arthur Aguilar stated during the Senate
hearings that "the Marubeni claim was never in the balance sheet x x x nor was it in a contingent
account."38 Miriam M. Pasetes, SVP Finance of PNCC, and Atty. Herman R. Cimafranca of the
Office of the Government Corporate Counsel, confirmed this fact, thus:

SEN. DRILON. x x x And so, PNCC itself did not recognize this as an obligation but the board
suddenly recognized it as an obligation. It was on that basis that the case was filed, is that correct?
In fact, the case hinges on – they knew that this claim has prescribed but because of that board
resolution which recognized the obligation they filed their complaint, is that correct?

MR. CIMAFRANCA. Apparently, it's like that, Senator, because the filing of the case came after
the acknowledgement.

SEN. DRILON. Yes. In fact, the filing of the case came three months after the acknowledgement.

MR. CIMAFRANCA. Yes. And that made it difficult to handle on our part.
SEN. DRILON. That is correct. So, that it was an obligation which was not recognized in
the financial statements of PNCC but revived – in the financial statements because it has
prescribed but revived by the board effectively. That's the theory, at least, of the plaintiff.
Is that correct? Who can answer that?

Ms. Pasetes, yes.

MS. PASETES. It is not an obligation of PNCC that is why it is not reflected in the financial
statements.39 (Emphasis supplied)

In short, after two decades of consistently refuting its liability for the Marubeni loans, the PNCC
Board suddenly and inexplicably reversed itself by admitting in October 2000 liability for the
Marubeni loans. Just three months after the PNCC Board recognized the Marubeni loans,
Radstock acquired Marubeni's receivable and filed the present collection case.

Second. The PNCC Board admitted liability for the Marubeni loans despite PNCC’s total liabilities
far exceeding its assets. There is no dispute that the Marubeni loans, once recognized, would
wipe out the assets of PNCC, "virtually emptying the coffers of the PNCC."40 While PNCC insists
that it remains financially viable, the figures in the COA Audit Reports tell otherwise. 41 For 2006
and 2005, "the Corporation has incurred negative gross margin of ₱84.531 Million and
₱80.180 Million, respectively, and net losses that had accumulated in a deficit of ₱14.823
Billion as of 31 December 2006."42 The COA even opined that "unless [PNCC] Management
addresses the issue on net losses in its financial rehabilitation plan, x x x the Corporation
may not be able to continue its operations as a going concern."

Notably, during the oral arguments before this Court, the Government Corporate Counsel
admitted the PNCC’s huge negative net worth, thus:

JUSTICE CARPIO

x x x what is the net worth now of PNCC? Negative what? Negative 6 Billion at least[?]

ATTY. AGRA

Yes, your Honor.43 (Emphasis supplied)

Clearly, the PNCC Board’s admission of liability for the Marubeni loans, given PNCC’s huge
negative net worth of at least ₱6 billion as admitted by PNCC’s counsel, or ₱14.823 billion based
on the 2006 COA Audit Report, would leave PNCC an empty shell, without any assets to pay its
biggest creditor, the National Government with an admitted receivable of ₱36 billion from PNCC.

Third. In a debilitating self-inflicted injury, the PNCC Board revived what appeared to have been
a dead claim by abandoning one of PNCC’s strong defenses, which is the prescription of the
action to collect the Marubeni loans.

Settled is the rule that actions prescribe by the mere lapse of time fixed by law.44 Under Article
1144 of the Civil Code, an action upon a written contract, such as a loan contract, must be brought
within ten years from the time the right of action accrues. The prescription of such an action is
interrupted when the action is filed before the court, when there is a written extrajudicial demand
by the creditor, or when there is any written acknowledgment of the debt by the debtor.45

In this case, Basay Mining obtained the Marubeni loans sometime between 1978 and 1981. While
Radstock claims that numerous demand letters were sent to PNCC, based on the records, the
extrajudicial demands to pay the loans appear to have been made only in 1984 and 1986.
Meanwhile, the written acknowledgment of the debt, in the form of Board Resolution No. BD-092-
2000, was issued only on 20 October 2000.

Thus, more than ten years would have already lapsed between Marubeni’s extrajudicial demands
in 1984 and 1986 and the acknowledgment by the PNCC Board of the Marubeni loans in 2000.
However, the PNCC Board suddenly passed Board Resolution No. BD-092-2000 expressly
admitting liability for the Marubeni loans. In short, the PNCC Board admitted liability for the
Marubeni loans despite the fact that the same might no longer be judicially collectible. Although
the legal advantage was obviously on its side, the PNCC Board threw in the towel even before
the fight could begin. During the Senate hearings, the matter of prescription was discussed, thus:

SEN. DRILON. ... the prescription period is 10 years and there were no payments – the last
demands were made, when? The last demands for payment?

MS. OGAN. It was made January 2001 prior to the filing of the case.

SEN. DRILON. Yes, all right. Before that, when was the last demand made? By the time they filed
the complaint more than 10 years already lapsed.

MS. OGAN. On record, Mr. Chairman, we have demands starting from - - a series of demands
which started from May 23, 1984, letter from Marubeni to PNCC, demand payment. And we also
have the letter of September 3, 1986, letter of Marubeni to then PNCC Chair Mr. Jaime. We have
the June 24, 1986 letter from Marubeni to the PNCC Chairman. Also the March 4, 1988 letter...

SEN. DRILON. The March 4, 1988 letter is not a demand letter.

MS. OGAN. It is exactly addressed to the Asset Privatization Trust.

SEN. DRILON. It is not a demand letter? Okay.

MS. OGAN. And we have also...

SEN. DRILON. Anyway...

THE CHAIRMAN. Please answer when you are asked, Ms. Ogan. We want to put it on the record
whether it is "yes" or "no".

MS. OGAN. Yes, sir.

SEN. DRILON. So, even assuming that all of those were demand letters, the 10 years prescription
set in and it should have prescribed in 1998, whatever is the date, or before the case was filed in
2001.

MR. CIMAFRANCA. The 10-year period for – if the contract is written, it's 10 years and it should
have prescribed in 10 years and we did raise that in our answer, in our motion to dismiss.

SEN. DRILON. I know. You raised this in your motion to dismiss and you raised this in your
answer. Now, we are not saying that you were negligent in not raising that. What we are just
putting on the record that indeed there is basis to argue that these claims have prescribed.

Now, the reason why there was a colorable basis on the complaint filed in 2001 was that somehow
the board of PNCC recognized the obligation in a special board meeting on October 20, 2000.
Hindi ba ganoon 'yon?

MS. OGAN. Yes, that is correct.

SEN. DRILON. Why did the PNCC recognize this obligation in 2000 when it was very clear that
at that point more than 10 years have lapsed since the last demand letter?

MR. AGUILAR. May I volunteer an answer?

SEN. DRILON. Please.

MR. AGUILAR. I looked into that, Mr. Chairman, Your Honor. It was as a result of and I go to the
folder letter "N." In our own demand research it was not period, Your Honor, that Punongbayan
in the big folder, sir, letter "N" it was the period where PMO was selling PNCC and Punongbayan
and Araullo Law Office came out with an investment brochure that indicated liabilities both to
national government and to Marubeni/Radstock. So, PMO said, "For good order, can you PNCC
board confirm that by board resolution?" That's the tone of the letter.

SEN. DRILON. Confirm what? Confirm the liabilities that are contained in the Punongbayan
investment prospectus both to the national government and to PNCC. That is the reason at least
from the record, Your Honor, how the PNCC board got to deliberate on the Marubeni.

THE CHAIRMAN. What paragraph? Second to the last paragraph?

MR. AGUILAR. Yes. Yes, Mr. Chairman. Ito po 'yong – that"s to our recollection, in the records,
that was the reason.

SEN. DRILON. Is that the only reason why ...

MR. AGUILAR. From just the records, Mr. Chairman, and then interviews with people who are
still around.

SEN. DRILON. You mean, you acknowledged a prescribed obligation because of this paragraph?

MR. AGUILAR. I don’t know what legal advice we were following at that time, Mr.
Chairman.46 (Emphasis supplied)

Besides prescription, the Office of the Government Corporate Counsel (OGCC) originally believed
that PNCC had another formidable legal weapon against Radstock, that is, the lack of authority
of Alfredo Asuncion, then Executive Vice-President of PNCC, to sign the letter of guarantee on
behalf of CDCP. During the Senate hearings, the following exchange reveals the OGCC’s original
opinion:

THE CHAIRMAN. What was the opinion of the Office of the Government Corporate Counsel?

MS. OGAN. The opinion of the Office of the Government Corporate Counsel is that PNCC should
exhaust all means to resist the case using all defenses available to a guarantee and a surety that
there is a valid ground for PNCC's refusal to honor or make good the alleged guarantee obligation.
It appearing that from the documents submitted to the OGCC that there is no board authority in
favor or authorizing Mr. Asuncion, then EVP, to sign or execute the letter of guarantee in behalf
of CDCP and that said letter of guarantee is not legally binding upon or enforceable against CDCP
as principals, your Honors.47

xxxx

SEN. DRILON. Now that we have read this, what was the opinion of the Government Corporate
Counsel, Mr. Cimafranca?

MR. CIMAFRANCA. Yes, Senator, we did issue an opinion upon the request of PNCC and our
opinion was that there was no valid obligation, no valid guarantee. And we incorporated that in
our pleadings in court.48 (Emphasis supplied)

Clearly, PNCC had strong defenses against the collection suit filed by Radstock, as originally
opined by the OGCC. It is quite puzzling, therefore, that the PNCC Board, which had solid grounds
to refute the legitimacy of the Marubeni loans, admitted its liability and entered into a Compromise
Agreement that is manifestly and grossly prejudicial to PNCC.

Fourth. The basis for the admission of liability for the Marubeni loans, which was an opinion of
the Feria Law Office, was not even shown to the PNCC Board.

Atty. Raymundo Francisco, the APT trustee overseeing the proposed privatization of PNCC at
the time, was responsible for recommending to the PNCC Board the admission of PNCC’s liability
for the Marubeni loans. Atty. Francisco based his recommendation solely on a mere alleged
opinion of the Feria Law Office. Atty. Francisco did not bother to show this "Feria opinion" to the
members of the PNCC Board, except to Atty. Renato Valdecantos, who as the then PNCC
Chairman did not also show the "Feria opinion" to the other PNCC Board members. During the
Senate hearings, Atty. Francisco could not produce a copy of the "Feria opinion." The Senators
grilled Atty. Francisco on his recommendation to recognize PNCC’s liability for the Marubeni
loans, thus:

THE CHAIRMAN. x x x You were the one who wrote this letter or rather this memorandum dated
17 October 2000 to Atty. Valdecantos. Can you tell us the background why you wrote the letter
acknowledging a debt which is non-existent?

MR. FRANCISCO. I was appointed as the trustee in charge of the privatization of the PNCC at
that time, sir. And I was tasked to do a study and engage the services of financial advisors as well
as legal advisors to do a legal audit and financial study on the position of PNCC. I bidded out
these engagements, the financial advisership went to Punongbayan and Araullo. The legal audit
went to the Feria Law Offices.

THE CHAIRMAN. Spell it. Boy Feria?

MR. FRANCISCO. Feria-- Feria.

THE CHAIRMAN. Lugto?

MR. FRANCISCO. Yes. Yes, Your Honor. And this was the findings of the Feria Law Office – that
the Marubeni account was a legal obligation.

So, I presented this to our board. Based on the findings of the legal audit conducted by the Ferial
Law Offices, sir.

THE CHAIRMAN. Why did you not ask the government corporate counsel? Why did you have to
ask for the opinion of an outside counsel?

MR. FRANCISCO. That was the – that was the mandate given to us, sir, that we have to engage
the ...

THE CHAIRMAN. Mandate given by whom?

MR. FRANCISCO. That is what we usually do, sir, in the APT.

THE CHAIRMAN. Ah, you get outside counsel?

MR. FRANCISCO. Yes, we...

THE CHAIRMAN. Not necessarily the government corporate counsel?

MR. FRANCISCO. No, sir.

THE CHAIRMAN. So, on the basis of the opinion of outside counsel, private, you proceeded to,
in effect, recognize an obligation which is not even entered in the books of the PNCC? You
probably resuscitated a non-existing obligation anymore?

MR. FRANCISCO. Sir, I just based my recommendation on the professional findings of the law
office that we engaged, sir.

THE CHAIRMAN. Did you not ask for the opinion of the government corporate counsel?

MR. FRANCISCO. No, sir.

THE CHAIRMAN. Why?

MR. FRANCISCO. I felt that the engagements of the law office was sufficient, anyway we were
going to raise it to the Committee on Privatization for their approval or disapproval, sir.
THE CHAIRMAN. The COP?

MR. FRANCISCO. Yes, sir.

THE CHAIRMAN. That’s a cabinet level?

MR. FRANCISCO. Yes, sir. And we did that, sir.

THE CHAIRMAN. Now... So you sent your memo to Atty. Renato B. Valdecantos, who
unfortunately is not here but I think we have to get his response to this. And as part of the minutes
of special meeting with the board of directors on October 20, 2000, the board resolved in its Board
Resolution No. 092-2000, the board resolved to recognize, acknowledge and confirm PNCC’s
obligations as of September 30, 1999, etcetera, etcetera. (A), or rather (B), Marubeni Corporation
in the amount of ₱10,740,000.

Now, we asked to be here because the franchise of PNCC is hanging in a balance because of
the – on the questions on this acknowledgement. So we want to be educated.

Now, the paper trail starts with your letter. So, that’s it – that’s my kuwan, Frank.

Yes, Senator Drilon.

SEN. DRILON. Thank you, Mr. Chairman.

Yes, Atty. Francisco, you have a copy of the minutes of October 20, 2000?

MR. FRANCISCO. I’m sorry, sir, we don’t have a copy.

SEN. DRILON. May we ask the corporate secretary of PNCC to provide us with a copy?

Okay naman andiyan siya.

(Ms. Ogan handing the document to Mr. Francisco.)

You have familiarized yourselves with the minutes, Atty. Francisco?

MR. FRANCISCO. Yes, sir.

SEN. DRILON. Now, mention is made of a memorandum here on line 8, page 3 of this board’s
minutes. It says, "Director Francisco has prepared a memorandum requesting confirmation,
acknowledgement, and ratification of this indebtedness of PNCC to the national government
which was determined by Bureau of Treasury as of September 30, 1999 is 36,023,784,751. And
with respect to PNCC’s obligation to Marubeni, this has been determined to be in the total amount
of 10,743,103,388, also as of September 30, 1999; that there is need to ratify this because there
has already been a representation made with respect to the review of the financial records of
PNCC by Punongbayan and Araullo, which have been included as part of the package of APT’s
disposition to the national government’s interest in PNCC."

You recall having made this representation as found in the minutes, I assume, Atty. Francisco?

MR. FRANCISCO. Yes, sir. But I’d like to be refreshed on the memorandum, sir, because I don’t
have a copy.

SEN. DRILON. Yes, this memorandum was cited earlier by Senator Arroyo, and maybe the
secretary can give him a copy? Give him a copy?

MS. OGAN. (Handing the document to Mr. Francisco.)

MR. FRANCISCO. Your Honor, I have here a memorandum to the PNCC board through Atty.
Valdecantos, which says that – in the last paragraph, if I may read? "May we request therefore,
that a board resolution be adopted, acknowledging and confirming the aforementioned PNCC
obligations with the national government and Marubeni as borne out by the due diligence audit."

SEN. DRILON. This is the memorandum referred to in these minutes. This memorandum dated
17 October 2000 is the memorandum referred to in the minutes.

MR. FRANCISCO. I would assume, Mr. Chairman.

SEN. DRILON. Right.

Now, the Punongbayan representative who was here yesterday, Mr...

THE CHAIRMAN. Navarro.

SEN. DRILON. ... Navarro denied that he made this recommendation.

THE CHAIRMAN. He asked for opinion, legal opinion.

SEN. DRILON. He said that they never made this representation and the transcript will bear us
out. They said that they never made this representation that the account of Marubeni should be
recognized.

MR. FRANCISCO. Mr. Chairman, in the memorandum, I only mentioned here the
acknowledgement and confirmation of the PNCC obligations. I was not asking for a ratification. I
never mentioned ratification in the memorandum. I just based my memo based on the due
diligence audit of the Feria Law Offices.

SEN. DRILON. Can you say that again? You never asked for a ratification...

MR. FRANCISCO. No. I never mentioned in my memorandum that I was asking for a ratification.
I was just – in my memo it says, "acknowledging and confirming the PNCC obligation." This was
what ...

SEN. DRILON. Isn’t it the same as ratification? I mean, what’s the difference?

MR. FRANCISCO. I – well, my memorandum was meant really just to confirm the findings of the
legal audit as ...

SEN. DRILON. In your mind as a lawyer, Atty. Francisco, there’s a difference between ratification
and – what’s your term? -- acknowledgment and confirmation?

MR. FRANCISCO. Well, I guess there’s no difference, Mr. Chairman.

SEN. DRILON. Right.

Anyway, just of record, the Punongbayan representatives here yesterday said that they never
made such representation.

In any case, now you’re saying it’s the Feria Law Office who rendered that opinion? Can we – you
know, yesterday we were asking for a copy of this opinion but we were never furnished one. The
... no less than the Chairman of this Committee was asking for a copy.

THE CHAIRMAN. Well, copy of the opinion...

MS. OGAN. Yes, Mr. Chairman, we were never furnished a copy of this opinion because it’s
opinion rendered for the Asset Privatization Trust which is its client, not the PNCC, Mr. Chairman.

THE CHAIRMAN. All right. The question is whether – but you see, this is a memorandum of Atty.
Francisco to the Chairman of the Asset Privatization Trust. You say now that you were never
furnished a copy because that’s supposed to be with the Asset ...
MS. OGAN. Yes, Mr. Chairman.

THE CHAIRMAN. ... but yet the action of – or rather the opinion of the Feria Law Offices was in
effect adopted by the board of directors of PNCC in its minutes of October 20, 2000 where you
are the corporate secretary, Ms. Ogan.

MS. OGAN. Yes, Mr. Chairman.

THE CHAIRMAN. So, what I am saying is that this opinion or rather the opinion of the Feria Law
Offices of which you don’t have a copy?

MS. OGAN. Yes, sir.

THE CHAIRMAN. And the reason being that, it does not concern the PNCC because that’s an
opinion rendered for APT and not for the PNCC.

MS. OGAN. Yes, Mr. Chairman, that was what we were told although we made several requests
to the APT, sir.

THE CHAIRMAN. All right. Now, since it was for the APT and not for the PNCC, I ask the question
why did PNCC adopt it? That was not for the consumption of PNCC. It was for the consumption
of the Asset Privatization Trust. And that is what Atty. Francisco says and it’s confirmed by you
saying that this was a memo – you don’t have a copy because this was sought for by APT and
the Feria Law Offices just provided an opinion – provided the APT with an opinion. So, as
corporate secretary, the board of directors of PNCC adopted it, recognized the Marubeni
Corporation.

You read the minutes of the October 20, 2000 meeting of the board of directors on Item V. The
resolution speaks of .. so, go ahead.

MS. OGAN. I gave my copies. Yes, sir.

THE CHAIRMAN. In effect the Feria Law Offices’ opinion was for the consumption of the APT.

MS. OGAN. That was what we were told, Mr. Chairman.

THE CHAIRMAN. And you were not even provided with a copy.

THE CHAIRMAN. Yet you adopted it.

MS. OGAN. Yes, sir.

SEN DRILON. Considering you were the corporate secretary.

THE CHAIRMAN. She was the corporate secretary.

SEN. DRILON. She was just recording the minutes.

THE CHAIRMAN. Yes, she was recording.

Now, we are asking you now why it was taken up?

MS. OGAN. Yes, sir, Mr. Chairman, this was mentioned in the memorandum of Atty. Francisco,
memorandum to the board.

SEN. DRILON. Mr. Chairman, Mr. Francisco represented APT in the board of PNCC. And is that
correct, Mr. Francisco?

THE CHAIRMAN. You’re an ex-officio member.

SEN. DRILON. Yes.

MR. FRANCISCO. Ex-officio member only, sir, as trustee in charge of the privatization of PNCC.

SEN. DRILON. With the permission of Mr. Chair, may I ask a question...

THE CHAIRMAN. Oh, yes, Senator Drilon.

SEN. DRILON. Atty. Francisco, you sat in the PNCC board as APT representative, you are a
lawyer, there was a legal opinion of Feria, Feria, Lugto, Lao Law Offices which you cited in your
memorandum. Did you discuss – first, did you give a copy of this opinion to PNCC?

MR. FRANCISCO. I gave a copy of this opinion, sir, to our chairman who was also a member of
the board of PNCC, Mr. Valdecantos, sir.

SEN. DRILON. And because he was...

MR. FRANCISCO. Because he was my immediate boss in the APT.

SEN. DRILON. Apparently, [it] just ended up in the personal possession of Mr. Valdecantos
because the corporate secretary, Glenda Ogan, who is supposed to be the custodian of the
records of the board never saw a copy of this.

MR. FRANCISCO. Well, sir, my – the copy that I gave was to Mr. Valdecantos because he was
the one sitting in the PNCC board, sir.

SEN. DRILON. No, you sit in the board.

MR. FRANCISCO. I was just an ex-officio member. And all my reports were coursed through our
Chairman, Mr. Valdecantos, sir.

SEN. DRILON. Now, did you ever tell the board that there is a legal position taken or at least from
the documents it is possible that the claim has prescribed?

MR. FRANCISCO. I took this up in the board meeting of the PNCC at that time and I told them
about this matter, sir.

SEN. DRILON. No, you told them that the claim could have, under the law, could have prescribed?

MR. FRANCISCO. No, sir.

SEN. DRILON. Why? You mean, you didn’t tell the board that it is possible that this liability is no
longer a valid liability because it has prescribed?

MR. FRANCISCO. I did not dwell into the findings anymore, sir, because I found the professional
opinion of the Feria Law Office to be sufficient.49 (Emphasis supplied)

Atty. Francisco’s act of recommending to the PNCC Board the acknowledgment of the Marubeni
loans based only on an opinion of a private law firm, without consulting the OGCC and without
showing this opinion to the members of the PNCC Board except to Atty. Valdecantos, reflects
how shockingly little his concern was for PNCC, contrary to his claim that "he only had the interest
of PNCC at heart." In fact, if what was involved was his own money, Atty. Francisco would have
preferred not just two, but at least three different opinions on how to deal with the matter, and he
would have maintained his non-liability.

SEN. OSMEÑA. x x x

All right. And lastly, just to clear our minds, there has always been this finger-pointing, of course,
whenever – this is typical Filipino. When they're caught in a bind, they always point a finger, they
pretend they don't know. And it just amazes me that you have been appointed trustees, meaning,
representatives of the Filipino people, that's what you were at APT, right? You were not Erap's
representatives, you were representative of the Filipino people and you were tasked to conserve
the assets that that had been confiscated from various cronies of the previous administration. And
here, you are asked to recognize the P10 billion debt and you point only to one law firm. If you
have cancer, don't you to a second opinion, a second doctor or a third doctor? This is just a
question. I am just asking you for your opinion if you would take the advice of the first doctor who
tells you that he's got to open you up.

MR. FRANCISCO. I would go to three or more doctors, sir.

SEN. OSMEÑA. Three or more. Yeah, that's right. And in this case the APT did not do so.

MR. FRANCISCO. We relied on the findings of the …

SEN. OSMEÑA. If these were your money, would you have gone also to obtain a second, third
opinion from other law firms. Kung pera mo itong 10 billion na ito. Siguro you're not gonna give it
up that easily ano, 'di ba?

MR. FRANCISCO. Yes, sir.

SEN. OSMEÑA. You'll probably keep it in court for the next 20 years.

x x x x50 (Emphasis supplied)

This is a clear admission by Atty. Francisco of bad faith in directing the affairs of PNCC - that he
would not have recognized the Marubeni loans if his own funds were involved or if he were the
owner of PNCC.

The PNCC Board admitted liability for the ₱10.743 billion Marubeni loans without seeing, reading
or discussing the "Feria opinion" which was the sole basis for its admission of liability. Such act
surely goes against ordinary human nature, and amounts to gross negligence and utter bad faith,
even bordering on fraud, on the part of the PNCC Board in directing the affairs of the corporation.
Owing loyalty to PNCC and its stockholders, the PNCC Board should have exercised utmost care
and diligence in admitting a gargantuan debt of ₱10.743 billion that would certainly force PNCC
into insolvency, a debt that previous PNCC Boards in the last two decades consistently refused
to admit.

Instead, the PNCC Board admitted PNCC’s liability for the Marubeni loans relying solely on a
mere opinion of a private law office, which opinion the PNCC Board members never saw, except
for Atty. Valdecantos and Atty. Francisco. The PNCC Board knew that PNCC, as a government
owned and controlled corporation (GOCC), must rely "exclusively" on the opinion of the OGCC.
Section 1 of Memorandum Circular No. 9 dated 27 August 1998 issued by the President states:

SECTION 1. All legal matters pertaining to government-owned or controlled corporations, their

subsidiaries, other corporate off-springs and government acquired asset corporations (GOCCs)
shall be exclusively referred to and handled by the Office of the Government Corporate Counsel
(OGCC). (Emphasis supplied)

The PNCC Board acted in bad faith in relying on the opinion of a private lawyer knowing that
PNCC is required to rely "exclusively" on the OGCC’s opinion. Worse, the PNCC Board, in
admitting liability for ₱10.743 billion, relied on the recommendation of a private lawyer whose
opinion the PNCC Board members have not even seen.

During the oral arguments, Atty. Sison explained to the Court that the intention of APT was for
the PNCC Board merely to disclose the claim of Marubeni as part of APT's full disclosure policy
to prospective buyers of PNCC. Atty. Sison stated that it was not the intention of APT for the
PNCC Board to admit liability for the Marubeni loans, thus:

x x x It was the Asset Privatization Trust A-P-T that was tasked to sell the company. The A-P-T,
for purposes of disclosure statements, tasked the Feria Law Office to handle the documentation
and the study of all legal issues that had to be resolved or clarified for the information of
prospective bidders and or buyers. In the performance of its assigned task the Feria Law Office
came upon the Marubeni claim and mentioned that the APTC and/or PNCC must disclose that
there is a claim by Marubeni against PNCC for purposes of satisfying the requirements of full
disclosure. This seemingly innocent statement or requirement made by the Feria Law Office was
then taken by two officials of the Asset Privatization Trust and with malice aforethought turned it
into the basis for a multi-billion peso debt by the now government owned and/or controlled PNCC.
x x x.51 (Emphasis supplied)

While the PNCC Board passed Board Resolution No. BD-099-2000 amending Board Resolution
No. BD-092-2000, such amendment merely added conditions for the recognition of the Marubeni
loans, namely, subjecting the recognition to a final determination by COA of the amount involved
and to the declaration by OGCC of the legality of PNCC’s liability. However, the PNCC Board
reiterated and stood firm that it "recognizes, acknowledges and confirms its obligations" for the
Marubeni loans. Apparently, Board Resolution No. BD-099-2000 was a futile attempt to "revoke"
Board Resolution No. BD-092-2000. Atty. Alfredo Laya, Jr., a former PNCC Director, spoke on
his protests against Board Resolution No. BD-092-2000 at the Senate hearings, thus:

MR. LAYA. Mr. Chairman, if I can …

THE CHAIRMAN. Were you also at the board?

MR. LAYA. At that time, yes, sir.

THE CHAIRMAN. Okay, go ahead.

MR. LAYA. That's why if – maybe this can help clarify the sequence. There was this meeting on
October 20. This matter of the Marubeni liability or account was also discussed. Mr. Macasaet, if
I may try to refresh. And there was some discussion, sir, and in fact, they were saying even at
that stage that there should be a COA or an OGCC audit. Now, that was during the discussion of
October 20. Later on, the minutes came out. The practice, then, sir, was for the minutes to come
out at the start of the meeting of the subsequent. So the minutes of October 20 came out on
November 22 and then we were going over it. And that is in the subsequent minutes of the meeting
…

THE CHAIRMAN. May I interrupt. You were taking up in your November 22 meeting the October
20 minutes?

MR. LAYA. Yes, sir.

THE CHAIRMAN. This minutes that we have?

MR. LAYA. Yes, sir.

THE CHAIRMAN. All right, go ahead.

MR. LAYA. Now, in the November 22 meeting, we noticed this resolution already for confirmation
of the board – proceedings of October 20. So immediately we made – actually, protest would be
a better term for that – we protested the wording of the resolution and that's why we came up with
this resolution amending the October 20 resolution.

SEN. DRILON. So you are saying, Mr. Laya, that the minutes of October 20 did not accurately
reflect the decisions that you made on October 20 because you were saying that this recognition
should be subject to OGCC and COA? You seem to imply and we want to make it – and I want
to get that for the record. You seem to imply that there was no decision to recognize the obligation
during that meeting because you wanted it to subject it to COA and OGCC, is that correct?

MR. LAYA. Yes, your Honor.

SEN. DRILON. So how did...

MR. LAYA. That's my understanding of the proceedings at that time, that's why in the subsequent
November 22 meeting, we raised this point about obtaining a COA and OGCC opinion.

SEN. DRILON. Yes. But you know, the November 22 meeting repeated the wording of the
resolution previously adopted only now you are saying subject to final determination which is
completely of different import from what you are saying was your understanding of the decision
arrived at on October 20.

MR. LAYA. Yes, sir. Because our thinking then...

SEN. DRILON. What do you mean, yes, sir?

MR. LAYA. It's just a claim under discussion but then the way it is translated, as the minutes of
October 20 were not really verbatim.

SEN. DRILON. So, you never intended to recognize the obligation.

MR. LAYA. I think so, sir. That was our – personally, that was my position.

SEN. DRILON. How did it happen, Corporate Secretary Ogan, that the minutes did not reflect
what the board …

THE CHAIRMAN. Ms. Pasetes …

MS. PASETES. Yes, Mr. Chairman.

THE CHAIRMAN. … you are the chief financial officer of PNCC.

MS. PASETES. Your Honor, before that November 22 board meeting, management headed by
Mr. Rolando Macasaet, myself and Atty. Ogan had a discussion about the recognition of the
obligations of 10 billion of Marubeni and 36 billion of the national government on whether to
recognize this as an obligation in our books or recognize it as an obligation in the pro forma
financial statement to be used for the privatization of PNCC because recognizing both obligations
in the books of PNCC would defeat our going concern status and that is where the position of the
president then, Mr. Macasaet, stemmed from and he went back to the board and moved to
reconsider the position of October 20, 2000, Mr. Chair.52 (Emphasis supplied)

In other words, despite Atty. Laya’s objections to PNCC’s admitting liability for the Marubeni loans,
the PNCC Board still admitted the same and merely imposed additional conditions to temper
somehow the devastating effects of Board Resolution No. BD-092-2000.

The act of the PNCC Board in issuing Board Resolution No. BD-092-2000 expressly admitting
liability for the Marubeni loans demonstrates the PNCC Board’s gross and willful disregard of the
requisite care and diligence in managing the affairs of PNCC, amounting to bad faith and resulting
in grave and irreparable injury to PNCC and its stockholders. This reckless and treacherous move
on the part of the PNCC Board clearly constitutes a serious breach of its fiduciary duty to PNCC
and its stockholders, rendering the members of the PNCC Board liable under Section 31 of the
Corporation Code, which provides:

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

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the profits which otherwise would
have accrued to the corporation.
Soon after the short-lived Estrada Administration, the PNCC Board revoked its previous
admission of liability for the Marubeni loans. During the oral arguments, Atty. Sison narrated to
the Court:

x x x After President Estrada was ousted, I was appointed as President and Chairman of PNCC
in April of 2001, this particular board resolution was brought to my attention and I immediately put
the matter before the board. I had no problem in convincing them to reverse the recognition as it
was illegal and had no basis in fact. The vote to overturn that resolution was unanimous. Strange
to say that some who voted to overturn the recognition were part of the old board that approved
it. Stranger still, Renato Valdecantos who was still a member of the Board voted in favor of
reversing the resolution he himself instigated and pushed. Some of the board members who voted
to recognize the obligation of Marubeni even came to me privately and said "pinilit lang kami." x
x x.53 (Emphasis supplied)

In approving PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board
caused undue injury to the Government and gave unwarranted benefits to Radstock, through
manifest partiality, evident bad faith or gross inexcusable negligence of the PNCC Board. Such
acts are declared under Section 3(e) of RA 3019 or the Anti-Graft and Corrupt Practices Act, as
"corrupt practices xxx and xxx unlawful." Being unlawful and criminal acts, these PNCC Board
Resolutions are void ab initio and cannot be implemented or in any way given effect by the
Executive or Judicial branch of the Government.

Not content with forcing PNCC to commit corporate suicide with the admission of liability for the
Marubeni loans under Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board
drove the last nail on PNCC’s coffin when the PNCC Board entered into the manifestly and grossly
disadvantageous Compromise Agreement with Radstock. This time, the OGCC, headed by
Agnes DST Devanadera, reversed itself and recommended approval of the Compromise
Agreement to the PNCC Board. As Atty. Sison explained to the Court during the oral arguments:

x x x While the case was pending in the Court of Appeals, Radstock in a rare display of extreme
generosity, conveniently convinced the Board of PNCC to enter into a compromise agreement for
½ the amount of the judgment rendered by the RTC or ₱6.5 Billion Pesos. This time the OGCC,
under the leadership of now Solicitor General Agnes Devanadera, approved the compromise
agreement abandoning the previous OGCC position that PNCC had a meritorious case and would
be hard press to lose the case. What is strange is that although the compromise agreement we
seek to stop ostensibly is for ₱6.5 Billion only, truth and in fact, the agreement agrees to convey
to Radstock all or substantially all of the assets of PNCC worth ₱18 Billion Pesos. There are three
items that are undervalued here, the real estate that was turned over as a result of the
controversial agreement, the toll revenues that were being assigned and the value of the new
shares of PNCC the difference is about ₱12 Billion Pesos. x x x (Emphasis supplied)

V.
The Compromise Agreement is Void
for Being Contrary to the Constitution,
Existing Laws, and Public Policy

For a better understanding of the present case, the pertinent terms and conditions of the
Compromise Agreement between PNCC and Radstock are quoted below:

COMPROMISE AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Agreement made and entered into this 17th day of August 2006, in Mandaluyong City, Metro
Manila, Philippines, by and between:

PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, a government acquired asset

corporation, created and existing under the laws of the Republic of the Philippines, with principal
office address at EDSA corner Reliance Street, Mandaluyong City, Philippines, duly represented
herein by its Chairman ARTHUR N. AGUILAR, pursuant to a Board Resolution attached herewith
as Annex "A" and made an integral part hereof, hereinafter referred to as PNCC;
- and -

RADSTOCK SECURITIES LIMITED, a private corporation incorporated in the British Virgin

Islands, with office address at Suite 1402 1 Duddell Street, Central Hongkong duly-represented
herein by its Director, CARLOS G. DOMINGUEZ, pursuant to a Board Resolution attached
herewith as Annex "B" and made an integral part hereof, hereinafter referred to as RADSTOCK.

WITNESSETH:

WHEREAS, on January 15, 2001, RADSTOCK, as assignee of Marubeni Corporation, filed a

complaint for sum of money and damages with application for a writ of preliminary attachment
with the Regional Trial Court (RTC), Mandaluyong City, docketed as Civil Case No. MC-01-1398,
to collect on PNCC’s guarantees on the unpaid loan obligations of CDCP Mining Corporation as
provided under an Advance Payment Agreement and Loan Agreement;

WHEREAS, on December 10, 2002, the RTC of Mandaluyong rendered a decision in favor of
plaintiff RADSTOCK directing PNCC to pay the total amount of Thirteen Billion One Hundred Fifty
One Million Nine Hundred Fifty-Six Thousand Five Hundred Twenty-Eight Pesos
(₱13,151,956,528.00) with interest from October 15, 2001 plus Ten Million Pesos
(₱10,000,000.00) as attorney's fees.

WHEREAS, PNCC had elevated the case to the Court of Appeals (CA-G.R. SP No. 66654) on
Certiorari and thereafter, to the Supreme Court (G.R. No. 156887) which Courts have consistently
ruled that the RTC did not commit grave abuse of discretion when it denied PNCC’s Motion to
Dismiss which sets forth similar or substantially the same grounds or defenses as those raised in
PNCC's Answer;

WHEREAS, the case has remained pending for almost six (6) years even after the main action
was appealed to the Court of Appeals;

WHEREAS, on the basis of the RTC Decision dated December 10, 2002, the current value of the
judgment debt against PNCC stands at ₱17,040,843,968.00 as of July 31, 2006 (the "Judgment
Debt");

WHEREAS, RADSTOCK is willing to settle the case at the reduced Compromise Amount of Six
Billion One Hundred Ninety-Six Million Pesos (₱6,196,000,000.00) which may be paid by PNCC,
either in cash or in kind to avoid the trouble and inconvenience of further litigation as a gesture of
goodwill and cooperation;

WHEREAS, it is an established legal policy or principle that litigants in civil cases should be
encouraged to compromise or amicably settle their claims not only to avoid litigation but also to
put an end to one already commenced (Articles 2028 and 2029, Civil Code);

WHEREAS, this Compromise Agreement has been approved by the respective Board of Directors
of both PNCC and RADSTOCK, subject to the approval of the Honorable Court;

NOW, THEREFORE, for and in consideration of the foregoing premises, and the mutual
covenants, stipulations and agreements herein contained, PNCC and RADSTOCK have agreed
to amicably settle the above captioned Radstock case under the following terms and conditions:

1. RADSTOCK agrees to receive and accept from PNCC in full and complete
settlement of the Judgment Debt, the reduced amount of Six Billion, One Hundred
Ninety-Six Million Pesos (₱6,196,000,000.00) (the "Compromise Amount").

2. This Compromise Amount shall be paid by PNCC to RADSTOCK in the following

manner:

a. PNCC shall assign to a third party assignee to be designated by RADSTOCK all its rights and
interests to the following real properties provided the assignee shall be duly qualified to own real
properties in the Philippines;
(1) PNCC’s rights over that parcel of land located in Pasay City with a total area of
One Hundred Twenty-Nine Thousand Five Hundred Forty-Eight (129,548) square
meters, more or less, and which is covered by and more particularly described in
Transfer Certificate of Title No. T-34997 of the Registry of Deeds for Pasay City.
The transfer value is ₱3,817,779,000.00.

PNCC’s rights and interests in Transfer Certificate of Title No. T-34997 of the
Registry of Deeds for Pasay City is defined and delineated by Administrative Order
No. 397, Series of 1998, and RADSTOCK is fully aware and recognizes that PNCC
has an undertaking to cede at least 2 hectares of this property to its creditor, the
Philippine National Bank; and that furthermore, the Government Service Insurance
System has also a current and existing claim in the nature of boundary conflicts,
which undertaking and claim will not result in the diminution of area or value of the
property. Radstock recognizes and acknowledges the rights and interests of GSIS
over the said property.

(2) T-452587 (T-23646) - Parañaque (5,123 sq. m.) subject to the clarification of
the Privatization and Management Office (PMO) claims thereon. The transfer value
is ₱45,000,900.00.

(3) T-49499 (529715 including T-68146-G (S-29716) (1,9747-A)-Parañaque (107

sq. m.) (54 sq. m.) subject to the clarification of the Privatization and Management
Office (PMO) claims thereon. The transfer value is ₱1,409,100.00.

(4) 5-29716-Parañaque (27,762 sq. m.) subject to the clarification of the

Privatization and Management Office (PMO) claims thereon. The transfer value is
₱242,917,500.00.

(5) P-169 - Tagaytay (49,107 sq. m.). The transfer value is ₱13,749,400.00.

(6) P-170 - Tagaytay (49,100 sq. m.). The transfer value is ₱13,749,400.00.

(7) N-3320 - Town and Country Estate, Antipolo (10,000 sq. m.). The transfer value
is ₱16,800,000.00.

(8) N-7424 - Antipolo (840 sq. m.). The transfer value is ₱940,800.00.

(9) N-7425 - Antipolo (850 sq. m.). The transfer value is ₱952,000.00.

(10) N-7426 - Antipolo (958 sq. m.). The transfer value is ₱1,073,100.00.

(11) T-485276 - Antipolo (741 sq. m.). The transfer value is ₱830,200.00.

(12) T-485277 - Antipolo (680 sq. m.). The transfer value is ₱761,600.00.

(13) T-485278 - Antipolo (701 sq. m.). The transfer value is ₱785,400.00.

(14) T-131500 - Bulacan (CDCP Farms Corp.) (4,945 sq, m.). The transfer value
is ₱6,475,000.00.

(15) T-131501 - Bulacan (678 sq. m.). The transfer value is ₱887,600.00.

(16) T-26,154 (M) - Bocaue, Bulacan (2,841 sq. m.). The transfer value is
₱3,779,300.00.

(17) T-29,308 (M) - Bocaue, Bulacan (733 sq. m.). The transfer value is
₱974,400.00.

(18) T-29,309 (M) Bocaue, Bulacan (1,141 sq. m.). The transfer value is
₱1,517,600.00.
 (19) T-260578 (R. Bengzon) Sta. Rita, Guiguinto, Bulacan (20,000 sq. m.). The
transfer value is ₱25,200,000.00.

The transfer values of the foregoing properties are based on 70% of the appraised value of the
respective properties.

b. PNCC shall issue to RADSTOCK or its assignee common shares of the capital stock of PNCC
issued at par value which shall comprise 20% of the outstanding capital stock of PNCC after the
conversion to equity of the debt exposure of the Privatization Management Office (PMO) and the
National Development Company (NDC) and other government agencies and creditors such that
the total government holdings shall not fall below 70% voting equity subject to the approval of the
Securities and Exchange Commission (SEC) and ratification of PNCC’s stockholders, if
necessary. The assigned value of the shares issued to RADSTOCK is ₱713 Million based on the
approximate last trading price of PNCC shares in the Philippine Stock Exchange as the date of
this agreement, based further on current generally accepted accounting standards which
stipulates the valuation of shares to be based on the lower of cost or market value.

Subject to the procurement of any and all necessary approvals from the relevant governmental
authorities, PNCC shall deliver to RADSTOCK an instrument evidencing an undertaking of the
Privatization and Management Office (PMO) to give RADSTOCK or its assignee the right to match
any offer to buy the shares of the capital stock and debts of PNCC held by PMO, in the event the
same shares and debt are offered for privatization.

c. PNCC shall assign to RADSTOCK or its assignee 50% of the PNCC's 6% share in the gross
toll revenue of the Manila North Tollways Corporation (MNTC), with a Net Present Value of ₱1.287
Billion computed in the manner outlined in Annex "C" herein attached as an integral part hereof,
that shall be due and owing to PNCC pursuant to the Joint Venture Agreement between PNCC
and First Philippine Infrastructure Development Corp. dated August 29, 1995 and other related
existing agreements, commencing in 2008. It shall be understood that as a result of this
assignment, PNCC shall charge and withhold the amounts, if any, pertaining to taxes due on the
amounts assigned.

Under the Compromise Agreement, PNCC shall pay Radstock the reduced amount of
₱6,185,000,000.00 in full settlement of PNCC’s guarantee of CDCP Mining’s debt allegedly
totaling ₱17,040,843,968.00 as of 31 July 2006. To satisfy its reduced obligation, PNCC
undertakes to (1) "assign to a third party assignee to be designated by Radstock all its rights and
interests" to the listed real properties therein; (2) issue to Radstock or its assignee common
shares of the capital stock of PNCC issued at par value which shall comprise 20% of the
outstanding capital stock of PNCC; and (3) assign to Radstock or its assignee 50% of PNCC’s
6% share, for the next 27 years (2008-2035), in the gross toll revenues of the Manila North
Tollways Corporation.

A. The PNCC Board has no power to compromise

the ₱6.185 billion amount.

Does the PNCC Board have the power to compromise the ₱6.185 billion "reduced" amount? The
answer is in the negative.1avvphi1

The Dissenting Opinion asserts that PNCC has the power, citing Section 36(2) of Presidential
Decree No. 1445 (PD 1445), otherwise known as the Government Auditing Code of the
Philippines, enacted in 1978. Section 36 states:

SECTION 36. Power to Compromise Claims. — (1) When the interest of the government so
requires, the Commission may compromise or release in whole or in part, any claim or settled
liability to any government agency not exceeding ten thousand pesos and with the written
approval of the Prime Minister, it may likewise compromise or release any similar claim or liability
not exceeding one hundred thousand pesos, the application for relief therefrom shall be
submitted, through the Commission and the Prime Minister, with their recommendations, to the
National Assembly.
(2) The respective governing bodies of government-owned or controlled corporations, and self-
governing boards, commissions or agencies of the government shall have the exclusive power to
compromise or release any similar claim or liability when expressly authorized by their charters
and if in their judgment, the interest of their respective corporations or agencies so requires. When
the charters do not so provide, the power to compromise shall be exercised by the Commission
in accordance with the preceding paragraph. (Emphasis supplied)

The Dissenting Opinion asserts that since PNCC is incorporated under the Corporation Code, the
PNCC Board has all the powers granted to the governing boards of corporations incorporated
under the Corporation Code, which includes the power to compromise claims or liabilities.

Section 36 of PD 1445, enacted on 11 June 1978, has been superseded by a later law -- Section
20(1), Chapter IV, Subtitle B, Title I, Book V of Executive Order No. 292 or the Administrative
Code of 1987, which provides:

Section 20. Power to Compromise Claims. - (1) When the interest of the Government so requires,
the Commission may compromise or release in whole or in part, any settled claim or liability to
any government agency not exceeding ten thousand pesos arising out of any matter or case
before it or within its jurisdiction, and with the written approval of the President, it may likewise
compromise or release any similar claim or liability not exceeding one hundred thousand pesos.
In case the claim or liability exceeds one hundred thousand pesos, the application for relief
therefrom shall be submitted, through the Commission and the President, with their
recommendations, to the Congress[.] x x x (Emphasis supplied)

Under this provision,54 the authority to compromise a settled claim or liability exceeding
₱100,000.00 involving a government agency, as in this case where the liability amounts to ₱6.185
billion, is vested not in COA but exclusively in Congress. Congress alone has the power to
compromise the ₱6.185 billion purported liability of PNCC. Without congressional approval, the
Compromise Agreement between PNCC and Radstock involving ₱6.185 billion is void for being
contrary to Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of
1987.

PNCC is a "government agency" because Section 2 on Introductory Provisions of the Revised

Administrative Code of 1987 provides that –

Agency of the Government refers to any of the various units of the Government, including a
department, bureau, office, instrumentality, or government-owned or controlled corporation, or a
local government or a distinct unit therein. (Boldfacing supplied)

Thus, Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987
applies to PNCC, which indisputably is a government owned or controlled corporation.

In the same vein, the COA’s stamp of approval on the Compromise Agreement is void for violating
Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987. Clearly,
the Dissenting Opinion’s reliance on the COA’s finding that the terms and conditions of the
Compromise Agreement are "fair and above board" is patently erroneous.

Citing Benedicto v. Board of Administrators of Television Stations RPN, BBC and IBC, 55 the
Dissenting Opinion views that congressional approval is not required for the validity of the
Compromise Agreement because the liability of PNCC is not yet "settled."

In Benedicto, the PCGG filed in the Sandiganbayan a civil case to recover from the defendants
(including Roberto S. Benedicto) their ill-gotten wealth consisting of funds and other properties.
The PCGG executed a compromise agreement with Roberto S. Benedicto ceding to the latter a
substantial part of his ill-gotten assets and the State granting him immunity from further
prosecution. The Court held that prior congressional approval is not required for the PCGG to
enter into a compromise agreement with persons against whom it has filed actions for recovery
of ill-gotten wealth.

In Benedicto, the Court found that the government’s claim against Benedicto was not yet settled
unlike here where the PNCC Board expressly admitted the liability of PNCC for the Marubeni
loans. In Benedicto, the ownership of the alleged ill-gotten assets was still being litigated in the
Sandiganbayan and no party ever admitted any liability, unlike here where the PNCC Board had
already admitted through a formal Board Resolution PNCC’s liability for the Marubeni loans.
PNCC’s express admission of liability for the Marubeni loans is essentially the premise of the
execution of the Compromise Agreement. In short, Radstock’s claim against PNCC is settled by
virtue of PNCC’s express admission of liability for the Marubeni loans. The Compromise
Agreement merely reduced this settled liability from ₱17 billion to ₱6.185 billion.

The provision of the Revised Administrative Code on the power to settle claims or liabilities was
precisely enacted to prevent government agencies from admitting liabilities against the
government, then compromising such "settled" liabilities. The present case is exactly what the
law seeks to prevent, a compromise agreement on a creditor’s claim settled through admission
by a government agency without the approval of Congress for amounts exceeding ₱100,000.00.
What makes the application of the law even more necessary is that the PNCC Board’s twin moves
are manifestly and grossly disadvantageous to the Government. First, the PNCC admitted
solidary liability for a staggering ₱10.743 billion private debt incurred by a private corporation
which PNCC does not even control. Second, the PNCC Board agreed to pay Radstock ₱6.185
billion as a compromise settlement ahead of all other creditors, including the Government which
is the biggest creditor.

The Dissenting Opinion further argues that since the PNCC is incorporated under the Corporation
Code, it has the power, through its Board of Directors, to compromise just like any other private
corporation organized under the Corporation Code. Thus, the Dissenting Opinion states:

Not being a government corporation created by special law, PNCC does not owe its creation to
some charter or special law, but to the Corporation Code. Its powers are enumerated in the
Corporation Code and its articles of incorporation. As an autonomous entity, it undoubtedly has
the power to compromise, and to enter into a settlement through its Board of Directors, just like
any other private corporation organized under the Corporation Code. To maintain otherwise is to
ignore the character of PNCC as a corporate entity organized under the Corporation Code, by
which it was vested with a personality and identity distinct and separate from those of its
stockholders or members. (Boldfacing and underlining supplied)

The Dissenting Opinion is woefully wide off the mark. The PNCC is not "just like any other private
corporation" precisely because it is not a private corporation but indisputably a government owned
corporation. Neither is PNCC "an autonomous entity" considering that PNCC is under the
Department of Trade and Industry, over which the President exercises control. To claim that
PNCC is an "autonomous entity" is to say that it is a lost command in the Executive branch, a
concept that violates the President's constitutional power of control over the entire Executive
branch of government.56

The government nominees in the PNCC Board, who practically compose the entire PNCC Board,
are public officers subject to the Anti-Graft and Corrupt Practices Act, accountable to the
Government and the Filipino people. To hold that a corporation incorporated under the
Corporation Code, despite its being 90.3% owned by the Government, is "an autonomous entity"
that could solely through its Board of Directors compromise, and transfer ownership of,
substantially all its assets to a private third party without the approval required under the
Administrative Code of 1987,57 is to invite the plunder of all such government owned corporations.

The Dissenting Opinion’s claim that PNCC is an autonomous entity just like any other private
corporation is inconsistent with its assertion that Section 36(2) of the Government Auditing Code
is the governing law in determining PNCC's power to compromise. Section 36(2) of the
Government Auditing Code expressly states that it applies to the governing bodies of
"government-owned or controlled corporations." The phrase "government-owned or
controlled corporations" refers to both those created by special charter as well as those
incorporated under the Corporation Code. Section 2, Article IX-D of the Constitution provides:

SECTION 2. (1) The Commission on Audit shall have the power, authority, and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses
of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned or controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or
equity, directly or indirectly, from or through the Government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity. However, where
the internal control system of the audited agencies is inadequate, the Commission may adopt
such measures, including temporary or special pre-audit, as are necessary and appropriate to
correct the deficiencies. It shall keep the general accounts of the Government and, for such period
as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to
define the scope of its audit and examination, establish the techniques and methods required
therefor, and promulgate accounting and auditing rules and regulations, including those for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures, or uses of government funds and properties. (Emphasis supplied)

In explaining the extent of the jurisdiction of COA over government owned or controlled
corporations, this Court declared in Feliciano v. Commission on Audit:58

The COA's audit jurisdiction extends not only to government "agencies or instrumentalities," but
also to "government-owned and controlled corporations with original charters" as well as "other
government-owned or controlled corporations" without original charters.

xxxx

Petitioner forgets that the constitutional criterion on the exercise of COA's audit jurisdiction
depends on the government's ownership or control of a corporation. The nature of the corporation,
whether it is private, quasi-public, or public is immaterial.

The Constitution vests in the COA audit jurisdiction over "government-owned and controlled
corporations with original charters," as well as "government-owned or controlled corporations"
without original charters. GOCCs with original charters are subject to COA pre-audit, while
GOCCs without original charters are subject to COA post-audit. GOCCs without original charters
refer to corporations created under the Corporation Code but are owned or controlled by the
government. The nature or purpose of the corporation is not material in determining COA's audit
jurisdiction. Neither is the manner of creation of a corporation, whether under a general or special
law.

Clearly, the COA’s audit jurisdiction extends to government owned or controlled corporations
incorporated under the Corporation Code. Thus, the COA must apply the Government Auditing
Code in the audit and examination of the accounts of such government owned or controlled
corporations even though incorporated under the Corporation Code. This means that Section
20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987 on the power to
compromise, which superseded Section 36 of the Government Auditing Code, applies to the
present case in determining PNCC’s power to compromise. In fact, the COA has been regularly
auditing PNCC on a post-audit basis in accordance with Section 2, Article IX-D of the Constitution,
the Government Auditing Code, and COA rules and regulations.

B. PNCC’s toll fees are public funds.

PD 1113 granted PNCC a 30-year franchise to construct, operate and maintain toll facilities in the
North and South Luzon Expressways. Section 1 of PD 111359 provides:

Section 1. Any provision of law to the contrary notwithstanding, there is hereby granted to the
Construction and Development Corporation of the Philippines (CDCP), a corporation duly
organized and registered under the laws of the Philippines, hereinafter called the GRANTEE, for
a period of thirty (30) years from May 1, 1977 the right, privilege and authority to construct, operate
and maintain toll facilities covering the expressways from Balintawak (Station 9 + 563) to Carmen,
Rosales, Pangasinan and from Nichols, Pasay City (Station 10 + 540) to Lucena, Quezon,
hereinafter referred to collectively as North Luzon Expressway, respectively.
The franchise herein granted shall include the right to collect toll fees at such rates as may be
fixed and/or authorized by the Toll Regulatory Board hereinafter referred to as the Board created
under Presidential Decree No. 1112 for the use of the expressways above-mentioned. (Emphasis
supplied)

Section 2 of PD 1894,60 which amended PD 1113 to include in PNCC’s franchise the Metro Manila
expressway, also provides:

Section 2. The term of the franchise provided under Presidential Decree No. 1113 for the North
Luzon Expressway and the South Luzon Expressway which is thirty (30) years from 1 May 1977
shall remain the same; provided that, the franchise granted for the Metro Manila Expressway and
all extensions linkages, stretches and diversions that may be constructed after the date of
approval of this decree shall likewise have a term of thirty (30) years commencing from the date
of completion of the project. (Emphasis supplied)

Based on these provisions, the franchise of the PNCC expired on 1 May 2007 or thirty years from
1 May 1977.

PNCC, however, claims that under PD 1894, the North Luzon Expressway (NLEX) shall have a
term of 30 years from the date of its completion in 2005. PNCC argues that the proviso in Section
2 of PD 1894 gave "toll road projects completed within the franchise period and after the approval
of PD No. 1894 on 12 December 1983 their own thirty-year term commencing from the date of
the completion of the said project, notwithstanding the expiry of the said franchise."

This contention is untenable.

The proviso in Section 2 of PD 1894 refers to the franchise granted for the Metro Manila
Expressway and all extensions linkages, stretches and diversions constructed after the approval
of PD 1894. It does not pertain to the NLEX because the term of the NLEX franchise, "which is
30 years from 1 May 1977, shall remain the same," as expressly provided in the first sentence of
the same Section 2 of PD 1894. To construe that the NLEX franchise had a new term of 30 years
starting from 2005 glaringly conflicts with the plain, clear and unequivocal language of the first
sentence of Section 2 of PD 1894. That would be clearly absurd.

There is no dispute that Congress did not renew PNCC’s franchise after its expiry on 1 May 2007.
However, PNCC asserts that it "remains a viable corporate entity even after the expiration of its
franchise under Presidential Decree No. 1113." PNCC points out that the Toll Regulatory Board
(TRB) granted PNCC a "Tollway Operation Certificate" (TOC) which conferred on PNCC the
authority to operate and maintain toll facilities, which includes the power to collect toll fees. PNCC
further posits that the toll fees are private funds because they represent "the consideration given
to tollway operators in exchange for costs they incurred or will incur in constructing, operating and
maintaining the tollways."

This contention is devoid of merit.

With the expiration of PNCC’s franchise, the assets and facilities of PNCC were automatically
turned over, by operation of law, to the government at no cost. Sections 2(e) and 9 of PD 1113
and Section 5 of PD 1894 provide:

Section 2 [of PD 1113]. In consideration of this franchise, the GRANTEE shall:

(e) Turn over the toll facilities and all equipment directly related thereto to the government upon
expiration of the franchise period without cost.

Section 9 [of PD 1113]. For the purposes of this franchise, the Government, shall turn over to the
GRANTEE (PNCC) not later than April 30, 1977 all physical assets and facilities including all
equipment and appurtenances directly related to the operations of the North and South Toll
Expressways: Provided, That, the extensions of such Expressways shall also be turned over to
GRANTEE upon completion of their construction or of functional sections thereof: Provided,
However, That upon termination of the franchise period, said physical assets and facilities
including improvements thereon, together with equipment and appurtenances directly related to
their operations, shall be turned over to the Government without any cost or obligation on the part
of the latter. (Emphasis supplied)

Section 5 [of PD No. 1894]. In consideration of this franchise, the GRANTEE shall:

(a) Construct, operate and maintain at its own expense the Expressways; and

(b) Turn over, without cost, the toll facilities and all equipment, directly related thereto to
the Government upon expiration of the franchise period. (Emphasis supplied)

The TRB does not have the power to give back to PNCC the toll assets and facilities which were
automatically turned over to the Government, by operation of law, upon the expiration of the
franchise of the PNCC on 1 May 2007. Whatever power the TRB may have to grant authority to
operate a toll facility or to issue a "Tollway Operation Certificate," such power does not obviously
include the authority to transfer back to PNCC ownership of National Government assets, like the
toll assets and facilities, which have become National Government property upon the expiry of
PNCC’s franchise. Such act by the TRB would repeal Section 5 of PD 1894 which automatically
vested in the National Government ownership of PNCC’s toll assets and facilities upon the expiry
of PNCC’s franchise. The TRB obviously has no power to repeal a law. Further, PD 1113, as
amended by PD 1894, granting the franchise to PNCC, is a later law that must necessarily prevail
over PD 1112 creating the TRB. Hence, the provisions of PD 1113, as amended by PD 1894, are
controlling.

The government’s ownership of PNCC's toll assets and facilities inevitably results in the
government’s ownership of the toll fees and the net income derived from these toll assets and
facilities. Thus, the toll fees form part of the National Government’s General Fund, which includes
public moneys of every sort and other resources pertaining to any agency of the
government.61 Even Radstock’s counsel admits that the toll fees are public funds, to wit:

ASSOCIATE JUSTICE CARPIO:

Okay. Now, when the franchise of PNCC expired on May 7, 2007, under the terms of the franchise
under PD 1896, all the assets, toll way assets, equipment, etcetera of PNCC became owned by
government at no cost, correct, under the franchise?

DEAN AGABIN:

Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:

Okay. So this is now owned by the national government. [A]ny income from these assets of the
national government is national government income, correct?

DEAN AGABIN:

Yes, Your Honor.62

xxxx

ASSOCIATE JUSTICE CARPIO:

x x x My question is very simple x x x Is the income from these assets of the national government
(interrupted)

DEAN AGABIN:

Yes, Your Honor.63

xxxx
ASSOCIATE JUSTICE CARPIO:

So, it’s the government [that] decides whether it goes to the general fund or another fund. [W]hat
is that other fund? Is there another fund where revenues of the government go?

DEAN AGABIN:

It’s the same fund, Your Honor, except that (interrupted)

ASSOCIATE JUSTICE CARPIO:

So it goes to the general fund?

DEAN AGABIN:

Except that it can be categorized as a private fund in a commercial sense, and it can be
categorized as a public fund in a Public Law sense.

ASSOCIATE JUSTICE CARPIO:

Okay. So we agree that, okay, it goes to the general fund. I agree with you, but you are saying it
is categorized still as a private funds?

DEAN AGABIN:

Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:

But it’s part of the general fund. Now, if it is part of the general fund, who has the authority to
spend that money?

DEAN AGABIN:

Well, the National Government itself.

ASSOCIATE JUSTICE CARPIO:

Who in the National Government, the Executive, Judiciary or Legislative?

DEAN AGABIN:

Well, the funds are usually appropriated by the Congress.

ASSOCIATE JUSTICE CARPIO:

x x x you mean to say there are exceptions that money from the general fund can be spent by the
Executive without going t[hrough] Congress, or xxx is [that] the absolute rule?

DEAN AGABIN:

Well, in so far as the general fund is concerned, that is the absolute rule set aside by the National
Government.

ASSOCIATE JUSTICE CARPIO:

x x x you are saying this is general fund money - the collection from the assets[?]

DEAN AGABIN:
Yes.64 (Emphasis supplied)

Forming part of the General Fund, the toll fees can only be disposed of in accordance with the
fundamental principles governing financial transactions and operations of any government
agency, to wit: (1) no money shall be paid out of the Treasury except in pursuance of an
appropriation made by law, as expressly mandated by Section 29(1), Article VI of the Constitution;
and (2) government funds or property shall be spent or used solely for public purposes, as
expressly mandated by Section 4(2) of PD 1445 or the Government Auditing Code.65

Section 29(1), Article VI of the Constitution provides:

Section 29(1). No money shall be paid out of the Treasury except in pursuance of an appropriation
made by law.

The power to appropriate money from the General Funds of the Government belongs exclusively
to the Legislature. Any act in violation of this iron-clad rule is unconstitutional.

Reinforcing this Constitutional mandate, Sections 84 and 85 of PD 1445 require that before a
government agency can enter into a contract involving the expenditure of government funds, there
must be an appropriation law for such expenditure, thus:

Section 84. Disbursement of government funds.

1. Revenue funds shall not be paid out of any public treasury or depository except in pursuance
of an appropriation law or other specific statutory authority.

xxxx

Section 85. Appropriation before entering into contract.

1. No contract involving the expenditure of public funds shall be entered into unless there is an
appropriation therefor, the unexpended balance of which, free of other obligations, is sufficient to
cover the proposed expenditure.

xxxx

Section 86 of PD 1445, on the other hand, requires that the proper accounting official must certify
that funds have been appropriated for the purpose.66 Section 87 of PD 1445 provides that any
contract entered into contrary to the requirements of Sections 85 and 86 shall be void,
thus:

Section 87. Void contract and liability of officer. Any contract entered into contrary to the
requirements of the two immediately preceding sections shall be void, and the officer or officers
entering into the contract shall be liable to the government or other contracting party for any
consequent damage to the same extent as if the transaction had been wholly between private
parties. (Emphasis supplied)

Applying Section 29(1), Article VI of the Constitution, as implanted in Sections 84 and 85 of the
Government Auditing Code, a law must first be enacted by Congress appropriating ₱6.185 billion
as compromise money before payment to Radstock can be made.67 Otherwise, such payment
violates a prohibitory law and thus void under Article 5 of the Civil Code which states that "[a]cts
executed against the provisions of mandatory or prohibitory laws shall be void, except
when the law itself authorizes their validity."

Indisputably, without an appropriation law, PNCC cannot lawfully pay ₱6.185 billion to Radstock.
Any contract allowing such payment, like the Compromise Agreement, "shall be void" as provided
in Section 87 of the Government Auditing Code. In Comelec v. Quijano-Padilla,68 this Court ruled:

Petitioners are justified in refusing to formalize the contract with PHOTOKINA. Prudence dictated
them not to enter into a contract not backed up by sufficient appropriation and available funds.
Definitely, to act otherwise would be a futile exercise for the contract would inevitably suffer the
vice of nullity. In Osmeña vs. Commission on Audit, this Court held:

The Auditing Code of the Philippines (P.D. 1445) further provides that no contract involving the
expenditure of public funds shall be entered into unless there is an appropriation therefor and the
proper accounting official of the agency concerned shall have certified to the officer entering into
the obligation that funds have been duly appropriated for the purpose and the amount necessary
to cover the proposed contract for the current fiscal year is available for expenditure on account
thereof. Any contract entered into contrary to the foregoing requirements shall be VOID.

Clearly then, the contract entered into by the former Mayor Duterte was void from the very
beginning since the agreed cost for the project (₱,368,920.00) was way beyond the appropriated
amount (₱,419,180.00) as certified by the City Treasurer. Hence, the contract was properly
declared void and unenforceable in COA's 2nd Indorsement, dated September 4, 1986. The COA
declared and we agree, that:

The prohibition contained in Sec. 85 of PD 1445 (Government Auditing Code) is explicit and
mandatory. Fund availability is, as it has always been, an indispensable prerequisite to the
execution of any government contract involving the expenditure of public funds by all government
agencies at all levels. Such contracts are not to be considered as final or binding unless such a
certification as to funds availability is issued (Letter of Instruction No. 767, s. 1978). Antecedent
of advance appropriation is thus essential to government liability on contracts (Zobel vs. City of
Manila, 47 Phil. 169). This contract being violative of the legal requirements aforequoted, the
same contravenes Sec. 85 of PD 1445 and is null and void by virtue of Sec. 87.

Verily, the contract, as expressly declared by law, is inexistent and void ab initio. This is to say
that the proposed contract is without force and effect from the very beginning or from its incipiency,
as if it had never been entered into, and hence, cannot be validated either by lapse of time or
ratification. (Emphasis supplied)

Significantly, Radstock’s counsel admits that an appropriation law is needed before PNCC can
use toll fees to pay Radstock, thus:

ASSOCIATE JUSTICE CARPIO:

Okay, I agree with you. Now, you are saying that money can be paid out of the general fund only
through an appropriation by Congress, correct? That’s what you are saying.

DEAN AGABIN:

Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:

I agree with you also. Okay, now, can PNCC xxx use this money to pay Radstock without
Congressional approval?

DEAN AGABIN:

Well, I believe that that may not be necessary. Your Honor, because earlier, the government had
already decreed that PNCC should be properly paid for the reclamation works which it had done.
And so (interrupted)

ASSOCIATE JUSTICE CARPIO:

No. I am talking of the funds.

DEAN AGABIN:

And so it is like a foreign obligation.

ASSOCIATE JUSTICE CARPIO:

Counsel, I'm talking of the general funds, collection from the toll fees. Okay. You said, they go to
the general fund. You also said, money from the general fund can be spent only if there is an
appropriation law by Congress.

DEAN AGABIN:

Yes, Your Honor.

There is no law.

DEAN AGABIN:

Yes, except that, Your Honor, this fund has not yet gone to the general fund.

ASSOCIATE JUSTICE CARPIO:

No. It’s being collected everyday. As of May 7, 2007, national government owned those assets
already. All those x x x collections that would have gone to PNCC are now national government
owned. It goes to the general fund. And any body who uses that without appropriation from
Congress commits malversation, I tell you.

DEAN AGABIN:

That is correct, Your Honor, as long as it has already gone into the general fund.

ASSOCIATE JUSTICE CARPIO:

Oh, you mean to say that it’s still being held now by the agent, PNCC. It has not been remitted to
the National Government?

DEAN AGABIN:

Well, if PNCC (interrupted)

ASSOCIATE JUSTICE CARPIO:

But if (interrupted)

DEAN AGABIN:

If this is the share that properly belongs to PNCC as a private entity (interrupted)

ASSOCIATE JUSTICE CARPIO:

No, no. I am saying that – You just agreed that all those collections now will go to the National
Government forming part of the general fund. If, somehow, PNCC is holding this money in the
meantime, it holds xxx it in trust, correct? Because you said, it goes to the general fund, National
Government. So it must be holding this in trust for the National Government.

DEAN AGABIN:

Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:

Okay. Can the person holding in trust use it to pay his private debt?
DEAN AGABIN:

No, Your Honor.

ASSOCIATE JUSTICE CARPIO:

Cannot be.

DEAN AGABIN:

But I assume that there must be some portion of the collections which properly pertain to PNCC.

ASSOCIATE JUSTICE CARPIO:

If there is some portion that xxx may be [for] operating expenses of PNCC. But that is not

DEAN AGABIN:

Even profit, Your Honor.

ASSOCIATE JUSTICE CARPIO:

Yeah, but that is not the six percent. Out of the six percent, that goes now to PNCC, that’s entirely
national government. But the National Government and the PNCC can agree on service fees for
collecting, to pay toll collectors.

DEAN AGABIN:

Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:

But those are expenses. We are talking of the net income. It goes to the general fund. And it’s
only Congress that can authorize that expenditure. Not even the Court of Appeals can give its
stamp of approval that it goes to Radstock, correct?

DEAN AGABIN:

Yes, Your Honor.69 (Emphasis supplied)

Without an appropriation law, the use of the toll fees to pay Radstock would constitute
malversation of public funds. Even counsel for Radstock expressly admits that the use of the toll
fees to pay Radstock constitutes malversation of public funds, thus:

ASSOCIATE JUSTICE CARPIO:

x x x As of May 7, 2007, [the] national government owned those assets already. All those x x x
collections that would have gone to PNCC are now national government owned. It goes to the
general fund. And any body who uses that without appropriation from Congress commits
malversation, I tell you.

DEAN AGABIN:

That is correct, Your Honor, as long as it has already gone into the general fund.

ASSOCIATE JUSTICE CARPIO:

Oh, you mean to say that it’s still being held now by the agent, PNCC. It has not been remitted to
the National Government?
DEAN AGABIN:

Well, if PNCC (interrupted)

ASSOCIATE JUSTICE CARPIO:

But if (interrupted)

DEAN AGABIN:

If this is the share that properly belongs to PNCC as a private entity (interrupted)

ASSOCIATE JUSTICE CARPIO:

No, no. I am saying that – You just agreed that all those collections now will go to the National
Government forming part of the general fund. If, somehow, PNCC is holding this money in the
meantime, it holds x x x it in trust, correct? Because you said, it goes to the general fund, National
Government. So it must be holding this in trust for the National Government.

DEAN AGABIN:

Yes, Your Honor.70 (Emphasis supplied)

Indisputably, funds held in trust by PNCC for the National Government cannot be used by
PNCC to pay a private debt of CDCP Mining to Radstock, otherwise the PNCC Board will
be liable for malversation of public funds.

In addition, to pay Radstock ₱6.185 billion violates the fundamental public policy, expressly
articulated in Section 4(2) of the Government Auditing Code,71 that government funds or property
shall be spent or used solely for pubic purposes, thus:

Section 4. Fundamental Principles. x x x (2) Government funds or property shall be spent or used
solely for public purposes. (Emphasis supplied)

There is no question that the subject of the Compromise Agreement is CDCP Mining’s private
debt to Marubeni, which Marubeni subsequently assigned to Radstock. Counsel for Radstock
admits that Radstock holds a private debt of CDCP Mining, thus:

ASSOCIATE JUSTICE CARPIO:

So your client is holding a private debt of CDCP Mining, correct?

DEAN AGABIN:

Correct, Your Honor.72 (Emphasis supplied)

CDCP Mining obtained the Marubeni loans when CDCP Mining and PNCC (then CDCP) were
still privately owned and managed corporations. The Government became the majority
stockholder of PNCC only because government financial institutions converted their loans to
PNCC into equity when PNCC failed to pay the loans. However, CDCP Mining have always
remained a majority privately owned corporation with PNCC owning only 13% of its equity as
admitted by former PNCC Chairman Arthur N. Aguilar and PNCC SVP Finance Miriam M. Pasetes
during the Senate hearings, thus:

SEN. OSMEÑA. x x x – I just wanted to know is CDCP Mining a 100 percent subsidiary of PNCC?

MR. AGUILAR. Hindi ho. Ah, no.

SEN. OSMEÑA. If they’re not a 100 percent, why would they sign jointly and severally? I just want
to plug the loopholes.
MR. AGUILAR. I think it was – if I may just speculate. It was just common ownership at that time.

SEN. OSMEÑA. Al right. Now – Also, the ...

MR. AGUILAR. Ah, 13 percent daw, your Honor.

SEN. OSMEÑA. Huh?

MR. AGUILAR. Thirteen percent ho.

SEN. OSMEÑA. What’s 13 percent?

MR. AGUILAR. We owned ...

MS. PASETES. Thirteen percent of ...

SEN. OSMEÑA. PNCC owned ...

MS. PASETES. (Mike off) CDCP ...

SEN. DRILON. Use the microphone, please.

MS. PASETES. Sorry. Your Honor, the ownership of CDCP of CDCP Basay Mining ...

SEN. OSMEÑA. No, no, the ownership of CDCP. CDCP Mining, how many percent of the equity
of CDCP Mining was owned by PNCC, formerly CDCP?

MS. PASETES. Thirteen percent.

SEN. OSMEÑA. Thirteen. And as a 13 percent owner, they agreed to sign jointly and severally?

MS. PASETES. Yes.

SEN. OSMEÑA. One-three?

So poor PNCC and CDCP got taken to the cleaners here. They sign for a 100 percent and they
only own 13 percent.

x x x x73 (Emphasis supplied)

PNCC cannot use public funds, like toll fees that indisputably form part of the General Fund, to
pay a private debt of CDCP Mining to Radstock. Such payment cannot qualify as expenditure for
a public purpose. The toll fees are merely held in trust by PNCC for the National Government,
which is the owner of the toll fees.

Considering that there is no appropriation law passed by Congress for the ₱6.185 billion
compromise amount, the Compromise Agreement is void for being contrary to law, specifically
Section 29(1), Article VI of the Constitution and Section 87 of PD 1445. And since the payment of
the ₱6.185 billion pertains to CDCP Mining’s private debt to Radstock, the Compromise
Agreement is also void for being contrary to the fundamental public policy that government funds
or property shall be spent or used solely for public purposes, as provided in Section 4(2) of the
Government Auditing Code.

C. Radstock is not qualified to own land in the Philippines.

Radstock is a private corporation incorporated in the British Virgin Islands. Its office address is at
Suite 14021 Duddell Street, Central Hongkong. As a foreign corporation, with unknown owners
whose nationalities are also unknown, Radstock is not qualified to own land in the Philippines
pursuant to Section 7, in relation to Section 3, Article XII of the Constitution. These provisions
state:
Section. 3. Lands of the public domain are classified into agricultural, forest or timber, mineral
lands, and national parks. Agricultural lands of the public domain may be further classified by law
according to the uses to which they may be devoted. Alienable lands of the public domain shall
be limited to agricultural lands. Private corporations or associations may not hold such lands of
the public domain except by lease, for a period not exceeding twenty-five years, renewable for
not more than twenty-five years, and not to exceed one hundred thousand hectares in area.
Citizens of the Philippines may lease not more than five hundred hectares, or acquire not more
than twelve hectares thereof by purchase, homestead, or grant.

Taking into account the requirements of conservation, ecology, and development, and subject to
the requirements of agrarian reform, the Congress shall determine, by law, the size of lands of
the public domain which may be acquired, developed, held, or leased and the conditions therefor.

xxxx

Section 7. Save in cases of hereditary succession, no private lands shall be transferred or

conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of
the public domain.

The OGCC admits that Radstock cannot own lands in the Philippines. However, the OGCC claims
that Radstock can own the rights to ownership of lands in the Philippines, thus:

ASSOCIATE JUSTICE CARPIO:

Under the law, a foreigner cannot own land, correct?

ATTY. AGRA:

Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:

Can a foreigner who xxx cannot own land assign the right of ownership to the land?

ATTY. AGRA:

Again, Your Honor, at that particular time, it will be PNCC, not through Radstock, that chain of
events should be, there’s a qualified nominee (interrupted)

ASSOCIATE JUSTICE CARPIO:

Yes, xxx you said, Radstock will assign the right of ownership to the qualified assignee[.] So my
question is, can a foreigner own the right to ownership of a land when it cannot own the land
itself?

ATTY. AGRA:

The foreigner cannot own the land, Your Honor.

ASSOCIATE JUSTICE CARPIO:

But you are saying it can own the right of ownership to the land, because you are saying, the right
of ownership will be assigned by Radstock.

ATTY. AGRA:

The rights over the properties, Your Honors, if there’s a valid assignment made to a qualified
party, then the assignment will be made.

ASSOCIATE JUSTICE CARPIO:

Who makes the assignment?

ATTY. AGRA:

It will be Radstock, Your Honor.

ASSOCIATE JUSTICE CARPIO:

So, if Radstock makes the assignment, it must own its rights, otherwise, it cannot assign it,
correct?

ATTY. AGRA:

Pursuant to the compromise agreement, once approved, yes, Your Honors.

ASSOCIATE JUSTICE CARPIO:

So, you are saying that Radstock can own the rights to ownership of the land?

ATTY. AGRA:

Yes, Your Honors.

ASSOCIATE JUSTICE CARPIO:

Yes?

ATTY. AGRA:

The premise, Your Honor, you mentioned a while ago was, if this Court approves said compromise
(interrupted)

ASSOCIATE JUSTICE CARPIO:

No, no. Whether there is such a compromise agreement - - It’s an academic question I am asking
you, can a foreigner assign rights to ownership of a land in the Philippines?

ATTY. AGRA:

Under the Compromise Agreement, Your Honors, these rights should be respected.

ASSOCIATE JUSTICE CARPIO:

So, it can?

ATTY. AGRA:

It can. Your Honor. But again, this right must, cannot be perfected or cannot be, could not take
effect.

ASSOCIATE JUSTICE CARPIO:

But if it cannot - - It’s not perfected, how can it assign?

ATTY. AGRA:

Not directly, Your Honors. Again, there must be a qualified nominee assigned by Radstock.

ASSOCIATE JUSTICE CARPIO:

It’s very clear, it’s an indirect way of selling property that is prohibited by law, is it not?

ATTY. AGRA:

Again, Your Honor, know, believe this is a Compromise Agreement. This is a dacion en pago.

ASSOCIATE JUSTICE CARPIO:

So, dacion en pago is an exception to the constitutional prohibition.

ATTY. AGRA:

No, Your Honor. PNCC, will still hold on to the property, absent a valid assignment of properties.

ASSOCIATE JUSTICE CARPIO:

But what rights will PNCC have over that land when it has already signed the compromise? It is
just waiting for instruction xxx from Radstock what to do with it? So, it’s a trustee of somebody,
because it does not, it cannot, [it] has no dominion over it anymore? It’s just holding it for
Radstock. So, PNCC becomes a dummy, at that point, of Radstock, correct?

ATTY. AGRA:

No, Your Honor, I believe it (interrupted)

ASSOCIATE JUSTICE CARPIO:

Yeah, but it does not own the land, but it still holding the land in favor of the other party to the
Compromise Agreement

ATTY. AGRA:

Pursuant to the compromise agreement, that will happen.

ASSOCIATE JUSTICE CARPIO:

Okay. May I (interrupted)

ATTY. AGRA:

Again, Your Honor, if the compromise agreement ended with a statement that Radstock will be
the owner of the property (interrupted)

ASSOCIATE JUSTICE CARPIO:

Yeah. Unfortunately, it says, to a qualified assignee.

ATTY. AGRA:

Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:

And at this point, when it is signed and execut[ed] and approved, PNCC has no dominion over
that land anymore. Who has dominion over it?

ATTY. AGRA:

Pending the assignment to a qualified party, Your Honor, PNCC will hold on to the property.
ASSOCIATE JUSTICE CARPIO:

Hold on, but who x x x can exercise acts of dominion, to sell it, to lease it?

ATTY. AGRA:

Again, Your Honor, without the valid assignment to a qualified nominee, the compromise
agreement in so far as the transfer of these properties will not become effective. It is subject to
such condition. Your Honor.74 (Emphasis supplied)

There is no dispute that Radstock is disqualified to own lands in the Philippines. Consequently,
Radstock is also disqualified to own the rights to ownership of lands in the Philippines. Contrary
to the OGCC’s claim, Radstock cannot own the rights to ownership of any land in the Philippines
because Radstock cannot lawfully own the land itself. Otherwise, there will be a blatant
circumvention of the Constitution, which prohibits a foreign private corporation from owning land
in the Philippines. In addition, Radstock cannot transfer the rights to ownership of land in the
Philippines if it cannot own the land itself. It is basic that an assignor or seller cannot assign or
sell something he does not own at the time the ownership, or the rights to the ownership, are to
be transferred to the assignee or buyer.75

The third party assignee under the Compromise Agreement who will be designated by Radstock
can only acquire rights duplicating those which its assignor (Radstock) is entitled by law to
exercise.76 Thus, the assignee can acquire ownership of the land only if its assignor, Radstock,
owns the land. Clearly, the assignment by PNCC of the real properties to a nominee to be
designated by Radstock is a circumvention of the Constitutional prohibition against a private
foreign corporation owning lands in the Philippines. Such circumvention renders the Compromise
Agreement void.

D. Public bidding is required for

the disposal of government properties.

Under Section 79 of the Government Auditing Code,77 the disposition

of government lands to private parties requires public bidding.78 COA Circular No. 89-926, issued
on 27 January 1989, sets forth the guidelines on the disposal of property and other assets of the
government. Part V of the COA Circular provides:

V. MODE OF DISPOSAL/DIVESTMENT: -

This Commission recognizes the following modes of disposal/divestment of assets and property
of national government agencies, local government units and government-owned or controlled
corporations and their subsidiaries, aside from other such modes as may be provided for by law.

1. Public Auction

Conformably to existing state policy, the divestment or disposal of government property as

contemplated herein shall be undertaken primarily thru public auction. Such mode of divestment
or disposal shall observe and adhere to established mechanics and procedures in public bidding,
viz:

a. adequate publicity and notification so as to attract the greatest number of interested

parties; (vide, Sec. 79, P.D. 1445)

b. sufficient time frame between publication and date of auction;

c. opportunity afforded to interested parties to inspect the property or assets to be

disposed of;

d. confidentiality of sealed proposals;

 e. bond and other prequalification requirements to guarantee performance; and

f. fair evaluation of tenders and proper notification of award.

It is understood that the Government reserves the right to reject any or all of the tenders.
(Emphasis supplied)

Under the Compromise Agreement, PNCC shall dispose of substantial parcels of land, by way of
dacion en pago, in favor of Radstock. Citing Uy v. Sandiganbayan,79 PNCC argues that a dacion
en pago is an exception to the requirement of a public bidding.

PNCC’s reliance on Uy is misplaced. There is nothing in Uy declaring that public bidding is

dispensed with in a dacion en pago transaction. The Court explained the transaction in Uy as
follows:

We do not see any infirmity in either the MOA or the SSA executed between PIEDRAS and
respondent banks. By virtue of its shareholdings in OPMC, PIEDRAS was entitled to subscribe to
3,749,906,250 class "A" and 2,499,937,500 class "B" OPMC shares. Admittedly, it was financially
sound for PIEDRAS to exercise its pre-emptive rights as an existing shareholder of OPMC lest its
proportionate shareholdings be diluted to its detriment. However, PIEDRAS lacked the necessary
funds to pay for the additional subscription. Thus, it resorted to contract loans from respondent
banks to finance the payment of its additional subscription. The mode of payment agreed upon
by the parties was that the payment would be made in the form of part of the shares subscribed
to by PIEDRAS. The OPMC shares therefore were agreed upon by the parties to be equivalent
payment for the amount advanced by respondent banks. We see the wisdom in the conditions of
the loan transaction. In order to save PIEDRAS and/or the government from the trouble of selling
the shares in order to raise funds to pay off the loans, an easier and more direct way was devised
in the form of the dacion en pago agreements.

Moreover, we agree with the Sandiganbayan that neither PIEDRAS nor the government sustained
any loss in these transactions. In fact, after deducting the shares to be given to respondent banks
as payment for the shares, PIEDRAS stood to gain about 1,540,781,554 class "A" and
710,550,000 class "B" OPMC shares virtually for free. Indeed, the question that must be asked is
whether or not PIEDRAS, in the exercise of its pre-emptive rights, would have been able to
acquire any of these shares at all if it did not enter into the financing agreements with the
respondent banks.80

Suffice it to state that in Uy, neither PIEDRAS81 nor the government suffered any loss in
the dacion en pago transactions, unlike here where the government stands to lose at least ₱6.185
billion worth of assets.

Besides, a dacion en pago is in essence a form of sale, which basically involves a disposition of
a property. In Filinvest Credit Corp. v. Philippine Acetylene, Co., Inc., 82 the Court defined dacion
en pago in this wise:

Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by the
debtor to the creditor as an accepted equivalent of the performance of obligation. In dacion en
pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts
it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense
of the nature of sale, that is, the creditor is really buying the thing or property of the debtor,
payment for which is to be charged against the debtor's debt.As such, the essential elements of
a contract of sale, namely, consent, object certain, and cause or consideration must be present.
In its modern concept, what actually takes place in dacion en pago is an objective novation of the
obligation where the thing offered as an accepted equivalent of the performance of an obligation
is considered as the object of the contract of sale, while the debt is considered as the purchase
price. In any case, common consent is an essential prerequisite, be it sale or innovation to have
the effect of totally extinguishing the debt or obligation.83 (Emphasis supplied)

E. PNCC must follow rules on preference of credit.

Radstock is only one of the creditors of PNCC. Asiavest is PNCC’s judgment creditor. In its Board
Resolution No. BD-092-2000, PNCC admitted not only its debt to Marubeni but also its debt to
the National Government84 in the amount of ₱36 billion.85 During the Senate hearings, PNCC
admitted that it owed the Government ₱36 billion, thus:

SEN. OSMEÑA. All right. Now, second question is, the management of PNCC also recognize the
obligation to the national government of 36 billion. It is part of the board resolution.

MS. OGAN. Yes, sir, it is part of the October 20 board resolution.

SEN. OSMEÑA. All right. So if you owe the national government 36 billion and you owe Marubeni
10 billion, you know, I would just declare bankruptcy and let an orderly disposition of assets be
done. What happened in this case to the claim, the 36 billion claim of the national government?
How was that disposed of by the PNCC? Mas malaki ang utang ninyo sa national government,
36 billion. Ang gagawin ninyo, babayaran lahat ang utang ninyo sa Marubeni without any assets
left to satisfy your obligations to the national government. There should have been, at least, a pari
passu payment of all your obligations, 'di ba?

MS. PASETES. Mr. Chairman...

SEN. OSMEÑA. Yes.

MS. PASETES. PNCC still carries in its books an equity account called equity adjustments arising
from transfer of obligations to national government - - 5.4 billion - - in addition to shares held by
government amounting to 1.2 billion.

SEN. OSMEÑA. What is the 36 billion?

THE CHAIRMAN. Ms. Pasetes...

SEN. OSMEÑA. Wait, wait, wait.

THE CHAIRMAN. Baka ampaw yun eh.

SEN. OSMEÑA. Teka muna. What is the 36 billion that appear in the resolution of the board in
September 2000 (sic)? This is the same resolution that recognizes, acknowledges and confirms
PNCC's obligations to Marubeni. And subparagraph (a) says "Government of the Philippines, in
the amount of 36,023,784,000 and change. And then (b) Marubeni Corporation in the amount of
10,743,000,000. So, therefore, in the same resolution, you acknowledged that had something like
P46.7 billion in obligations. Why did PNCC settle the 10 billion and did not protect the national
government's 36 billion? And then, number two, why is it now in your books, the 36 billion is now
down to five? If you use that ratio, then Marubeni should be down to one.

MS. PASETES. Sir, the amount of 36 billion is principal plus interest and penalties.

SEN. OSMEÑA. And what about Marubeni? Is that just principal only?

MS. PASETES. Principal and interest.

SEN. OSMEÑA. So, I mean, you know, it's equal treatment. Ten point seven billion is principal
plus penalties plus interest, hindi ba?

MS. PASETES. Yes, sir. Yes, Your Honor.

SEN. OSMEÑA. All right. So now, what you are saying is that you gonna pay Marubeni 6 billion
and change and the national government is only recognizing 5 billion. I don't think that's protecting
the interest of the national government at all.86
In giving priority and preference to Radstock, the Compromise Agreement is certainly in fraud of
PNCC’s other creditors, including the National Government, and violates the provisions of the
Civil Code on concurrence and preference of credits.

This Court has held that while the Corporation Code allows the transfer of all or substantially all
of the assets of a corporation, the transfer should not prejudice the creditors of the assignor
corporation.87 Assuming that PNCC may transfer all or substantially all its assets, to allow PNCC
to do so without the consent of its creditors or without requiring Radstock to assume PNCC’s
debts will defraud the other PNCC creditors88 since the assignment will place PNCC’s assets
beyond the reach of its other creditors.89 As this Court held in Caltex (Phil.), Inc. v. PNOC Shipping
and Transport Corporation:90

While the Corporation Code allows the transfer of all or substantially all the properties and assets
of a corporation, the transfer should not prejudice the creditors of the assignor. The only way the
transfer can proceed without prejudice to the creditors is to hold the assignee liable for the
obligations of the assignor. The acquisition by the assignee of all or substantially all of the assets
of the assignor necessarily includes the assumption of the assignor's liabilities, unless the
creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud.
To allow an assignor to transfer all its business, properties and assets without the consent of its
creditors and without requiring the assignee to assume the assignor's obligations will defraud the
creditors. The assignment will place the assignor's assets beyond the reach of its creditors.
(Emphasis supplied)

Also, the law, specifically Article 138791 of the Civil Code, presumes that there is fraud of creditors
when property is alienated by the debtor after judgment has been rendered against him, thus:

Alienations by onerous title are also presumed fraudulent when made by persons against whom
some judgment has been rendered in any instance or some writ of attachment has been issued.
The decision or attachment need not refer to the property alienated, and need not have been
obtained by the party seeking rescission. (Emphasis supplied)

As stated earlier, Asiavest is a judgment creditor of PNCC in G.R. No. 110263 and a court has
already issued a writ of execution in its favor. Thus, when PNCC entered into the Compromise
Agreement conveying several prime lots in favor of Radstock, by way of dacion en pago, there is
a legal presumption that such conveyance is fraudulent under Article 1387 of the Civil
Code.92 This presumption is strengthened by the fact that the conveyance has virtually left
PNCC’s other creditors, including the biggest creditor – the National Government - with no other
asset to garnish or levy.

Notably, the presumption of fraud or intention to defraud creditors is not just limited to the two
instances set forth in the first and second paragraphs of Article 1387 of the Civil Code. Under the
third paragraph of the same article, "the design to defraud creditors may be proved in any other
manner recognized by the law of evidence." In Oria v. Mcmicking, 93 this Court considered the
following instances as badges of fraud:

1. The fact that the consideration of the conveyance is fictitious or is inadequate.

2. A transfer made by a debtor after suit has begun and while it is pending against him.

3. A sale upon credit by an insolvent debtor.

4. Evidence of large indebtedness or complete insolvency.

5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent
or greatly embarrassed financially.

6. The fact that the transfer is made between father and son, when there are present other
of the above circumstances.

7. The failure of the vendee to take exclusive possession of all the property. (Emphasis
supplied)
Among the circumstances indicating fraud is a transfer of all or nearly all of the debtor’s assets,
especially when the debtor is greatly embarrassed financially. Accordingly, neither a declaration
of insolvency nor the institution of insolvency proceedings is a condition sine qua non for a transfer
of all or nearly all of a debtor’s assets to be regarded in fraud of creditors. It is sufficient that a
debtor is greatly embarrassed financially.

In this case, PNCC’s huge negative net worth - at least ₱6 billion as expressly admitted by PNCC’s
counsel during the oral arguments, or ₱14 billion based on the 2006 COA Audit Report -
necessarily translates to an extremely embarrassing financial situation. With its huge negative net
worth arising from unpaid billions of pesos in debt, PNCC cannot claim that it is financially stable.
As a consequence, the Compromise Agreement stipulating a transfer in favor of Radstock of
substantially all of PNCC’s assets constitutes fraud. To legitimize the Compromise Agreement
just because there is still no judicial declaration of PNCC’s insolvency will work fraud on PNCC’s
other creditors, the biggest creditor of which is the National Government. To insist that PNCC is
very much liquid, given its admitted huge negative net worth, is nothing but denial of the truth.
The toll fees that PNCC collects belong to the National Government. Obviously, PNCC cannot
claim it is liquid based on its collection of such toll fees, because PNCC merely holds such toll
fees in trust for the National Government. PNCC does not own the toll fees, and such toll fees do
not form part of PNCC’s assets.

PNCC owes the National Government ₱36 billion, a substantial part of which constitutes taxes
and fees, thus:

SEN. ROXAS. Thank you, Mr. Chairman.

Mr. PNCC Chairman, could you describe for us the composition of your debt of about five billion
– there are in thousands, so this looks like five and half billion. Current portion of long-term debt,
about five billion. What is this made of?

MS. PASETES. The five billion is composed of what is owed the Bureau of Treasury and
the Toll Regulatory Board for concession fees that’s almost three billion and another 2.4
billion owed Philippine National Bank.

SEN. ROXAS. So, how much is the Bureau of Treasury?

MS. PASETES. Three billion.

SEN. ROXAS. Three – Why do you owe the Bureau of Treasury three billion?

MS. PASETES. That represents the concession fees due Toll Regulatory Board principal plus
interest, Your Honor.

x x x x94 (Emphasis supplied)

In addition, PNCC’s 2006 Audit Report by COA states as follows:

TAX MATTERS

The Company was assessed by the Bureau of Internal Revenue (BIR) of its deficiencies in various
taxes. However, no provision for any liability has been made yet in the Company’s financial
statements.

• 1980 deficiency income tax, deficiency contractor’s tax and deficiency documentary stamp tax
assessments by the BIR totaling ₱212.523 Million.

xxxx

• Deficiency business tax of ₱64 Million due the Belgian Consortium, PNCC’s partner in its LRT
Project.
• 1992 deficiency income tax, deficiency value-added tax and deficiency expanded withholding
tax of ₱1.04 Billion which was reduced to ₱709 Million after the Company’s written protest.

xxxx

• 2002 deficiency internal revenue taxes totaling ₱72.916 Million.

x x x x.95 (Emphasis supplied)

Clearly, PNCC owes the National Government substantial taxes and fees amounting to billions of
pesos.

The ₱36 billion debt to the National Government was acknowledged by the PNCC Board in the
same board resolution that recognized the Marubeni loans. Since PNCC is clearly insolvent with
a huge negative net worth, the government enjoys preference over Radstock in the satisfaction
of PNCC’s liability arising from taxes and duties, pursuant to the provisions of the Civil Code on
concurrence and preference of credits. Articles 2241,96 224297 and 224398 of the Civil Code
expressly mandate that taxes and fees due the National Government "shall be preferred" and
"shall first be satisfied" over claims like those arising from the Marubeni loans which "shall enjoy
no preference" under Article 2244.99

However, in flagrant violation of the Civil Code, the PNCC Board favored Radstock over the
National Government in the order of credits. This would strip PNCC of its assets leaving virtually
nothing for the National Government. This action of the PNCC Board is manifestly and grossly
disadvantageous to the National Government and amounts to fraud.

During the Senate hearings, Senator Osmeña pointed out that in the Board Resolution of 20
October 2000, PNCC acknowledged its obligations to the National Government amounting to
₱36,023,784,000 and to Marubeni amounting to ₱10,743,000,000. Yet, Senator Osmeña noted
that in the PNCC books at the time of the hearing, the ₱36 billion obligation to the National
Government was reduced to ₱5 billion. PNCC’s Miriam M. Pasetes could not properly explain this
discrepancy, except by stating that the ₱36 billion includes the principal plus interest and
penalties, thus:

SEN. OSMEÑA. Teka muna. What is the 36 billion that appear in the resolution of the board in
September 2000 (sic)? This is the same resolution that recognizes, acknowledges and confirms
PNCC's obligations to Marubeni. And subparagraph (a) says "Government of the Philippines, in
the amount of 36,023,784,000 and change. And then (b) Marubeni Corporation in the amount of
10,743,000,000. So, therefore, in the same resolution, you acknowledged that had something like
P46.7 billion in obligations. Why did PNCC settle the 10 billion and did not protect the national
government's 36 billion? And then, number two, why is it now in your books, the 36 billion is now
down to five? If you use that ratio, then Marubeni should be down to one.

MS. PASETES. Sir, the amount of 36 billion is principal plus interest and penalties.

SEN. OSMEÑA. And what about Marubeni? Is that just principal only?

MS. PASETES. Principal and interest.

SEN. OSMEÑA. So, I mean, you know, it's equal treatment. Ten point seven billion is principal
plus penalties plus interest, hindi ba?

MS. PASETES. Yes, sir. Yes, Your Honor.

SEN. OSMEÑA. All right. So now, what you are saying is that you gonna pay Marubeni 6 billion
and change and the national government is only recognizing 5 billion. I don't think that's protecting
the interest of the national government at all.100

PNCC failed to explain satisfactorily why in its books the obligation to the National Government
was reduced when no payment to the National Government appeared to have been made. PNCC
failed to justify why it made it appear that the obligation to the National Government was less than
the obligation to Marubeni. It is another obvious ploy to justify the preferential treatment given to
Radstock to the great prejudice of the National Government.

VI.
Supreme Court is Not Legitimizer of Violations of Laws

During the oral arguments, counsels for Radstock and PNCC admitted that the Compromise
Agreement violates the Constitution and existing laws. However, they rely on this Court to approve
the Compromise Agreement to shield their clients from possible criminal acts arising from violation
of the Constitution and existing laws. In their view, once this Court approves the Compromise
Agreement, their clients are home free from prosecution, and can enjoy the ₱6.185 billion loot.
The following exchanges during the oral arguments reveal this view:

ASSOCIATE JUSTICE CARPIO:

If there is no agreement, they better remit all of that to the National Government. They cannot just
hold that. They are holding that [in] trust, as you said, x x x you agree, for the National
Government.

DEAN AGABIN:

Yes, that’s why, they are asking the Honorable Court to approve the compromise agreement.

ASSOCIATE JUSTICE CARPIO:

We cannot approve that if the power to authorize the expenditure [belongs] to Congress.
How can we usurp x x x the power of Congress to authorize that expenditure[?] It’s only
Congress that can authorize the expenditure of funds from the general funds.

DEAN AGABIN:

But, Your Honor, if the Honorable Court would approve of this compromise agreement, I
believe that this would be binding on Congress.

ASSOCIATE JUSTICE CARPIO:

Ignore the Constitutional provision that money shall be paid out of the National Treasury
only pursuant to an appropriation by law. You want us to ignore that[?]

DEAN AGABIN:

Not really, Your Honor, but I suppose that Congress would have no choice, because this is a final
judgment of the Honorable Court. 101

xxxx

ASSOCIATE JUSTICE CARPIO:

So, if Radstock makes the assignment, it must own its rights, otherwise, it cannot assign it,
correct?

ATTY. AGRA:

Pursuant to the compromise agreement, once approved, yes, Your Honors.

ASSOCIATE JUSTICE CARPIO:

So, you are saying that Radstock can own the rights to ownership of the land?

ATTY. AGRA:
Yes, Your Honors.

ASSOCIATE JUSTICE CARPIO:

Yes?

ATTY. AGRA:

The premise, Your Honor, you mentioned a while ago was, if this Court approves said compromise
(interrupted).102 (Emphasis supplied)

This Court is not, and should never be, a rubber stamp for litigants hankering to pocket public
funds for their selfish private gain. This Court is the ultimate guardian of the public interest, the
last bulwark against those who seek to plunder the public coffers. This Court cannot, and must
never, bring itself down to the level of legitimizer of violations of the Constitution, existing laws or
public policy.

Conclusion

In sum, the acts of the PNCC Board in (1) issuing Board Resolution Nos. BD-092-2000 and BD-
099-2000 expressly admitting liability for the Marubeni loans, and (2) entering into the
Compromise Agreement, constitute evident bad faith and gross inexcusable negligence,
amounting to fraud, in the management of PNCC’s affairs. Being public officers, the government
nominees in the PNCC Board must answer not only to PNCC and its stockholders, but also to the
Filipino people for grossly mishandling PNCC’s finances.

Under Article 1409 of the Civil Code, the Compromise Agreement is "inexistent and void from the
beginning," and "cannot be ratified," thus:

Art. 1409. The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy;

xxx

(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. x x x. (Emphasis supplied)

The Compromise Agreement is indisputably contrary to the Constitution, existing laws and public
policy. Under Article 1409, the Compromise Agreement is expressly declared void and "cannot
be ratified." No court, not even this Court, can ratify or approve the Compromise Agreement. This
Court must perform its duty to defend and uphold the Constitution, existing laws, and fundamental
public policy. This Court must not shirk in declaring the Compromise Agreement inexistent and
void ab initio.

WHEREFORE, we GRANT the petition in G.R. No. 180428. We SET ASIDE the Decision dated
25 January 2007 and the Resolutions dated 12 June 2007 and 5 November 2007 of the Court of
Appeals. We DECLARE (1) PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000
admitting liability for the Marubeni loans VOID AB INITIO for causing undue injury to the
Government and giving unwarranted benefits to a private party, constituting a corrupt practice
and unlawful act under Section 3(e) of the Anti-Graft and Corrupt Practices Act, and (2) the
Compromise Agreement between the Philippine National Construction Corporation and Radstock
Securities Limited INEXISTENT AND VOID AB INITIO for being contrary to Section 29(1), Article
VI and Sections 3 and 7, Article XII of the Constitution; Section 20(1), Chapter IV, Subtitle B, Title
I, Book V of the Administrative Code of 1987; Sections 4(2), 79, 84(1), and 85 of the Government
Auditing Code; and Articles 2241, 2242, 2243 and 2244 of the Civil Code.
We GRANT the intervention of Asiavest Merchant Bankers Berhad in G.R. No. 178158 but
DECLARE that Strategic Alliance Development Corporation has no legal standing to sue.

SO ORDERED.

7. Unchuan vs. Lozada, 585 SCRA 421

G.R. No. 172671 April 16, 2009

MARISSA R. UNCHUAN, Petitioner,

vs.
ANTONIO J.P. LOZADA, ANITA LOZADA and THE REGISTER OF DEEDS OF CEBU
CITY, Respondents.

DECISION

QUISUMBING, J.:

For review are the Decision1 dated February 23, 2006 and Resolution2 dated April 12, 2006 of the
Court of Appeals in CA-G.R. CV. No. 73829. The appellate court had affirmed with modification
the Order3 of the Regional Trial Court (RTC) of Cebu City, Branch 10 reinstating its
Decision4 dated June 9, 1997.

The facts of the case are as follows:

Sisters Anita Lozada Slaughter and Peregrina Lozada Saribay were the registered co-owners of
Lot Nos. 898-A-3 and 898-A-4 covered by Transfer Certificates of Title (TCT) Nos. 532585 and
532576 in Cebu City.

The sisters, who were based in the United States, sold the lots to their nephew Antonio J.P.
Lozada (Antonio) under a Deed of Sale7 dated March 11, 1994. Armed with a Special Power of
Attorney8 from Anita, Peregrina went to the house of their brother, Dr. Antonio Lozada (Dr.
Lozada), located at 4356 Faculty Avenue, Long Beach California.9 Dr. Lozada agreed to advance
the purchase price of US$367,000 or ₱10,000,000 for Antonio, his nephew. The Deed of Sale
was later notarized and authenticated at the Philippine Consul’s Office. Dr. Lozada then forwarded
the deed, special power of attorney, and owners’ copies of the titles to Antonio in the Philippines.
Upon receipt of said documents, the latter recorded the sale with the Register of Deeds of Cebu.
Accordingly, TCT Nos. 12832210 and 12832311 were issued in the name of Antonio Lozada.

Pending registration of the deed, petitioner Marissa R. Unchuan caused the annotation of an
adverse claim on the lots. Marissa claimed that Anita donated an undivided share in the lots to
her under an unregistered Deed of Donation12 dated February 4, 1987.

Antonio and Anita brought a case against Marissa for quieting of title with application for
preliminary injunction and restraining order. Marissa for her part, filed an action to declare the
Deed of Sale void and to cancel TCT Nos. 128322 and 128323. On motion, the cases were
consolidated and tried jointly.

At the trial, respondents presented a notarized and duly authenticated sworn statement, and a
videotape where Anita denied having donated land in favor of Marissa. Dr. Lozada testified that
he agreed to advance payment for Antonio in preparation for their plan to form a corporation. The
lots are to be eventually infused in the capitalization of Damasa Corporation, where he and
Antonio are to have 40% and 60% stake, respectively. Meanwhile, Lourdes G. Vicencio, a witness
for respondents confirmed that she had been renting the ground floor of Anita’s house since 1983,
and tendering rentals to Antonio.
For her part, Marissa testified that she accompanied Anita to the office of Atty. Cresencio Tomakin
for the signing of the Deed of Donation. She allegedly kept it in a safety deposit box but continued
to funnel monthly rentals to Peregrina’s account.

A witness for petitioner, one Dr. Cecilia Fuentes, testified on Peregrina’s medical records.
According to her interpretation of said records, it was physically impossible for Peregrina to have
signed the Deed of Sale on March 11, 1994, when she was reported to be suffering from edema.
Peregrina died on April 4, 1994.

In a Decision dated June 9, 1997, RTC Judge Leonardo B. Cañares disposed of the consolidated
cases as follows:

WHEREFORE, judgment is hereby rendered in Civil Case No. CEB-16145, to wit:

1. Plaintiff Antonio J.P. Lozada is declared the absolute owner of the properties in
question;

2. The Deed of Donation (Exh. "9") is declared null and void, and Defendant Marissa R.
Unchuan is directed to surrender the original thereof to the Court for cancellation;

3. The Register of Deeds of Cebu City is ordered to cancel the annotations of the Affidavit
of Adverse Claim of defendant Marissa R. Unchuan on TCT Nos. 53257 and 53258 and
on such all other certificates of title issued in lieu of the aforementioned certificates of title;

4. Defendant Marissa R. Unchuan is ordered to pay Antonio J.P. Lozada and Anita Lozada
Slaughter the sum of ₱100,000.00 as moral damages; exemplary damages of ₱50,000.00;
₱50,000.00 for litigation expenses and attorney’s fees of ₱50,000.00; and

5. The counterclaims of defendant Marissa R. Unchuan [are] DISMISSED.

In Civil Case No. CEB-16159, the complaint is hereby DISMISSED.

In both cases, Marissa R. Unchuan is ordered to pay the costs of suit.

SO ORDERED.13

On motion for reconsideration by petitioner, the RTC of Cebu City, Branch 10, with Hon. Jesus S.
dela Peña as Acting Judge, issued an Order14 dated April 5, 1999. Said order declared the Deed
of Sale void, ordered the cancellation of the new TCTs in Antonio’s name, and directed Antonio
to pay Marissa ₱200,000 as moral damages, ₱100,000 as exemplary damages, ₱100,000
attorney’s fees and ₱50,000 for expenses of litigation. The trial court also declared the Deed of
Donation in favor of Marissa valid. The RTC gave credence to the medical records of Peregrina.

Respondents moved for reconsideration. On July 6, 2000, now with Hon. Soliver C. Peras, as
Presiding Judge, the RTC of Cebu City, Branch 10, reinstated the Decision dated June 9, 1997,
but with the modification that the award of damages, litigation expenses and attorney’s fees were
disallowed.

Petitioner appealed to the Court of Appeals. On February 23, 2006 the appellate court affirmed
with modification the July 6, 2000 Order of the RTC. It, however, restored the award of ₱50,000
attorney’s fees and ₱50,000 litigation expenses to respondents.

Thus, the instant petition which raises the following issues:

I.

WHETHER THE COURT OF APPEALS ERRED AND VIOLATED PETITIONER’S RIGHT TO

DUE PROCESS WHEN IT FAILED TO RESOLVE PETITIONER’S THIRD ASSIGNED ERROR.

II.
WHETHER THE HONORABLE SUPREME COURT MAY AND SHOULD REVIEW THE
CONFLICTING FACTUAL FINDINGS OF THE HONORABLE REGIONAL TRIAL COURT IN ITS
OWN DECISION AND RESOLUTIONS ON THE MOTIONS FOR RECONSIDERATION, AND
THAT OF THE HONORABLE COURT OF APPEALS.

III.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

PETITIONER’S CASE IS BARRED BY LACHES.

IV.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED
OF DONATION EXECUTED IN FAVOR OF PETITIONER IS VOID.

V.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT ANITA
LOZADA’S VIDEOTAPED STATEMENT IS HEARSAY.15

Simply stated, the issues in this appeal are: (1) Whether the Court of Appeals erred in upholding
the Decision of the RTC which declared Antonio J.P. Lozada the absolute owner of the questioned
properties; (2) Whether the Court of Appeals violated petitioner’s right to due process; and (3)
Whether petitioner’s case is barred by laches.

Petitioner contends that the appellate court violated her right to due process when it did not rule
on the validity of the sale between the sisters Lozada and their nephew, Antonio. Marissa finds it
anomalous that Dr. Lozada, an American citizen, had paid the lots for Antonio. Thus, she accuses
the latter of being a mere dummy of the former. Petitioner begs the Court to review the conflicting
factual findings of the trial and appellate courts on Peregrina’s medical condition on March 11,
1994 and Dr. Lozada’s financial capacity to advance payment for Antonio. Likewise, petitioner
assails the ruling of the Court of Appeals which nullified the donation in her favor and declared
her case barred by laches. Petitioner finally challenges the admissibility of the videotaped
statement of Anita who was not presented as a witness.

On their part, respondents pray for the dismissal of the petition for petitioner’s failure to furnish
the Register of Deeds of Cebu City with a copy thereof in violation of Sections 316 and 4,17 Rule
45 of the Rules. In addition, they aver that Peregrina’s unauthenticated medical records were
merely falsified to make it appear that she was confined in the hospital on the day of the sale.
Further, respondents question the credibility of Dr. Fuentes who was neither presented in court
as an expert witness18 nor professionally involved in Peregrina’s medical care.

Further, respondents impugn the validity of the Deed of Donation in favor of Marissa. They assert
that the Court of Appeals did not violate petitioner’s right to due process inasmuch as it resolved
collectively all the factual and legal issues on the validity of the sale.

Faithful adherence to Section 14,19 Article VIII of the 1987 Constitution is indisputably a
paramount component of due process and fair play. The parties to a litigation should be informed
of how it was decided, with an explanation of the factual and legal reasons that led to the
conclusions of the court.20

In the assailed Decision, the Court of Appeals reiterates the rule that a notarized and
authenticated deed of sale enjoys the presumption of regularity, and is admissible without further
proof of due execution. On the basis thereof, it declared Antonio a buyer in good faith and for
value, despite petitioner’s contention that the sale violates public policy. While it is a part of the
right of appellant to urge that the decision should directly meet the issues presented for
resolution,21 mere failure by the appellate court to specify in its decision all contentious issues
raised by the appellant and the reasons for refusing to believe appellant’s contentions is not
sufficient to hold the appellate court’s decision contrary to the requirements of the law22 and the
Constitution.23 So long as the decision of the Court of Appeals contains the necessary findings of
facts to warrant its conclusions, we cannot declare said court in error if it withheld "any specific
findings of fact with respect to the evidence for the defense." 24 We will abide by the legal
presumption that official duty has been regularly performed,25 and all matters within an issue in a
case were laid down before the court and were passed upon by it.26

In this case, we find nothing to show that the sale between the sisters Lozada and their nephew
Antonio violated the public policy prohibiting aliens from owning lands in the Philippines. Even as
Dr. Lozada advanced the money for the payment of Antonio’s share, at no point were the lots
registered in Dr. Lozada’s name. Nor was it contemplated that the lots be under his control for
they are actually to be included as capital of Damasa Corporation. According to their agreement,
Antonio and Dr. Lozada are to hold 60% and 40% of the shares in said corporation, respectively.
Under Republic Act No. 7042,27 particularly Section 3,28 a corporation organized under the laws
of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines, is considered a Philippine National. As such, the
corporation may acquire disposable lands in the Philippines. Neither did petitioner present proof
to belie Antonio’s capacity to pay for the lots subjects of this case.

Petitioner, likewise, calls on the Court to ascertain Peregrina’s physical ability to execute the Deed
of Sale on March 11, 1994. This essentially necessitates a calibration of facts, which is not the
function of this Court.29 Nevertheless, we have sifted through the Decisions of the RTC and the
Court of Appeals but found no reason to overturn their factual findings. Both the trial court and
appellate court noted the lack of substantial evidence to establish total impossibility for Peregrina
to execute the Deed of Sale.

In support of its contentions, petitioner submits a copy of Peregrina’s medical records to show
that she was confined at the Martin Luther Hospital from February 27, 1994 until she died on April
4, 1994. However, a Certification30 from Randy E. Rice, Manager for the Health Information
Management of the hospital undermines the authenticity of said medical records. In the
certification, Rice denied having certified or having mailed copies of Peregrina’s medical records
to the Philippines. As a rule, a document to be admissible in evidence, should be previously
authenticated, that is, its due execution or genuineness should be first shown.31 Accordingly, the
unauthenticated medical records were excluded from the evidence. Even assuming that
Peregrina was confined in the cited hospital, the Deed of Sale was executed on March 11, 1994,
a month before Peregrina reportedly succumbed to Hepato Renal Failure caused by Septicemia
due to Myflodysplastic Syndrome.32 Nothing in the records appears to show that Peregrina was
so incapacitated as to prevent her from executing the Deed of Sale. Quite the contrary, the records
reveal that close to the date of the sale, specifically on March 9, 1994, Peregrina was even able
to issue checks33 to pay for her attorney’s professional fees and her own hospital bills. At no point
in the course of the trial did petitioner dispute this revelation.

Now, as to the validity of the donation, the provision of Article 749 of the Civil Code is in point:

art. 749. In order that the donation of an immovable may be valid, it must be made in a public
document, specifying therein the property donated and the value of the charges which the donee
must satisfy.

The acceptance may be made in the same deed of donation or in a separate public document,
but it shall not take effect unless it is done during the lifetime of the donor.

If the acceptance is made in a separate instrument, the donor shall be notified thereof in an
authentic form, and this step shall be noted in both instruments.

When the law requires that a contract be in some form in order that it may be valid or enforceable,
or that a contract be proved in a certain way, that requirement is absolute and
indispensable.34 Here, the Deed of Donation does not appear to be duly notarized. In page three
of the deed, the stamped name of Cresencio Tomakin appears above the words Notary Public
until December 31, 1983 but below it were the typewritten words Notary Public until December
31, 1987. A closer examination of the document further reveals that the
number 7 in 1987 and Series of 1987 were merely superimposed.35 This was confirmed by
petitioner’s nephew Richard Unchuan who testified that he saw petitioner’s husband write 7 over
1983 to make it appear that the deed was notarized in 1987. Moreover, a Certification36 from Clerk
of Court Jeoffrey S. Joaquino of the Notarial Records Division disclosed that the Deed of Donation
purportedly identified in Book No. 4, Document No. 48, and Page No. 35 Series of 1987 was not
reported and filed with said office. Pertinent to this, the Rules require a party producing a
document as genuine which has been altered and appears to have been altered after its
execution, in a part material to the question in dispute, to account for the alteration. He may show
that the alteration was made by another, without his concurrence, or was made with the consent
of the parties affected by it, or was otherwise properly or innocently made, or that the alteration
did not change the meaning or language of the instrument. If he fails to do that, the document
shall, as in this case, not be admissible in evidence.371avvphi1

Remarkably, the lands described in the Deed of Donation are covered by TCT Nos. 7364538 and
73646,39 both of which had been previously cancelled by an Order40 dated April 8, 1981 in LRC
Record No. 5988. We find it equally puzzling that on August 10, 1987, or six months after Anita
supposedly donated her undivided share in the lots to petitioner, the Unchuan Development
Corporation, which was represented by petitioner’s husband, filed suit to compel the Lozada
sisters to surrender their titles by virtue of a sale. The sum of all the circumstances in this case
calls for no other conclusion than that the Deed of Donation allegedly in favor of petitioner is void.
Having said that, we deem it unnecessary to rule on the issue of laches as the execution of the
deed created no right from which to reckon delay in making any claim of rights under the
instrument.

Finally, we note that petitioner faults the appellate court for not excluding the videotaped
statement of Anita as hearsay evidence. Evidence is hearsay when its probative force depends,
in whole or in part, on the competency and credibility of some persons other than the witness by
whom it is sought to be produced. There are three reasons for excluding hearsay evidence: (1)
absence of cross-examination; (2) absence of demeanor evidence; and (3) absence of oath. 41 It
is a hornbook doctrine that an affidavit is merely hearsay evidence where its maker did not take
the witness stand.42 Verily, the sworn statement of Anita was of this kind because she did not
appear in court to affirm her averments therein. Yet, a more circumspect examination of our rules
of exclusion will show that they do not cover admissions of a party;43 the videotaped statement of
Anita appears to belong to this class. Section 26 of Rule 130 provides that "the act, declaration
or omission of a party as to a relevant fact may be given in evidence against him. It has long been
settled that these admissions are admissible even if they are hearsay.44 Indeed, there is a vital
distinction between admissions against interest and declaration against interest. Admissions
against interest are those made by a party to a litigation or by one in privity with or identified in
legal interest with such party, and are admissible whether or not the declarant is available as a
witness. Declaration against interest are those made by a person who is neither a party nor in
privity with a party to the suit, are secondary evidence and constitute an exception to the hearsay
rule. They are admissible only when the declarant is unavailable as a witness.45 Thus, a man’s
acts, conduct, and declaration, wherever made, if voluntary, are admissible against him, for the
reason that it is fair to presume that they correspond with the truth, and it is his fault if they do
not.46 However, as a further qualification, object evidence, such as the videotape in this case,
must be authenticated by a special testimony showing that it was a faithful reproduction.47 Lacking
this, we are constrained to exclude as evidence the videotaped statement of Anita. Even so, this
does not detract from our conclusion concerning petitioner’s failure to prove, by preponderant
evidence, any right to the lands subject of this case.

Anent the award of moral damages in favor of respondents, we find no factual and legal basis
therefor. Moral damages cannot be awarded in the absence of a wrongful act or omission or fraud
or bad faith. When the action is filed in good faith there should be no penalty on the right to litigate.
One may have erred, but error alone is not a ground for moral damages. 48 The award of moral
damages must be solidly anchored on a definite showing that respondents actually experienced
emotional and mental sufferings. Mere allegations do not suffice; they must be substantiated by
clear and convincing proof.49 As exemplary damages can be awarded only after the claimant has
shown entitlement to moral damages,50 neither can it be granted in this case.

WHEREFORE, the instant petition is DENIED. The Decision dated February 23, 2006, and
Resolution dated April 12, 2006 of the Court of Appeals in CA-G.R. CV. No. 73829 are AFFIRMED
with MODIFICATION. The awards of moral damages and exemplary damages in favor of
respondents are deleted. No pronouncement as to costs.

SO ORDERED.
8. Tatad vs. Garcia, Jr., 243 SCRA 436 (1995)

G.R. No. 114222 April 6, 1995

FRANCISCO S. TATAD, JOHN H. OSMENA and RODOLFO G. BIAZON, petitioners,

vs.
HON. JESUS B. GARCIA, JR., in his capacity as the Secretary of the Department of
Transportation and Communications, and EDSA LRT CORPORATION, LTD., respondents.

QUIASON, J.:

This is a petition under Rule 65 of the Revised Rules of Court to prohibit respondents from further
implementing and enforcing the "Revised and Restated Agreement to Build, Lease and Transfer
a Light Rail Transit System for EDSA" dated April 22, 1992, and the "Supplemental Agreement to
the 22 April 1992 Revised and Restated Agreement To Build, Lease and Transfer a Light Rail
Transit System for EDSA" dated May 6, 1993.

Petitioners Francisco S. Tatad, John H. Osmena and Rodolfo G. Biazon are members of the
Philippine Senate and are suing in their capacities as Senators and as taxpayers. Respondent
Jesus B. Garcia, Jr. is the incumbent Secretary of the Department of Transportation and
Communications (DOTC), while private respondent EDSA LRT Corporation, Ltd. is a private
corporation organized under the laws of Hongkong.

In 1989, DOTC planned to construct a light railway transit line along EDSA, a major thoroughfare
in Metropolitan Manila, which shall traverse the cities of Pasay, Quezon, Mandaluyong and
Makati. The plan, referred to as EDSA Light Rail Transit III (EDSA LRT III), was intended to
provide a mass transit system along EDSA and alleviate the congestion and growing
transportation problem in the metropolis.

On March 3, 1990, a letter of intent was sent by the Eli Levin Enterprises, Inc., represented by
Elijahu Levin to DOTC Secretary Oscar Orbos, proposing to construct the EDSA LRT III on a
Build-Operate-Transfer (BOT) basis.

On March 15, 1990, Secretary Orbos invited Levin to send a technical team to discuss the project
with DOTC.

On July 9, 1990, Republic Act No. 6957 entitled "An Act Authorizing the Financing, Construction,
Operation and Maintenance of Infrastructure Projects by the Private Sector, and For Other
Purposes," was signed by President Corazon C. Aquino. Referred to as the Build-Operate-
Transfer (BOT) Law, it took effect on October 9, 1990.

Republic Act No. 6957 provides for two schemes for the financing, construction and operation of
government projects through private initiative and investment: Build-Operate-Transfer (BOT) or
Build-Transfer (BT).

In accordance with the provisions of R.A. No. 6957 and to set the EDSA LRT III project underway,
DOTC, on January 22, 1991 and March 14, 1991, issued Department Orders Nos. 91-494 and
91-496, respectively creating the Prequalification Bids and Awards Committee (PBAC) and the
Technical Committee.

After its constitution, the PBAC issued guidelines for the prequalification of contractors for the
financing and implementation of the project The notice, advertising the prequalification of bidders,
was published in three newspapers of general circulation once a week for three consecutive
weeks starting February 21, 1991.
The deadline set for submission of prequalification documents was March 21, 1991, later
extended to April 1, 1991. Five groups responded to the invitation namely, ABB Trazione of Italy,
Hopewell Holdings Ltd. of Hongkong, Mansteel International of Mandaue, Cebu, Mitsui & Co.,
Ltd. of Japan, and EDSA LRT Consortium, composed of ten foreign and domestic corporations:
namely, Kaiser Engineers International, Inc., ACER Consultants (Far East) Ltd. and Freeman
Fox, Tradeinvest/CKD Tatra of the Czech and Slovak Federal Republics, TCGI Engineering All
Asia Capital and Leasing Corporation, The Salim Group of Jakarta, E. L. Enterprises, Inc., A.M.
Oreta & Co. Capitol Industrial Construction Group, Inc, and F. F. Cruz & co., Inc.

On the last day for submission of prequalification documents, the prequalification criteria
proposed by the Technical Committee were adopted by the PBAC. The criteria totalling 100
percent, are as follows: (a) Legal aspects — 10 percent; (b) Management/Organizational
capability — 30 percent; and (c) Financial capability — 30 percent; and (d) Technical capability
— 30 percent (Rollo, p. 122).

On April 3, 1991, the Committee, charged under the BOT Law with the formulation of the
Implementation Rules and Regulations thereof, approved the same.

After evaluating the prequalification, bids, the PBAC issued a Resolution on May 9, 1991 declaring
that of the five applicants, only the EDSA LRT Consortium "met the requirements of garnering at
least 21 points per criteria [sic], except for Legal Aspects, and obtaining an over-all passing mark
of at least 82 points" (Rollo, p. 146). The Legal Aspects referred to provided that the BOT/BT
contractor-applicant meet the requirements specified in the Constitution and other pertinent laws
(Rollo, p. 114).

Subsequently, Secretary Orbos was appointed Executive Secretary to the President of the
Philippines and was replaced by Secretary Pete Nicomedes Prado. The latter sent to President
Aquino two letters dated May 31, 1991 and June 14, 1991, respectively recommending the award
of the EDSA LRT III project to the sole complying bidder, the EDSA LRT Consortium, and
requesting for authority to negotiate with the said firm for the contract pursuant to paragraph 14(b)
of the Implementing Rules and Regulations of the BOT Law (Rollo, pp. 298-302).

In July 1991, Executive Secretary Orbos, acting on instructions of the President, issued a directive
to the DOTC to proceed with the negotiations. On July 16, 1991, the EDSA LRT Consortium
submitted its bid proposal to DOTC.

Finding this proposal to be in compliance with the bid requirements, DOTC and respondent EDSA
LRT Corporation, Ltd., in substitution of the EDSA LRT Consortium, entered into an "Agreement
to Build, Lease and Transfer a Light Rail Transit System for EDSA" under the terms of the BOT
Law (Rollo, pp. 147-177).

Secretary Prado, thereafter, requested presidential approval of the contract.

In a letter dated March 13, 1992, Executive Secretary Franklin Drilon, who replaced Executive
Secretary Orbos, informed Secretary Prado that the President could not grant the requested
approval for the following reasons: (1) that DOTC failed to conduct actual public bidding in
compliance with Section 5 of the BOT Law; (2) that the law authorized public bidding as the only
mode to award BOT projects, and the prequalification proceedings was not the public bidding
contemplated under the law; (3) that Item 14 of the Implementing Rules and Regulations of the
BOT Law which authorized negotiated award of contract in addition to public bidding was of
doubtful legality; and (4) that congressional approval of the list of priority projects under the BOT
or BT Scheme provided in the law had not yet been granted at the time the contract was awarded
(Rollo, pp. 178-179).

In view of the comments of Executive Secretary Drilon, the DOTC and private respondents re-
negotiated the agreement. On April 22, 1992, the parties entered into a "Revised and Restated
Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" (Rollo, pp. 47-78)
inasmuch as "the parties [are] cognizant of the fact the DOTC has full authority to sign the
Agreement without need of approval by the President pursuant to the provisions of Executive
Order No. 380 and that certain events [had] supervened since November 7, 1991 which
necessitate[d] the revision of the Agreement" (Rollo, p. 51). On May 6, 1992, DOTC, represented
by Secretary Jesus Garcia vice Secretary Prado, and private respondent entered into a
"Supplemental Agreement to the 22 April 1992 Revised and Restated Agreement to Build, Lease
and Transfer a Light Rail Transit System for EDSA" so as to "clarify their respective rights and
responsibilities" and to submit [the] Supplemental Agreement to the President, of the Philippines
for his approval" (Rollo, pp. 79-80).

Secretary Garcia submitted the two Agreements to President Fidel V. Ramos for his consideration
and approval. In a Memorandum to Secretary Garcia on May 6, 1993, approved the said
Agreements, (Rollo, p. 194).

According to the agreements, the EDSA LRT III will use light rail vehicles from the Czech and
Slovak Federal Republics and will have a maximum carrying capacity of 450,000 passengers a
day, or 150 million a year to be achieved-through 54 such vehicles operating simultaneously. The
EDSA LRT III will run at grade, or street level, on the mid-section of EDSA for a distance of 17.8
kilometers from F.B. Harrison, Pasay City to North Avenue, Quezon City. The system will have
its own power facility (Revised and Restated Agreement, Sec. 2.3 (ii); Rollo p. 55). It will also
have thirteen (13) passenger stations and one depot in 16-hectare government property at North
Avenue (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).

Private respondents shall undertake and finance the entire project required for a complete
operational light rail transit system (Revised and Restated Agreement, Sec. 4.1; Rollo, p. 58).
Target completion date is 1,080 days or approximately three years from the implementation date
of the contract inclusive of mobilization, site works, initial and final testing of the system
(Supplemental Agreement, Sec. 5; Rollo, p. 83). Upon full or partial completion and viability
thereof, private respondent shall deliver the use and possession of the completed portion to
DOTC which shall operate the same (Supplemental Agreement, Sec. 5; Revised and Restated
Agreement, Sec. 5.1; Rollo, pp. 61-62, 84). DOTC shall pay private respondent rentals on a
monthly basis through an Irrevocable Letter of Credit. The rentals shall be determined by an
independent and internationally accredited inspection firm to be appointed by the parties
(Supplemental Agreement, Sec. 6; Rollo, pp. 85-86) As agreed upon, private respondent's capital
shall be recovered from the rentals to be paid by the DOTC which, in turn, shall come from the
earnings of the EDSA LRT III (Revised and Restated Agreement, Sec. 1, p. 5; Rollo, p. 54). After
25 years and DOTC shall have completed payment of the rentals, ownership of the project shall
be transferred to the latter for a consideration of only U.S. $1.00 (Revised and Restated
Agreement, Sec. 11.1; Rollo, p. 67).

On May 5, 1994, R.A. No. 7718, an "Act Amending Certain Sections of Republic Act No. 6957,
Entitled "An Act Authorizing the Financing, Construction, Operation and Maintenance of
Infrastructure Projects by the Private Sector, and for Other Purposes" was signed into law by the
President. The law was published in two newspapers of general circulation on May 12, 1994, and
took effect 15 days thereafter or on May 28, 1994. The law expressly recognizes BLT scheme
and allows direct negotiation of BLT contracts.

II

In their petition, petitioners argued that:

(1) THE AGREEMENT OF APRIL 22, 1992, AS AMENDED BY THE

SUPPLEMENTAL AGREEMENT OF MAY 6, 1993, INSOFAR AS IT GRANTS
EDSA LRT CORPORATION, LTD., A FOREIGN CORPORATION, THE
OWNERSHIP OF EDSA LRT III, A PUBLIC UTILITY, VIOLATES THE
CONSTITUTION AND, HENCE, IS UNCONSTITUTIONAL;

(2) THE BUILD-LEASE-TRANSFER SCHEME PROVIDED IN THE

AGREEMENTS IS NOT DEFINED NOR RECOGNIZED IN R.A. NO. 6957 OR ITS
IMPLEMENTING RULES AND REGULATIONS AND, HENCE, IS ILLEGAL;

(3) THE AWARD OF THE CONTRACT ON A NEGOTIATED BASIS VIOLATES R;

A. NO. 6957 AND, HENCE, IS UNLAWFUL;
 (4) THE AWARD OF THE CONTRACT IN FAVOR OF RESPONDENT EDSA LRT
CORPORATION, LTD. VIOLATES THE REQUIREMENTS PROVIDED IN THE
IMPLEMENTING RULES AND REGULATIONS OF THE BOT LAW AND, HENCE,
IS ILLEGAL;

(5) THE AGREEMENTS VIOLATE EXECUTIVE ORDER NO 380 FOR THEIR

FAILURE TO BEAR PRESIDENTIAL APPROVAL AND, HENCE, ARE ILLEGAL
AND INEFFECTIVE; AND

(6) THE AGREEMENTS ARE GROSSLY DISADVANTAGEOUS TO THE

GOVERNMENT (Rollo, pp. 15-16).

Secretary Garcia and private respondent filed their comments separately and claimed that:

(1) Petitioners are not the real parties-in-interest and have no legal standing to institute the present
petition;

(2) The writ of prohibition is not the proper remedy and the petition requires ascertainment of
facts;

(3) The scheme adopted in the Agreements is actually a build-transfer scheme allowed by the
BOT Law;

(4) The nationality requirement for public utilities mandated by the Constitution does not apply to
private respondent;

(5) The Agreements executed by and between respondents have been approved by President
Ramos and are not disadvantageous to the government;

(6) The award of the contract to private respondent through negotiation and not public bidding is
allowed by the BOT Law; and

(7) Granting that the BOT Law requires public bidding, this has been amended by R.A No. 7718
passed by the Legislature On May 12, 1994, which provides for direct negotiation as a mode of
award of infrastructure projects.

III

Respondents claimed that petitioners had no legal standing to initiate the instant action.
Petitioners, however, countered that the action was filed by them in their capacity as Senators
and as taxpayers.

The prevailing doctrines in taxpayer's suits are to allow taxpayers to question contracts entered
into by the national government or government-owned or controlled corporations allegedly in
contravention of the law (Kilosbayan, Inc. v. Guingona, 232 SCRA 110 [1994]) and to disallow the
same when only municipal contracts are involved (Bugnay Construction and Development
Corporation v. Laron, 176 SCRA. 240 [1989]).

For as long as the ruling in Kilosbayan on locus standi is not reversed, we have no choice but to
follow it and uphold the legal standing of petitioners as taxpayers to institute the present action.

IV

In the main, petitioners asserted that the Revised and Restated Agreement of April 22, 1992 and
the Supplemental Agreement of May 6, 1993 are unconstitutional and invalid for the following
reasons:

(1) the EDSA LRT III is a public utility, and the ownership and operation thereof is
limited by the Constitution to Filipino citizens and domestic corporations, not
foreign corporations like private respondent;
 (2) the Build-Lease-Transfer (BLT) scheme provided in the agreements is not the
BOT or BT Scheme under the law;

(3) the contract to construct the EDSA LRT III was awarded to private respondent
not through public bidding which is the only mode of awarding infrastructure
projects under the BOT law; and

(4) the agreements are grossly disadvantageous to the government.

1. Private respondent EDSA LRT Corporation, Ltd. to whom the contract to construct the EDSA
LRT III was awarded by public respondent, is admittedly a foreign corporation "duly incorporated
and existing under the laws of Hongkong" (Rollo, pp. 50, 79). There is also no dispute that once
the EDSA LRT III is constructed, private respondent, as lessor, will turn it over to DOTC, as
lessee, for the latter to operate the system and pay rentals for said use.

The question posed by petitioners is:

Can respondent EDSA LRT Corporation, Ltd., a foreign corporation own EDSA
LRT III; a public utility? (Rollo, p. 17).

The phrasing of the question is erroneous; it is loaded. What private respondent owns are the rail
tracks, rolling stocks like the coaches, rail stations, terminals and the power plant, not a public
utility. While a franchise is needed to operate these facilities to serve the public, they do not by
themselves constitute a public utility. What constitutes a public utility is not their ownership but
their use to serve the public (Iloilo Ice & Cold Storage Co. v. Public Service Board, 44 Phil. 551,
557 558 [1923]).

The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility.
However, it does not require a franchise before one can own the facilities needed to operate a
public utility so long as it does not operate them to serve the public.

Section 11 of Article XII of the Constitution provides:

No franchise, certificate or any other form of authorization for the operation of a

public utility shall be granted except to citizens of the Philippines or to corporations
or associations organized under the laws of the Philippines at least sixty per
centum of whose capital is owned by such citizens, nor shall such franchise,
certificate or authorization be exclusive character or for a longer period than fifty
years . . . (Emphasis supplied).

In law, there is a clear distinction between the "operation" of a public utility and the ownership of
the facilities and equipment used to serve the public.

Ownership is defined as a relation in law by virtue of which a thing pertaining to one person is
completely subjected to his will in everything not prohibited by law or the concurrence with the
rights of another (Tolentino, II Commentaries and Jurisprudence on the Civil Code of the
Philippines 45 [1992]).

The exercise of the rights encompassed in ownership is limited by law so that a property cannot
be operated and used to serve the public as a public utility unless the operator has a franchise.
The operation of a rail system as a public utility includes the transportation of passengers from
one point to another point, their loading and unloading at designated places and the movement
of the trains at pre-scheduled times (cf. Arizona Eastern R.R. Co. v. J.A.. Matthews, 20 Ariz 282,
180 P.159, 7 A.L.R. 1149 [1919] ;United States Fire Ins. Co. v. Northern P.R. Co., 30 Wash 2d.
722, 193 P. 2d 868, 2 A.L.R. 2d 1065 [1948]).

The right to operate a public utility may exist independently and separately from the ownership of
the facilities thereof. One can own said facilities without operating them as a public utility, or
conversely, one may operate a public utility without owning the facilities used to serve the public.
The devotion of property to serve the public may be done by the owner or by the person in control
thereof who may not necessarily be the owner thereof.
This dichotomy between the operation of a public utility and the ownership of the facilities used to
serve the public can be very well appreciated when we consider the transportation industry.
Enfranchised airline and shipping companies may lease their aircraft and vessels instead of
owning them themselves.

While private respondent is the owner of the facilities necessary to operate the EDSA. LRT III, it
admits that it is not enfranchised to operate a public utility (Revised and Restated Agreement,
Sec. 3.2; Rollo, p. 57). In view of this incapacity, private respondent and DOTC agreed that on
completion date, private respondent will immediately deliver possession of the LRT system by
way of lease for 25 years, during which period DOTC shall operate the same as a common carrier
and private respondent shall provide technical maintenance and repair services to DOTC
(Revised and Restated Agreement, Secs. 3.2, 5.1 and 5.2; Rollo, pp. 57-58, 61-62). Technical
maintenance consists of providing (1) repair and maintenance facilities for the depot and rail lines,
services for routine clearing and security; and (2) producing and distributing maintenance
manuals and drawings for the entire system (Revised and Restated Agreement, Annex F).

Private respondent shall also train DOTC personnel for familiarization with the operation, use,
maintenance and repair of the rolling stock, power plant, substations, electrical, signaling,
communications and all other equipment as supplied in the agreement (Revised and Restated
Agreement, Sec. 10; Rollo, pp. 66-67). Training consists of theoretical and live training of DOTC
operational personnel which includes actual driving of light rail vehicles under simulated operating
conditions, control of operations, dealing with emergencies, collection, counting and securing
cash from the fare collection system (Revised and Restated Agreement, Annex E, Secs. 2-3).
Personnel of DOTC will work under the direction and control of private respondent only during
training (Revised and Restated Agreement, Annex E, Sec. 3.1). The training objectives, however,
shall be such that upon completion of the EDSA LRT III and upon opening of normal revenue
operation, DOTC shall have in their employ personnel capable of undertaking training of all new
and replacement personnel (Revised and Restated Agreement, Annex E Sec. 5.1). In other
words, by the end of the three-year construction period and upon commencement of normal
revenue operation, DOTC shall be able to operate the EDSA LRT III on its own and train all new
personnel by itself.

Fees for private respondent' s services shall be included in the rent, which likewise includes the
project cost, cost of replacement of plant equipment and spare parts, investment and financing
cost, plus a reasonable rate of return thereon (Revised and Restated Agreement, Sec. 1; Rollo,
p. 54).

Since DOTC shall operate the EDSA LRT III, it shall assume all the obligations and liabilities of a
common carrier. For this purpose, DOTC shall indemnify and hold harmless private respondent
from any losses, damages, injuries or death which may be claimed in the operation or
implementation of the system, except losses, damages, injury or death due to defects in the EDSA
LRT III on account of the defective condition of equipment or facilities or the defective
maintenance of such equipment facilities (Revised and Restated Agreement, Secs. 12.1 and
12.2; Rollo, p. 68).

In sum, private respondent will not run the light rail vehicles and collect fees from the riding public.
It will have no dealings with the public and the public will have no right to demand any services
from it.

It is well to point out that the role of private respondent as lessor during the lease period must be
distinguished from the role of the Philippine Gaming Management Corporation (PGMC) in the
case of Kilosbayan Inc. v. Guingona, 232 SCRA 110 (1994). Therein, the Contract of Lease
between PGMC and the Philippine Charity Sweepstakes Office (PCSO) was actually a
collaboration or joint venture agreement prescribed under the charter of the PCSO. In the Contract
of Lease; PGMC, the lessor obligated itself to build, at its own expense, all the facilities necessary
to operate and maintain a nationwide on-line lottery system from whom PCSO was to lease the
facilities and operate the same. Upon due examination of the contract, the Court found that
PGMC's participation was not confined to the construction and setting up of the on-line lottery
system. It spilled over to the actual operation thereof, becoming indispensable to the pursuit,
conduct, administration and control of the highly technical and sophisticated lottery system. In
effect, the PCSO leased out its franchise to PGMC which actually operated and managed the
same.

Indeed, a mere owner and lessor of the facilities used by a public utility is not a public utility
(Providence and W.R. Co. v. United States, 46 F. 2d 149, 152 [1930]; Chippewa Power Co. v.
Railroad Commission of Wisconsin, 205 N.W. 900, 903, 188 Wis. 246 [1925]; Ellis v. Interstate
Commerce Commission, Ill 35 S. Ct. 645, 646, 237 U.S. 434, 59 L. Ed. 1036 [1914]). Neither are
owners of tank, refrigerator, wine, poultry and beer cars who supply cars under contract to railroad
companies considered as public utilities (Crystal Car Line v. State Tax Commission, 174 p. 2d
984, 987 [1946]).

Even the mere formation of a public utility corporation does not ipso facto characterize the
corporation as one operating a public utility. The moment for determining the requisite Filipino
nationality is when the entity applies for a franchise, certificate or any other form of authorization
for that purpose (People v. Quasha, 93 Phil. 333 [1953]).

2. Petitioners further assert that the BLT scheme under the Agreements in question is not
recognized in the BOT Law and its Implementing Rules and Regulations.

Section 2 of the BOT Law defines the BOT and BT schemes as follows:

(a) Build-operate-and-transfer scheme — A contractual arrangement whereby the

contractor undertakes the construction including financing, of a given infrastructure
facility, and the operation and maintenance thereof. The contractor operates the
facility over a fixed term during which it is allowed to charge facility users
appropriate tolls, fees, rentals and charges sufficient to enable the contractor to
recover its operating and maintenance expenses and its investment in the project
plus a reasonable rate of return thereon. The contractor transfers the facility to the
government agency or local government unit concerned at the end of the fixed
term which shall not exceed fifty (50) years. For the construction stage, the
contractor may obtain financing from foreign and/or domestic sources and/or
engage the services of a foreign and/or Filipino constructor [sic]: Provided, That
the ownership structure of the contractor of an infrastructure facility whose
operation requires a public utility franchise must be in accordance with the
Constitution: Provided, however, That in the case of corporate investors in the
build-operate-and-transfer corporation, the citizenship of each stockholder in the
corporate investors shall be the basis for the computation of Filipino equity in the
said corporation: Provided, further, That, in the case of foreign constructors [sic],
Filipino labor shall be employed or hired in the different phases of the construction
where Filipino skills are available: Provided, furthermore, that the financing of a
foreign or foreign-controlled contractor from Philippine government financing
institutions shall not exceed twenty percent (20%) of the total cost of the
infrastructure facility or project: Provided, finally, That financing from foreign
sources shall not require a guarantee by the Government or by government-owned
or controlled corporations. The build-operate-and-transfer scheme shall include a
supply-and-operate situation which is a contractual agreement whereby the
supplier of equipment and machinery for a given infrastructure facility, if the interest
of the Government so requires, operates the facility providing in the process
technology transfer and training to Filipino nationals.

(b) Build-and-transfer scheme — "A contractual arrangement whereby the

contractor undertakes the construction including financing, of a given infrastructure
facility, and its turnover after completion to the government agency or local
government unit concerned which shall pay the contractor its total investment
expended on the project, plus a reasonable rate of return thereon. This
arrangement may be employed in the construction of any infrastructure project
including critical facilities which for security or strategic reasons, must be operated
directly by the government (Emphasis supplied).

The BOT scheme is expressly defined as one where the contractor undertakes the construction
and financing in infrastructure facility, and operates and maintains the same. The contractor
operates the facility for a fixed period during which it may recover its expenses and investment in
the project plus a reasonable rate of return thereon. After the expiration of the agreed term, the
contractor transfers the ownership and operation of the project to the government.

In the BT scheme, the contractor undertakes the construction and financing of the facility, but
after completion, the ownership and operation thereof are turned over to the government. The
government, in turn, shall pay the contractor its total investment on the project in addition to a
reasonable rate of return. If payment is to be effected through amortization payments by the
government infrastructure agency or local government unit concerned, this shall be made in
accordance with a scheme proposed in the bid and incorporated in the contract (R.A. No. 6957,
Sec. 6).

Emphasis must be made that under the BOT scheme, the owner of the infrastructure facility must
comply with the citizenship requirement of the Constitution on the operation of a public utility. No
such a requirement is imposed in the BT scheme.

There is no mention in the BOT Law that the BOT and BT schemes bar any other arrangement
for the payment by the government of the project cost. The law must not be read in such a way
as to rule out or unduly restrict any variation within the context of the two schemes. Indeed, no
statute can be enacted to anticipate and provide all the fine points and details for the multifarious
and complex situations that may be encountered in enforcing the law (Director of Forestry v.
Munoz, 23 SCRA 1183 [1968]; People v. Exconde, 101 Phil. 1125 [1957]; United States v. Tupasi
Molina, 29 Phil. 119 [1914]).

The BLT scheme in the challenged agreements is but a variation of the BT scheme under the law.

As a matter of fact, the burden on the government in raising funds to pay for the project is made
lighter by allowing it to amortize payments out of the income from the operation of the LRT
System.

In form and substance, the challenged agreements provide that rentals are to be paid on a
monthly basis according to a schedule of rates through and under the terms of a confirmed
Irrevocable Revolving Letter of Credit (Supplemental Agreement, Sec. 6; Rollo, p. 85). At the end
of 25 years and when full payment shall have been made to and received by private respondent,
it shall transfer to DOTC, free from any lien or encumbrances, all its title to, rights and interest in,
the project for only U.S. $1.00 (Revised and Restated Agreement, Sec. 11.1; Supplemental
Agreement, Sec; 7; Rollo, pp. 67, .87).

A lease is a contract where one of the parties binds himself to give to another the enjoyment or
use of a thing for a certain price and for a period which may be definite or indefinite but not longer
than 99 years (Civil Code of the Philippines, Art. 1643). There is no transfer of ownership at the
end of the lease period. But if the parties stipulate that title to the leased premises shall be
transferred to the lessee at the end of the lease period upon the payment of an agreed sum, the
lease becomes a lease-purchase agreement.

Furthermore, it is of no significance that the rents shall be paid in United States currency, not
Philippine pesos. The EDSA LRT III Project is a high priority project certified by Congress and the
National Economic and Development Authority as falling under the Investment Priorities Plan of
Government (Rollo, pp. 310-311). It is, therefore, outside the application of the Uniform Currency
Act (R.A. No. 529), which reads as follows:

Sec. 1. — Every provision contained in, or made with respect to, any domestic
obligation to wit, any obligation contracted in the Philippines which provisions
purports to give the obligee the right to require payment in gold or in a particular
kind of coin or currency other than Philippine currency or in an amount of money
of the Philippines measured thereby, be as it is hereby declared against public
policy, and null, void, and of no effect, and no such provision shall be contained in,
or made with respect to, any obligation hereafter incurred. The above prohibition
shall not apply to (a) . . .; (b) transactions affecting high-priority economic projects
for agricultural, industrial and power development as may be determined by
 the National Economic Council which are financed by or through foreign funds; . .
..

3. The fact that the contract for the construction of the EDSA LRT III was awarded through
negotiation and before congressional approval on January 22 and 23, 1992 of the List of National
Projects to be undertaken by the private sector pursuant to the BOT Law (Rollo, pp. 309-312)
does not suffice to invalidate the award.

Subsequent congressional approval of the list including "rail-based projects packaged with
commercial development opportunities" (Rollo, p. 310) under which the EDSA LRT III projects
falls, amounts to a ratification of the prior award of the EDSA LRT III contract under the BOT Law.

Petitioners insist that the prequalifications process which led to the negotiated award of the
contract appears to have been rigged from the very beginning to do away with the usual open
international public bidding where qualified internationally known applicants could fairly
participate.

The records show that only one applicant passed the prequalification process. Since only one
was left, to conduct a public bidding in accordance with Section 5 of the BOT Law for that lone
participant will be an absurb and pointless exercise (cf. Deloso v. Sandiganbayan, 217 SCRA 49,
61 [1993]).

Contrary to the comments of the Executive Secretary Drilon, Section 5 of the BOT Law in relation
to Presidential Decree No. 1594 allows the negotiated award of government infrastructure
projects.

Presidential Decree No. 1594, "Prescribing Policies, Guidelines, Rules and Regulations for
Government Infrastructure Contracts," allows the negotiated award of government projects in
exceptional cases. Sections 4 of the said law reads as follows:

Bidding. — Construction projects shall generally be undertaken by contract after

competitive public bidding. Projects may be undertaken by administration or force
account or by negotiated contract only in exceptional cases where time is of the
essence, or where there is lack of qualified bidders or contractors, or where there
is conclusive evidence that greater economy and efficiency would be achieved
through this arrangement, and in accordance with provision of laws and acts on
the matter, subject to the approval of the Minister of Public Works and
Transportation and Communications, the Minister of Public Highways, or the
Minister of Energy, as the case may be, if the project cost is less than P1 Million,
and the President of the Philippines, upon recommendation of the Minister, if the
project cost is P1 Million or more (Emphasis supplied).

xxx xxx xxx

Indeed, where there is a lack of qualified bidders or contractors, the award of government
infrastructure contracts may he made by negotiation. Presidential Decree No. 1594 is the general
law on government infrastructure contracts while the BOT Law governs particular arrangements
or schemes aimed at encouraging private sector participation in government infrastructure
projects. The two laws are not inconsistent with each other but are in pari materia and should be
read together accordingly.

In the instant case, if the prequalification process was actually tainted by foul play, one wonders
why none of the competing firms ever brought the matter before the PBAC, or intervened in this
case before us (cf. Malayan Integrated Industries Corp. v. Court of Appeals, 213 SCRA 640
[1992]; Bureau Veritas v. Office of the President, 205 SCRA 705 [1992]).

The challenged agreements have been approved by President Ramos himself. Although then
Executive Secretary Drilon may have disapproved the "Agreement to Build, Lease and Transfer
a Light Rail Transit System for EDSA," there is nothing in our laws that prohibits parties to a
contract from renegotiating and modifying in good faith the terms and conditions thereof so as to
meet legal, statutory and constitutional requirements. Under the circumstances, to require the
parties to go back to step one of the prequalification process would just be an idle ceremony.
Useless bureaucratic "red tape" should be eschewed because it discourages private sector
participation, the "main engine" for national growth and development (R.A. No. 6957, Sec. 1), and
renders the BOT Law nugatory.

Republic Act No. 7718 recognizes and defines a BLT scheme in Section 2 thereof as:

(e) Build-lease-and-transfer — A contractual arrangement whereby a project

proponent is authorized to finance and construct an infrastructure or development
facility and upon its completion turns it over to the government agency or local
government unit concerned on a lease arrangement for a fixed period after which
ownership of the facility is automatically transferred to the government unit
concerned.

Section 5-A of the law, which expressly allows direct negotiation of contracts, provides:

Direct Negotiation of Contracts. — Direct negotiation shall be resorted to when

there is only one complying bidder left as defined hereunder.

(a) If, after advertisement, only one contractor applies for prequalification and it
meets the prequalification requirements, after which it is required to submit a bid
proposal which is subsequently found by the agency/local government unit (LGU)
to be complying.

(b) If, after advertisement, more than one contractor applied for prequalification but
only one meets the prequalification requirements, after which it submits
bid/proposal which is found by the agency/local government unit (LGU) to be
complying.

(c) If, after prequalification of more than one contractor only one submits a bid
which is found by the agency/LGU to be complying.

(d) If, after prequalification, more than one contractor submit bids but only one is
found by the agency/LGU to be complying. Provided, That, any of the disqualified
prospective bidder [sic] may appeal the decision of the implementing agency,
agency/LGUs prequalification bids and awards committee within fifteen (15)
working days to the head of the agency, in case of national projects or to the
Department of the Interior and Local Government, in case of local projects from
the date the disqualification was made known to the disqualified bidder: Provided,
furthermore, That the implementing agency/LGUs concerned should act on the
appeal within forty-five (45) working days from receipt thereof.

Petitioners' claim that the BLT scheme and direct negotiation of contracts are not contemplated
by the BOT Law has now been rendered moot and academic by R.A. No. 7718. Section 3 of this
law authorizes all government infrastructure agencies, government-owned and controlled
corporations and local government units to enter into contract with any duly prequalified proponent
for the financing, construction, operation and maintenance of any financially viable infrastructure
or development facility through a BOT, BT, BLT, BOO (Build-own-and-operate), CAO (Contract-
add-operate), DOT (Develop-operate-and-transfer), ROT (Rehabilitate-operate-and-transfer),
and ROO (Rehabilitate-own-operate) (R.A. No. 7718, Sec. 2 [b-j]).

From the law itself, once and applicant has prequalified, it can enter into any of the schemes
enumerated in Section 2 thereof, including a BLT arrangement, enumerated and defined therein
(Sec. 3).

Republic Act No. 7718 is a curative statute. It is intended to provide financial incentives and "a
climate of minimum government regulations and procedures and specific government
undertakings in support of the private sector" (Sec. 1). A curative statute makes valid that which
before enactment of the statute was invalid. Thus, whatever doubts and alleged procedural lapses
private respondent and DOTC may have engendered and committed in entering into the
questioned contracts, these have now been cured by R.A. No. 7718 (cf. Development Bank of
the Philippines v. Court of Appeals, 96 SCRA 342 [1980]; Santos V. Duata, 14 SCRA 1041 [1965];
Adong V. Cheong Seng Gee, 43 Phil. 43 [1922].

4. Lastly, petitioners claim that the agreements are grossly disadvantageous to the government
because the rental rates are excessive and private respondent's development rights over the 13
stations and the depot will rob DOTC of the best terms during the most productive years of the
project.

It must be noted that as part of the EDSA LRT III project, private respondent has been granted,
for a period of 25 years, exclusive rights over the depot and the air space above the stations for
development into commercial premises for lease, sublease, transfer, or advertising
(Supplemental Agreement, Sec. 11; Rollo, pp. 91-92). For and in consideration of these
development rights, private respondent shall pay DOTC in Philippine currency guaranteed
revenues generated therefrom in the amounts set forth in the Supplemental Agreement (Sec.
11; Rollo, p. 93). In the event that DOTC shall be unable to collect the guaranteed revenues,
DOTC shall be allowed to deduct any shortfalls from the monthly rent due private respondent for
the construction of the EDSA LRT III (Supplemental Agreement, Sec. 11; Rollo, pp. 93-94). All
rights, titles, interests and income over all contracts on the commercial spaces shall revert to
DOTC upon expiration of the 25-year period. (Supplemental Agreement, Sec. 11; Rollo, pp. 91-
92).

The terms of the agreements were arrived at after a painstaking study by DOTC. The
determination by the proper administrative agencies and officials who have acquired expertise,
specialized skills and knowledge in the performance of their functions should be accorded respect
absent any showing of grave abuse of discretion (Felipe Ysmael, Jr. & Co. v. Deputy Executive
Secretary, 190 SCRA 673 [1990]; Board of Medical Education v. Alfonso, 176 SCRA 304 [1989]).

Government officials are presumed to perform their functions with regularity and strong evidence
is necessary to rebut this presumption. Petitioners have not presented evidence on the
reasonable rentals to be paid by the parties to each other. The matter of valuation is an esoteric
field which is better left to the experts and which this Court is not eager to undertake.

That the grantee of a government contract will profit therefrom and to that extent the government
is deprived of the profits if it engages in the business itself, is not worthy of being raised as an
issue. In all cases where a party enters into a contract with the government, he does so, not out
of charity and not to lose money, but to gain pecuniarily.

5. Definitely, the agreements in question have been entered into by DOTC in the exercise of its
governmental function. DOTC is the primary policy, planning, programming, regulating and
administrative entity of the Executive branch of government in the promotion, development and
regulation of dependable and coordinated networks of transportation and communications
systems as well as in the fast, safe, efficient and reliable postal, transportation and
communications services (Administrative Code of 1987, Book IV, Title XV, Sec. 2). It is the
Executive department, DOTC in particular that has the power, authority and technical expertise
determine whether or not a specific transportation or communication project is necessary, viable
and beneficial to the people. The discretion to award a contract is vested in the government
agencies entrusted with that function (Bureau Veritas v. Office of the President, 205 SCRA 705
[1992]).

WHEREFORE, the petition is DISMISSED.

SO ORDERED

Bellosillo and Kapunan, JJ., concur.

Padilla and Regalado, JJ., concurs in the result.

Romero, J., is on leave.

 Separate Opinions

MENDOZA, J., concurring:

I concur in all but Part III of the majority opinion. Because I hold that petitioners do not have
standing to sue, I join to dismiss the petition in this case. I write only to set forth what I understand
the grounds for our decisions on the doctrine of standing are and, why in accordance with these
decisions, petitioners do not have the rights to sue, whether as legislators, taxpayers or citizens.
As members of Congress, because they allege no infringement of prerogative as legislators. 1 As
taxpayers because petitioners allege neither an unconstitutional exercise of the taxing or
spending powers of Congress (Art VI, §§24-25 and 29)2 nor an illegal disbursement of public
money.3 As this Court pointed out in Bugnay Const. and Dev. Corp. v. Laron,4 a party suing as
taxpayer "must specifically prove that he has sufficient interest in preventing the illegal
expenditure of money raised by taxation and that he will sustain a direct injury as a result of the
enforcement of the questioned statute or contract. It is not sufficient that he has merely a general
interest common to all members of the public." In that case, it was held that a contract, whereby
a local government leased property to a private party with the understanding that the latter would
build a market building and at the end of the lease would transfer the building of the lessor, did
not involve a disbursement of public funds so as to give taxpayer standing to question the legality
of the contract. I see no substantial difference, as far as the standing is of taxpayers to question
public contracts is concerned, between the contract there and the build-lease-transfer (BLT)
contract being questioned by petitioners in this case.

Nor do petitioners have standing to bring this suit as citizens. In the cases5 in which citizens were
authorized to sue, this Court found standing because it thought the constitutional claims pressed
for decision to be of "transcendental importance," as in fact it subsequently granted relief to
petitioners by invalidating the challenged statutes or governmental actions. Thus in the Lotto
case6 relied upon by the majority for upholding petitioners standing, this Court took into account
the "paramount public interest" involved which "immeasurably affect[ed] the social, economic, and
moral well-being of the people . . . and the counter-productive and retrogressive effects of the
envisioned on-line lottery system:"7 Accordingly, the Court invalidated the contract for the
operation of lottery.

But in the case at bar, the Court precisely finds the opposite by finding petitioners' substantive
contentions to be without merit To the extent therefore that a party's standing is affected by a
determination of the substantive merit of the case or a preliminary estimate thereof, petitioners in
the case at bar must be held to be without standing. This is in line with our ruling in Lawyers
League for a Better Philippines v. Aquino8 and In re Bermudez 9 where we dismissed citizens'
actions on the ground that petitioners had no personality to sue and their petitions did not state a
cause of action. The holding that petitioners did not have standing followed from the finding that
they did not have a cause of action.

In order that citizens' actions may be allowed a party must show that he personally has suffered
some actual or threatened injury as a result of the allegedly illegal conduct of the government; the
injury is fairly traceable to the challenged action; and the injury is likely to be redressed by a
favorable action. 10 As the U.S. Supreme Court has held:

Typically, . . . the standing inquiry requires careful judicial examination of a

complaint's allegation to ascertain whether the particular plaintiff is entitled to an
adjudication of the particular claims asserted. Is the injury too abstract, or
otherwise not appropriate, to be considered judicially cognizable? Is the line of
causation between the illegal conduct and injury too attenuated? Is the prospect
of obtaining relief from the injury as a result of a favorable ruling too speculative?
These questions and any others relevant to the standing inquiry must be answered
by reference to the Art III notion that federal courts may exercise power only "in
 the last resort, and as a necessity, Chicago & Grand Trunk R. Co. v. Wellman, 143
US 339, 345, 36 L Ed 176,12 S Ct 400 (1892), and only when adjudication is
"consistent with a system of separated powers and [the dispute is one] traditionally
thought to be capable of resolution through the judicial process," Flast v Cohen,
392 US 83, 97, 20 L Ed 2d 947, 88 S Ct 1942 (1968). See Valley Forge, 454 US,
at 472-473, 70 L Ed 2d 700, 102 S Ct 752.11

Today's holding that a citizen, qua citizen, has standing to question a government contract unduly
expands the scope of public actions and sweeps away the case and controversy requirement so
carefully embodied in Art. VIII, §5 in defining the jurisdiction of this Court. The result is to convert
the Court into an office of ombudsman for the ventilation of generalized grievances. Consistent
with the view that this case has no merit I submit with respect that petitioners, as representatives
of the public interest, have no standing.

Narvasa, C.J., Bidin, Melo, Puno, Vitug and Francisco, JJ., concur.

DAVIDE, JR., J., dissenting:

After wading through the record of the vicissitudes of the challenged contract and evaluating the
issues raised and the arguments adduced by the parties, I find myself unable to joint majority in
the well-written ponencia of Mr. Justice Camilo P. Quiason.

I most respectfully submit that the challenged contract is void for at least two reasons: (a) it is an-
ultra-vires act of the Department of Transportation and Communications (DOTC) since under R.A.
6957 the DOTC has no authority to enter into a Build-Lease-and-Transfer (BLT) contract; and (b)
even assuming arguendo that it has, the contract was entered into without complying with the
mandatory requirement of public bidding.

Respondents admit that the assailed contract was entered into under R.A. 6957. This law, fittingly
entitled "An Act Authorizing the Financing, Construction, Operation and Maintenance of
Infrastructure Projects by the Private Sector, and For Other Purposes," recognizes only two (2)
kinds of contractual arrangements between the private sector and government infrastructure
agencies: (a) the Build-Operate-and-Transfer (BOT) scheme and (b) the Build-and-Transfer (BT)
scheme. This conclusion finds support in Section 2 thereof which defines only the BOT and BT
schemes, in Section 3 which explicitly provides for said schemes thus:

Sec. 3 Private Initiative in Infrastructure. — All government infrastructure agencies,

including government-owned and controlled corporations and local government
units, are hereby authorized to enter into contract with any duly prequalified private
contractor for the financing, construction, operation and maintenance of any
financially viable infrastructure facilities through the build-operate-and transfer or
build-and-transfer scheme, subject to the terms and conditions hereinafter set
forth; (Emphasis supplied).

and in Section 5 which requires public bidding of projects under both schemes.

All prior acts and negotiations leading to the perfection of the challenged contract were clearly
intended and pursued for such schemes.

A Build-Lease-and-Transfer (BLT) scheme is not authorized under the said law, and none of the
aforesaid prior acts and negotiations were designed for such unauthorized scheme. Hence, the
DOTC is without any power or authority to enter into the BLT contract in question.

The majority opinion maintains, however, that since "[t]here is no mention in the BOT Law that
the BOT and the BT schemes bar any other arrangement for the payment by the government of
the project cost," then "[t]he law must not be read in such a way as to rule outer unduly restrict
any variation within the context of the two schemes." This interpretation would be correct if the
law itself provides a room for flexibility. We find no such provisions in R.A. No. 6957 if it intended
to include a BLT scheme, then it should have so stated, for contracts of lease are not unknown in
our jurisdiction, and Congress has enacted several laws relating to leases. That the BLT scheme
was never intended as a permissible variation "within the context" of the BOT and BT schemes is
conclusively established by the passage of R.A. No. 7718 which amends:

a. Section 2 by adding to the original BOT and BT schemes the following schemes:

(1) Build-own-and-operate (BOO)

(2) Build-Lease-and-transfer (BLT)
(3) Build-transfer-and-operate (BTO)
(4) Contract-add-and-operate (CAO)
(5) Develop-operate-and-transfer (DOT)
(6) Rehabilitate-operate-and-transfer (ROT)
(7) Rehabilitate-own-and-operate (ROO).

b) Section 3 of R.A. No. 6957 by deleting therefrom the phrase "through the build-
operate-and-transfer or build-and-transfer scheme."

II

Public bidding is mandatory in R.A. No. 6957. Section 5 thereof reads as follows:

Sec. 5 Public Bidding of Projects. — Upon approval of the projects mentioned in

Section 4 of this Act, the concerned head of the infrastructure agency or local
government unit shall forthwith cause to be published, once every week for three
(3) consecutive weeks, in at least two (2) newspapers of general circulation and in
at least one (1) local newspaper which is circulated in the region, province, city or
municipality in which the project is to be constructed a notice inviting all duly
prequalified infrastructure contractors to participate in the public bidding for the
projects so approved. In the case of a build-operate-and-transfer arrangement, the
contract shall be awarded to the lowest complying bidder based on the present
value of its proposed tolls, fees, rentals, and charges over a fixed term for the
facility to be constructed, operated, and maintained according to the prescribed
minimum design and performance standards plans, and specifications. For this
purpose, the winning contractor shall be automatically granted by the infrastructure
agency or local government unit the franchise to operate and maintain the facility,
including the collection of tolls, fees, rentals; and charges in accordance with
Section 6 hereof.

In the case of a build-and-transfer arrangement, the contract shall be awarded to

the lowest complying bidder based on the present value of its proposed, schedule
of amortization payments for the facility to be constructed according to the
prescribed minimum design and performance standards, plans and
specifications: Provided, however, That a Filipino constructor who submits an
equally advantageous bid shall be given preference.

A copy of each build-operate-and-transfer or build-and-transfer contract shall

forthwith be submitted to Congress for its information.

The requirement of public bidding is not an idle ceremony. It has been aptly said that in our
jurisdiction "public bidding is the policy and medium adhered to in Government procurement and
construction contracts under existing laws and regulations. It is the accepted method for arriving
at a fair and reasonable price and ensures that overpricing, favoritism, and other anomalous
practices are eliminated or minimized. And any Government contract entered into without the
required bidding is null and void and cannot adversely affect the rights of third parties." (Bartolome
C. Fernandez, Jr., A TREATISE ON GOVERNMENT CONTRACTS UNDER PHILIPPINE LAW
25 [rev. ed. 1991], citing Caltex vs. Delgado Bros., 96 Phil. 368 [1954]).

The Office of the President, through then Executive Secretary Franklin Drilon Correctly
disapproved the contract because no public bidding is strict compliance with Section 5 of R.A.
No. 6957 was conducted. Secretary Drilon Further bluntly stated that the provision of the
Implementing Rules of said law authorizing negotiated contracts was of doubtful legality. Indeed,
it is null and void because the law itself does not recognize or allow negotiated contracts.

However the majority opinion posits the view that since only private respondent EDSA LRT was
prequalified, then a public bidding would be "an absurd and pointless exercise." I submit that the
mandatory requirement of public bidding cannot be legally dispensed with simply because only
one was qualified to bid during the prequalification proceedings. Section 5 mandates that the BOT
or BT contract should be awarded "to the lowest complying bidder," which logically means that
there must at least be two (2) bidders. If this minimum requirement is not met, then the proposed
bidding should be deferred and a new prequalification proceeding be scheduled. Even those who
were earlier disqualified may by then have qualified because they may have, in the meantime,
exerted efforts to meet all the qualifications.

This view of the majority would open the floodgates to the rigging of prequalification proceedings
or to unholy conspiracies among prospective bidders, which would even include dishonest
government officials. They could just agree, for a certain consideration, that only one of them
qualify in order that the latter would automatically corner the contract and obtain the award.

That section 5 admits of no exception and that no bidding could be validly had with only one bidder
is likewise conclusively shown by the amendments introduced by R.A. No. 7718 Per section 7
thereof, a new section denominated as Section 5-A was introduced in R.A. No. 6957 to allow
direct negotiation contracts. This new section reads:

Sec. 5-A. Direct Negotiation Of Contracts — Direct negotiation, shall be resorted

to when there is only one complying bidder left as defined hereunder.

(a) If, after advertisement, only one contractor applies for

prequalification requirements, after which it is required to submit a
bid/proposal which subsequently found by the agency/local
government unit (LGU) to be complying.

(b) If, after advertisement, more than one contractor applied for
prequalification but only one meets the prequalification
requirements, after which it submits bid/proposal which is found by
the agency/local government unit (LGU) to be complying,

(c) If after prequalification of more than one contractor only one

submits a bid which is found by the agency/LGU to be complying.

(d) If, after prequalification, more than one contractor, only one
submit bids but only one is found by the agency/LGU to be
complying: Provided, That, any of the disqualified prospective
bidder may appeal the decision contractor of the implementing
agency/LGUs prequalification bids an award committee within
fifteen (15) working days to the head of the agency, in case of
national projects or to the Department of the Interior and Local
Government, in case of local projects from the date the
disqualification was made known to the disqualified
bidder Provided, That the implementing agency/LGUs concerned
should act on the appeal within forty-five (45) working days from
receipt thereof.

Can this amendment be given retroactive effect to the challenged contract so that it may now be
considered a permissible negotiated contract? I submit that it cannot be R.A. No. 7718 does not
provide that it should be given retroactive effect to pre-existing contracts. Section 18 thereof says
that it "shall take effect fifteen (15) days after its publication in at least two (2) newspapers of
general circulation." If it were the intention of Congress to give said act retroactive effect then it
would have so expressly provided. Article 4 of the Civil Code provides that "[l]aws shall have no
retroactive effect, unless the contrary is provided."
The presumption is that all laws operate prospectively, unless the contrary clearly appears or is
clearly, plainly, and unequivocally expressed or necessarily implied. In every case of doubt, the
doubt will be resolved against the retroactive application of laws. (Ruben E Agpalo, STATUTORY
CONSTRUCTION 225 [2d ed. 1990]). As to amendatory acts, or acts which change an existing
statute, Sutherland states:

In accordance with the rule applicable to original acts, it is presumed that

provisions added by the amendment affecting substantive rights are intended to
operate prospectively. Provisions added by the amendment that affect substantive
rights will not be construed to apply to transactions and events completed prior to
its enactment unless the legislature has expressed its intent to that effect or such
intent is clearly implied by the language of the amendment or by the circumstances
surrounding its enactment. (1 Frank E. Horack, Jr., SUTHERLAND'S STATUTES
AND STATUTORY CONSTRUCTION 434-436 [1943 ed.]).

I vote then to grant the instant petition and to declare void the challenged contract and its
supplement.

FELICIANO, J., dissenting:

After considerable study and effort, and with much reluctance, I find I must dissent in the instant
case. I agree with many of the things set out in the majority opinion written by my distinguished
brother in the Court Quiason, J. At the end of the day, however, I find myself unable to join in the
result reached by the majority.

I join in the dissenting opinion written by Mr. Justice. Davide, Jr; which is appropriately drawn on
fairly narrow grounds. At the same time; I wish to address briefly one of the points made by Justice
Quiason in the majority opinion in his effort to meet the difficulties posed by Davide Jr., J.

I refer to the invocation of the provisions of presidential Decree No. 1594 dated 11 June 1978
entitled: "Prescribing policies, Guidelines, Rules and Regulations for Government Infrastructure
Contracts·" More specifically, the majority opinion invokes paragraph 1 of Section 4 of this Degree
which reads as follows:

Sec. 4. Bidding. — Construction projects shall, generally be undertaken by

contract after competitive public bidding. Projects may be undertaken by
administration or force account or by negotiated contract only in exceptional cases
where time is of the essence, or where there is lack of qualified bidders or
contractors, or where there is a conclusive evidence that greater economy and
efficiency would be achieved through this arrangement, and in accordance with
provisions of laws and acts on the matter, subject to the approval of the Ministry of
public Works, Transportation and Communications, the Minister of Public
Highways, or the Minister of Energy, as the case may be, if the project cost is less
than P1 Million, and of the President of the Philippines, upon the recommendation
of the Minister, if the project cost is P1 Million or more.

xxx xxx xxx

I understand the unspoken theory in the majority opinion to be that above Section 4 and
presumably the rest of Presidential Decree No. 1594 continue to exist and to run parallel to the
provisions of Republic Act No. 6957, whether in its original form or as amended by Republic Act
No. 7718.

A principal difficulty with this approach is that Presidential Decree No. 1594 purports to apply
to all "government contracts for infrastructure and other construction projects." But Republic Act
No. 6957 as amended by Republic Act No. 7718, relates only to "infrastructure projects" which are
financed, constructed, operated and maintained "by the private sector" "through
the build/operate-and-transfer or build-and-transfer scheme" under Republic Act No. 6597 and
under a series of other comparable schemes under Republic Act No. 7718. In other words,
Republic Act No. 6957 and Republic Act. No. 7718 must be held, in my view, to be special
statutes applicable to a more limited field of "infrastructure projects" than the wide-ranging scope
of application of the general statute i.e., Presidential Decree No. 1594. Thus, the high relevance
of the point made by Mr. Justice Davide that Republic Act No. 6957 in specific connection with
BCT- and BLT type and BLT type of contracts imposed an unqualified requirement of public
bidding set out in Section 5 thereof.

It should also be pointed out that under Presidential Decree No. 1594, projects may be undertaken
"by administration or force account or by negotiated contract only"

(1) in exceptional cases where time is of the essence; or

(2) where there is lack of bidders or contractors; or

(3) where there is a conclusive evidence that greater economy and efficiency
would be achieved through these arrangements, and in accordance with
provision[s] of laws and acts on the matter.

It must, upon the one hand, be noted that the special law Republic Act No. 6957 made
absolutely no mention of negotiated contracts being permitted to displace the requirement of
public bidding. Upon the other hand, Section 5-a, inserted in Republic Act No. 6957 by the
amending statute Republic Act No. 7718, does not purport to authorize direct negotiation of
contracts situations where there is a lack of pre-qualified contractors or, complying bidders. Thus,
even under the amended special statute, entering into contracts by negotiation
is not permissible in the other (2) categories of cases referred to in Section 4 of Presidential
Decree No. 1594, i.e., "in exceptional cases where time is of the essence" and "when there is
conclusive evidence that greater economy and efficiency would be achieved through these
arrangements, etc."

The result I reach is that insofar as BOT, etc.-types of contracts are concerned, the applicable
public bidding requirement is that set out in Republic Act No. 6957 and, with respect to such type
of contracts opened for pre-qualification and bidding after the date of effectivity of Republic Act
No. 7718, The provision of Republic Act No. 7718. The assailed contract was entered into before
Republic Act. No. 7718 was enacted.

The difficulties. of applying the provisions of Presidential Degree No. 1594 to the Edsa LRT-type
of contracts are aggravated when one considers the detailed "Implementing Rules and
Regulations as amended April 1988" issued under that Presidential Decree.1 For instance:

IB [2.5.2] 2.4.2 By Negotiated Contract

xxx xxx xxx

a. In times of emergencies arising from natural calamities where

immediate action is necessary to prevent imminent loss of life
and/or property.

b. Failure to award the contract after competitive public bidding for

valid cause or causes [such as where the prices obtained through
public bidding are all above the AAE and the bidders refuse to
reduce their prices to the AAE].

In these cases, bidding may be undertaken through sealed canvass of at least

three (3) qualified contractors. Authority to negotiate contracts for projects under
these exceptional cases shall be subject to prior approval by heads of agencies
within their limits of approving authority.

c. Where the subject project is adjacent or contiguous to an on-

going project and it could be economically prosecuted by the same
contractor provided that he has no negative slippage and has
demonstrated a satisfactory performance. (Emphasis supplied).
Note that there is no reference at all in these Presidential Decree No. 1594 Implementing Rules
and Regulations to absence of pre-qualified applicants and bidders as justifying negotiation of
contracts as distinguished from requiring public bidding or a second public bidding.

Note also the following provision of the same Implementing Rules and Regulations:

IB 1 Prequalification

The following may be become contractors for government projects:

1 Filipino

a. Citizens (single proprietorship)

b. Partnership of corporation duly organized under the laws of the Philippines, and
at least seventy five percent (75%) of the capital stock of which belongs to Filipino
citizens.

2. Contractors forming themselves into a joint venture, i.e., a group of two or more
contractors that intend to be jointly and severally responsible for a particular
contract, shall for purposes of bidding/tendering comply with LOI 630, and, aside
from being currently and properly accredited by the Philippine Contractors
Accreditation Board, shall comply with the provisions of R.A. 4566, provided
that joint ventures in which Filipino ownership is less than seventy five percent (
75%) may be prequalified where the structures to be built require the application
of techniques and/or technologies which are not adequately possessed by a
Filipino entity as defined above.

[The foregoing shall not negate any existing and future commitments with respect
to the bidding and aware of contracts financed partly or wholly with funds from
international lending institutions like the Asian Development Bank and the Worlds
Bank as well as from bilateral and other similar sources.(Emphases supplied)

The record of this case is entirely silent on the extent of Philippine equity in the Edsa LRT
Corporation; there is no suggestion that this corporation is organized under Philippine law and is
at least seventy-five (75%) percent owned by Philippine citizens.

Public bidding is the normal method by which a government keeps contractors honest and is able
to assure itself that it would be getting the best possible value for its money in any construction
or similar project. It is not for nothing that multilateral financial organizations like the World Bank
and the Asian Development Bank uniformly require projects financed by them to be implemented
and carried out by public bidding. Public bidding is much too important a requirement casually to
loosen by a latitudinarian exercise in statutory construction.

The instant petition should be granted and the challenged contract and its supplement should be
nullified and set aside. A true public bidding, complete with a new prequalification proceeding,
should be required for the Edsa LRT Project.

Separate Opinions

MENDOZA, J., concurring:

I concur in all but Part III of the majority opinion. Because I hold that petitioners do not have
standing to sue, I join to dismiss the petition in this case. I write only to set forth what I understand
the grounds for our decisions petitioners do not have the rights to sue, whether as legislators,
taxpayers or citizens. As members of Congress, because they allege no infringement of
prerogative as legislators.1 As taxpayers because petitioners allege neither an unconstitutional
exercise of the taxing or spending powers of Congress (Art VI, §§24-25 and 29)2 nor an illegal
disbursement of public money.3 As this Court pointed out in Bugnay Const. and
Dev. Corp. v. Laron,4 a party suing as taxpayer "must specifically prove that he has sufficient
interest in preventing the illegal expenditure of money raised by taxation and that he will sustain
a direct injury as a result of the enforcement of the questioned statute or contract, It is not sufficient
that has merely a general interest common to all members of the public." In that case, it was held
that a contract, whereby a local government leased property to a private party with the
understanding that the latter would build a market building and at the end of the lease would
transfer the building of the lessor, did not involve a disbursement of public funds so as to give
taxpayer standing to question the legality of the contract contracts I see no substantial difference,
as far as the standing is of taxpayers is concerned, between the contract there and the build-
lease-transfer (BLT) contract being questioned by petitioners in this case.

Nor do petitioners have standing to bring this suit as citizens. In the cases5 in which citizens were
authorized to sue, this Court found standing because it thought the constitutional claims pressed
for decision to be of "transcendental importance," as in fact it subsequently granted relief to
petitioners by invalidating the challenged statutes or governmental actions. Thus in the Lotto
case6 relied upon by the majority for upholding petitioners standing, this Court took into account
the "paramount public interest" involved which "immeasurably affect[ed] the social, economic, and
moral well-being of the people . . . and the counter-productive and retrogressive effects of the
envisioned on-line lottery system:"7 Accordingly, the Court invalidated the contract for the
operation of lottery.

But in the case at bar, the Court precisely finds the opposite by finding petitioners' substantive
contentions to be without merit To the extent therefore that a party's standing is affected by a
determination of the substantive merit of the case or a preliminary estimate thereof, petitioners in
the case at bar must be held to be without standing. This is in line with our ruling in Lawyers
League for a Better Philippines v. Aquino8 and In re Bermudez9 where we dismissed citizens'
actions on the ground that petitioners had no personality to sue and their petitions did not state a
cause of action. The holding that petitioners did not have standing followed from the finding that
they did not have a cause of action.

In order that citizens' actions may be allowed a party must show that he personally has suffered
some actual or threatened injury as a result of the allegedly illegal conduct of the government; the
injury is fairly traceable to the challenged action; and the injury is likely to be redressed by a
favorable action. 10 As the U.S. Supreme Court has held:

Typically, . . . the standing inquiry requires careful judicial examination of a

complaint's allegation to ascertain whether the particular plaintiff is entitled to an
adjudication of the particular claims asserted. Is the injury too abstract, or
otherwise not appropriate, to be considered judicially cognizable? Is the line of
causation between the illegal conduct and injury too attenuated? Is the prospect
of obtaining relief from the injury as a result of a favorable ruling too speculative?
These questions and any others relevant to the standing inquiry must be answered
by reference to the Art III notion that federal courts may exercise power only "in
the last resort, and as a necessity, Chicago & Grand Trunk R. Co. v. Wellman, 143
US 339, 345, 36 L Ed 176,12 S Ct 400 (1892), and only when adjudication is
"consistent with a system of separated powers and [the dispute is one] traditionally
thought to be capable of resolution through the judicial process," Flast v Cohen,
392 US 83, 97, 20 L Ed 2d 947, .88 S Ct 1942 (1968). See Valley Forge, 454 US,
at 472-473, 70 L Ed 2d 700, 102 S Ct 752.11

Today's holding that a citizen, qua citizen, has standing to question a government contract unduly
expands the scope of public actions and sweeps away the case and controversy requirement so
carefully embodied in Art. VIII, §5 in defining the jurisdiction of this Court. The result is to convert
the Court into an office of ombudsman for the ventilation of generalized grievances. Consistent
with the view that this case has no merit I submit with respect that petitioners, as representatives
of the public interest, have no standing.

Narvasa, C.J., Bidin, Melo, Puno, Vitug and Francisco, JJ., concur.

DAVIDE, JR., J., dissenting:

After wading through the record of the vicissitudes of the challenged contract and evaluating the
issues raised and the arguments adduced by the parties, I find myself unable to joint majority in
the well-written ponencia of Mr. Justice Camilo P. Quiason.

I most respectfully submit that the challenged contract is void for at least two reasons: (a) it is an-
ultra-vires act of the Department of Transportation and Communications (DOTC) since under R.A.
6957 the DOTC has no authority to enter into a Build-Lease-and-Transfer (BLT) contract; and (b)
even assuming arguendo that it has, the contract was entered into without complying with the
mandatory requirement of public bidding.

Respondents admit that the assailed contract was entered into under R.A. 6957. This law, fittingly
entitled "An Act Authorizing the Financing, Construction, Operation and Maintenance of
Infrastructure Projects by the Private Sector, and For Other Purposes," recognizes only two (2)
kinds of contractual arrangements between the private sector and government infrastructure
agencies: (a) the Build-Operate-and-Transfer (BOT) scheme and (b) the Build-and-Transfer (BT)
scheme. This conclusion finds support in Section 2 thereof which defines only the BOT and BT
schemes, in Section 3 which explicitly provides for said schemes thus:

Sec. 3 Private Initiative in Infrastructure. — All government infrastructure agencies,

including government-owned and controlled corporations and local government
units, are hereby authorized to enter into contract with any duly prequalified private
contractor for the financing, construction, operation and maintenance of any
financially viable infrastructure facilities through the build-operate-and transfer or
build-and-transfer scheme, subject to the terms and conditions hereinafter set
forth; (Emphasis supplied).

and in Section 5 which requires public bidding of projects under both schemes.

All prior acts and negotiations leading to the perfection of the challenged contract were clearly
intended and pursued for such schemes.

A Build-Lease-and-Transfer (BLT) scheme is not authorized under the said law, and none of the
aforesaid prior acts and negotiations were designed for such unauthorized scheme. Hence, the
DOTC is without any power or authority to enter into the BLT contract in question.

The majority opinion maintains, however, that since "[t]here is no mention in the BOT Law that
the BOT and the BT schemes bar any other arrangement for the payment by the government of
the project cost," then "[t]he law must not be read in such a way as to rule outer unduly restrict
any variation within the context of the two schemes." This interpretation would be correct if the
law itself provides a room for flexibility. We find no such provisions in R.A. No. 6957 if it intended
to include a BLT scheme, then it should have so stated, for contracts of lease are not unknown in
our jurisdiction, and Congress has enacted several laws relating to leases. That the BLT scheme
was never intended as a permissible variation "within the context" of the BOT and BT schemes is
conclusively established by the passage of R.A. No. 7718 which amends:

a. Section. 2 by adding to the original BOT and BT schemes the following schemes:

1) Build-own-and-operate (BOO)
2) Build-Lease-and-transfer (BLT)
3) Build-transfer-and-operate (BTO)
4) Contract-add-and-operate (CAO)
5) Develop-operate-and-transfer (DOT)
6) Rehabilitate-operate-and-transfer (ROT)
7) Rehabilitate-own-and-operate (ROO).

b) Section 3 of R.A. No. 6957 by deleting therefrom the phrase "through the build-
operate-and-transfer or build-and-transfer scheme.
II

Public bidding is mandatory in R.A. No. 6957. Section 5 thereof reads as follows:

Sec. 5 Public Bidding of Projects. — Upon approval of the projects mentioned in

Section 4 of this Act, the concerned head of the infrastructure agency or local
government unit shall forthwith cause to be published, once every week for three
(3) consecutive weeks, in at least two (2) newspapers of general circulation and in
at least one (1) local newspaper which is circulated in the region, province, city or
municipality in which the project is to be constructed a notice inviting all duly
prequalified infrastructure contractors to participate in the public bidding for the
projects so approved. In the case of a build-operate-and-transfer arrangement, the
contract shall be awarded to the lowest complying bidder based on the present
value of its proposed tolls, fees, rentals, and charges over a fixed term for the
facility to be constructed, operated, and maintained according to the prescribed
minimum design and performance standards plans, and specifications. For this
purpose, the winning contractor shall be automatically granted by the infrastructure
agency or local government unit the franchise to operate and maintain the facility,
including the collection of tolls, fees, rentals; and charges in accordance with
Section 6 hereof.

In the case of a build-and-transfer arrangement, the contract shall be awarded to

the lowest complying bidder based on the present value of its proposed, schedule
of amortization payments for the facility to be constructed according to the
prescribed minimum design and performance standards, plans and
specifications: Provided, however, That a Filipino constructor who submits an
equally advantageous bid shall be given preference.

A copy of each build-operate-and-transfer or build-and-transfer contract shall

forthwith be submitted to Congress for its information.

The requirement of public bidding is not an idle ceremony. It has been aptly said that in our
jurisdiction "public bidding is the policy and medium adhered to in Government procurement and
construction contracts under existing laws and regulations. It is the accepted method for arriving
at a fair and reasonable price and ensures that overpricing, favoritism, and other anomalous
practices are eliminated or minimized. And any Government contract entered into without the
required bidding is null and void and cannot adversely affect the rights of third parties." (Bartolome
C. Fernandez, Jr., A TREATISE ON GOVERNMENT CONTRACTS UNDER PHILIPPINE LAW
25 [rev. ed. 1991], citing Caltex vs. Delgado Bros., 96 Phil. 368 [1954]).

The Office of the president secretary through then Executive Secretary Franklin Drilon Correctly
disapproved the contract because no public bidding is strict compliance with Section 5 of R.A.
No. 6957 was conducted. Secretary Drilon Further bluntly stated that the provision of the
Implementing Rules of said law authorizing negotiated contracts was of doubtful legality. Indeed,
it is null and void because the law itself does not recognize or allow negotiated contracts.

However the majority opinion posits the view that since only private respondent EDSA LRT was
prequalified, then a public bidding would be "an absurd and pointless exercise." I submit that the
mandatory requirement of public bidding cannot be legally dispensed with simply because only
one was qualified to bid during the prequalification proceedings. Section 5 mandates that the BOT
or BT contract should be awarded "to the lowest complying bidder," which logically means that
there must at least be two (2) bidders. If this minimum requirement is not met, then the proposed
bidding should be deferred and a new prequalification proceeding be scheduled. Even those who
were earlier disqualified may by then have qualified because they may have, in the meantime,
exerted efforts to meet all the qualifications.

This view of the majority would open the floodgates to the rigging of prequalification proceedings
or to unholy conspiracies among prospective bidders, which would even include dishonest
government officials. They could just agree, for a certain consideration, that only one of them
qualify in order that the latter would automatically corner the contract and obtain the award.
That section 5 admits of no exception and that no bidding could be validly had with only one bidder
is likewise conclusively shown by the amendments introduced by R.A. No. 7718 Per section 7
thereof, a new section denominated as Section 5-A was introduced in R.A. No. 6957 to allow
direct negotiation contracts. This new section reads:

Sec. 5-A. Direct Negotiation Of Contracts — Direct negotiation, shall be resorted

to when there is only one complying bidder left as defined hereunder.

(a) If, after advertisement, only one contractor applies for

prequalification requirements submit a bid/proposal which
subsequently found by the agency/local government unit (LGU) to
be complying.

(b) If, after advertisement, more than one contractor applied for
prequalification but only one meets the prequalification
.requirements, after which it submits bid/proposal which is found by
the agency/local government unit (LGU) to be complying,

(c) If after prequalification of more than one contractor only one

submits a bid which is found by the agency/LGU to be complying.

(d) If, after prequalification, more than one contractor, only one
submit bids but only one is found by the agency/LGU to be
complying: Provided, That, any of the disqualified prospective
bidder may appeal the decision contractor of the implementing
agency/LGUs prequalification bids an award committee within
fifteen (15) working days to the head of the agency of national
projects or to the Department of the Interior and Local Government,
in case of local projects from the date the disqualification was made
known to the disqualified bidder Provided, That the implementing
agency/LGUs concerned should act on the appeal within forty-five
(45) working days from receipt thereof.

Can this amendment be given retroactive effect to the challenged contract so that it may now be
considered a permissible negotiated contract? I submit that it cannot be R.A. No. 7718 does not
provide that it should be given retroactive effect to pre-existing contracts. Section 18 thereof says
that it "shall take effect fifteen (15) after its publication in at least two (2) newspapers of general
circulation." If it were the intention of Congress to give said act retroactive effect then it would
have so expressly provided. Article 4 of the Civil Code provides that "[l]aws shall have no
retroactive effect, unless the contrary is provided."

The presumption is that all laws operate prospectively, unless the contrary clearly appears or is
clearly, plainly, and unequivocally expressed or necessarily implied. In every case of doubt, the
doubt will be resolved against the retroactive application of laws. (Ruben E Agpalo, STATUTORY
CONSTRUCTION 225 [2d ed. 1990]). As to amendatory acts, or acts which change an existing
statute, Sutherland states:

In accordance with the rule applicable to original acts, it is presumed that

provisions added by the amendment affecting substantive rights are intended to
operate prospectively. Provisions added by the amendment that affect substantive
rights will not be construed to apply to transactions and events completed prior to
its enactment unless the legislature has expressed its intent to that effect or such
intent is clearly implied by the language of the amendment or by the circumstances
surrounding its enactment. (1 Frank E. Horack, Jr., SUTHERLAND'S STATUTES
AND STATUTORY CONSTRUCTION 434-436 [1943 ed.]).

I vote then to grant the instant petition and to declare void the challenged contract and its
supplement.

FELICIANO, J., dissenting:

After considerable study and effort, and with much reluctance, I find I must dissent in the instant
case. I agree with many of the things set out in the majority opinion written by my distinguished
brother in the Court Quiason, J. At the end of the day, however, I find myself unable to join in the
result reached by the majority.

I join in the dissenting opinion written by Mr. Justice. Davide, Jr; which is appropriately drawn on
fairly narrow grounds. At the same time; I wish to address briefly one of Justice Quiason in the
majority opinion in his effort to meet the difficulties posed by Davide Jr., J.

I refer to the invocation of the provisions of presidential Decree No. 1594 dated 11 June 1978
entitled: "Prescribing policies, Guidelines, Rules and Regulations for Government Infrastructure
Contracts·" More specifically, the majority opinion invokes paragraph 1 of Section 4 of this Degree
which reads as follows:

Sec. 4. Bidding. — Construction projects shall, generally be undertaken by

contract after competitive public bidding. Projects may be undertaken by
administration or force account or by negotiated contract only in exceptional cases
where time is of the essence, or where there is lack of qualified bidders or
contractors, or where there is a conclusive evidence that greater economy and
efficiency would be achieved through this arrangement, and in accordance with
provisions of laws and acts on the matter, subject to the approval of the Ministry of
public Works, Transportation and Communications, the Minister of Public
Highways, or the Minister of Energy, as the case may be, if the project cost is less
than P1 Million, and of the president of the Philippines, upon the recommendation
of the Minister, if the project cost is P1 Million or more.

xxx xxx xxx

I understand the unspoken theory in the majority opinion utility and the ownership of the facilities
used to serve the public can be very w1594 continue to exist and to run parallel to the provisions
of Republic Act No. 6957, whether in its original form or as amended by Republic Act No. 7718.

A principal difficulty with this approach is that Presidential Decree No. 1594 purports to apply to
all "government contracts for infrastructure and other construction projects" But Republic Act No.
6957 as amended by Republic Act No. 7718, relates on to "infrastructure projects" which are
financed, constructed, operated and maintained "by the private sector" "through the build/operate-
and-transfer or build-and-transfer scheme" under Republic Act No. 6597 and under a series of
other comparable schemes under Republic Act No. 7718. In other words, Republic Act No. 6957
and Republic Act. No: 7718 must be held, in my view, to be special statutes applicable to a more
limited field of "infrastructure projects" than the wide-ranging scope of application of the general
statute i.e., Presidential Decree No. 1594. Thus, the high relevance of the point made by Mr.
Justice Davide that Republic Act No. 6957 in specific connection with BCT- and BLT type and
BLT type of contracts imposed an unqualified requirement of public bidding set out in Section 5
thereof.

It should also be pointed out that under Presidential Decree No. 1594, projects may be undertaken
"by administration or force account or by negotiated contract only "

(1) in exceptional cases where time is of the essence; or

(2) where there is lack of bidders or contractors; or

(3) where there is a conclusive evidence that greater economy and efficiency
would be achieved through these arrangements, and in accordance with
provision[s] of laws and acts on the matter.

It must, upon the one hand, be noted that the special law Republic Act- No. 6957 made
absolutely no mention of negotiated contracts being permitted to displace the requirement of
public bidding. Upon the other hand, Section 5-a, inserted in Republic Act No. 6957 by the
amending statute Republic Act No. 7718, does not purport to authorize direct negotiation of
contracts situations where there is a lack of pre-qualified contractors or, complying bidders. Thus,
even under the amended special statute, entering into contracts by negotiation
is not permissible in the other (2) categories of cases referred to in Section 4 of Presidential
Decree No. 1594, i.e., "in exceptional cases where time is of the essence" and "when there is
conclusive evidence that greater economy and efficiency would be achieved through these
arrangements, etc."

The result I reach is that insofar as BOT, etc.-types of contracts are concerned, the applicable
public bidding requirement is that set out in Republic Act No. 6957 and, with respect to such type
of contracts opened for pre-qualification and bidding after the date of effectivity of Republic Act
No. 7718. The provision of Republic Act No. 7718. The assailed contract was entered into before
Republic Act. No. 7718 was enacted.

The difficulties. of applying the provisions of presidential Degree No. 1594 to the Edsa LRT-type
of contracts are aggravated when one considers the detailed" Implementing Rules and
Regulations as amended April 1988" issued under that Presidential Decree.1 For instance:

IB [2.5.2] 2.4.2 By Negotiated Contract

xxx xxx xxx

a. In times of emergencies arising from natural calamities where

immediate action is necessary to prevent imminent loss of life
and/or property.

b. Failure to award the contract after competitive public bidding for

valid cause or causes [such as where the prices obtained through
public bidding are all above the AAE and the bidders refuse to
reduce their prices to the AAE].

In these cases, bidding may be undertaken through sealed canvass of at least

three (3) qualified contractors. Authority to negotiate contracts for projects under
these exceptional cases shall be subject to prior approval by heads of agencies
within their limits of approving authority.

c. Where the subject project is adjacent or contiguous to an on-

going project and it could be economically prosecuted by the same
contractor provided that he has no negative slippage and has
demonstrated a satisfactory performance. (Emphasis supplied).

Note that there is no reference at all in these presidential Decree No. 1594 Implementing Rules
and Regulations to absence of pre-qualified applicants and bidders as justifying negotiation of
contracts as distinguished from requiring public bidding or a second public bidding.

Note also the following provision of the same Implementing Rules and Regulations:

IB 1 Prequalification

The following may be become contractors for government projects:

1 Filipino

a. Citizens (single proprietorship)

b. Partnership of corporation duly organized under the laws of the Philippines, and
at least seventy five percent (75%) of the capital stock of which belongs to Filipino
citizens.

2. Contractors forming themselves into a joint venture, i.e., a group of two or more
contractors that intend to be jointly and severally responsible for a particular
contract, shall for purposes of bidding/tendering comply with LOI 630, and, aside
 from being currently and properly accredited by the Philippine Contractors
Accreditation Board, shall comply with the provisions of R.A. 4566, provided
that joint ventures in which Filipino ownership is less than seventy five percent (
75%) may be prequalified where the structures to be built require the application
of techniques and/or technologies which are not adequately possessed by a
Filipino entity as defined above.

[The foregoing shall not negate any existing and future commitments with respect
to the bidding and aware of contracts financed partly or wholly with funds from
international lending institutions like the Asian Development Bank and the Worlds
Bank as well as from bilateral and other similar sources.(Emphases supplied)

The record of this case is entirely silent on the extent of Philippine equity in the Edsa LRT
Corporation; there is no suggestion that this corporation is organized under Philippine law and is
at least seventy-five (75%) percent owned by Philippine citizens.

Public bidding is the normal method by which a government keeps contractors honest and is able
to assure itself that it would be getting the best possible value for its money in any construction
or similar project. It is not for nothing that multilateral financial organizations like the World Bank
and the Asian Development Bank uniformly require projects financed by them to be implemented
and carried out by public bidding. Public bidding is much too important a requirement casually to
loosen by a latitudinarian exercise in statutory construction.

The instant petition should be granted and the challenged contract and its supplement should be
nullified and set aside. A true public bidding, complete with a new prequalification proceeding,
should be required for the Edsa LRT Project.

9. Hontiveros - Baraquel, et. Al., vs. Toll Regulatory Board, et. Al., G.R. No. 181293, Feb. 23,
2015

G.R. No. 181293, February 23, 2015

ANA THERESIA “RISA” HONTIVEROS-BARAQUEL, DANIEL L. EDRALIN, VICTOR M.

GONZALES, SR., JOSE APOLLO R. ADO, RENE D. SORIANO, ALLIANCE OF
PROGRESSIVE LABOR, BUKLURAN NG MANGGAGAWANG PILIPINO, LAHING PILIPINO
MULTI-PURPOSE TRANSPORT SERVICE COOPERATIVE, PNCC SKYWAY CORPORATION
EMPLOYEES UNION (PSCEU), AND PNCC TRAFFIC MANAGEMENT & SECURITY
DEPARTMENT WORKERS ORGANIZATION (PTMSDWO), Petitioners, v. TOLL
REGULATORY BOARD, THE SECRETARY OF THE DEPARTMENT OF TRANSPORTATION
AND COMMUNICATIONS (DOTC), PNCC SKYWAY CORPORATION, PHILIPPINE NATIONAL
CONSTRUCTION CORPORATION, SKYWAY O & M CORPORATION, AND CITRA METRO
MANILA TOLLWAYS CORP., Respondents.

DECISION

SERENO, C.J.:

This is an original petition for certiorari and prohibition under Rule 65 of the Rules of Court, with
a prayer for the issuance of a writ of preliminary injunction and/or temporary restraining order,
seeking the annulment of the following:

1. The Amendment to the Supplemental Toll Operation Agreement executed on 18 July 2007
between the Republic of the Philippines, the Philippine National Construction Corporation,
and Citra Metro Manila Tollways Corporation;ChanRoblesVirtualawlibrary

2. The Memorandum dated 20 July 2007 of the Secretary of Transportation and

Communications, approving the Amendment to the Supplemental Toll Operation
Agreement;ChanRoblesVirtualawlibrary
 3. The Memorandum of Agreement executed on 21 December 2007 between the Philippine
National Construction Corporation, PNCC Skyway Corporation, and Citra Metro Manila
Tollways Corporation; and

4. The Toll Operation Certificate issued by the Toll Regulatory Board on 28 December 2007
in favor of Skyway O & M Corporation.

The annulment of the above is sought for being unconstitutional, contrary to law, and grossly
disadvantageous to the government. Petitioners also seek to prohibit Skyway O & M Corporation
from assuming operations and maintenance responsibilities over the Skyway toll
facilities.chanroblesvirtuallawlibrary

ANTECEDENT FACTS

The Toll Regulatory Board (TRB) was created on 31 March 1977 by Presidential Decree No.
(P.D.) 11121 in order to supervise and regulate, on behalf of the government, the collection of toll
fees and the operation of toll facilities by the private sector.

On the same date, P.D. 11132 was issued granting to the Construction and Development
Corporation of the Philippines (now Philippine National Construction Corporation or PNCC) the
right, privilege, and authority to construct, operate, and maintain toll facilities in the North and
South Luzon Toll Expressways for a period of 30 years starting 1 May 1977.

TRB and PNCC later entered into a Toll Operation Agreement,3 which prescribed the operating
conditions of the right granted to PNCC under P.D. 1113.

P.D. 1113 was amended by P.D. 1894,4 which granted PNCC the right, privilege, and authority to
construct, maintain, and operate the North Luzon, South Luzon and Metro Manila Expressways,
together with the toll facilities appurtenant thereto. The term of 30 years provided under P. D.
1113 starting from 1 May 1977 remained the same for the North and the South Luzon
Expressways, while the franchise granted for the Metro Manila Expressway (MME) provided a
term of 30 years commencing from the date of completion of the project.

On 22 September 1993, PNCC entered into an agreement5 with PT Citra Lamtoro Gung Persada
(CITRA), a limited liability company organized and established under the laws of the Republic of
Indonesia, whereby the latter committed to provide PNCC with a pre-feasibility study on the
proposed MME project. The agreement was supplemented6 on 14 February 1994 with a related
undertaking on the part of CITRA. CITRA was to provide a preliminary feasibility study on the
Metro Manila Skyways (MMS) project, a system of elevated roadway networks passing through
the heart of the Metropolitan Manila area. In order to accelerate the actual implementation of both
the MME and the MMS projects, PNCC and CITRA entered into a second agreement.7 Through
that agreement, CITRA committed to finance and undertake the preparation, updating, and
revalidation of previous studies on the construction, operation, and maintenance of the projects.

As a result of the feasibility and related studies, PNCC and CITRA submitted, through the TRB,
a Joint Investment Proposal (JIP) to the Republic of the Philippines.8 The JIP embodied the
implementation schedule for the financing, design and construction of the MMS in three stages:
the South Metro Manila Skyway, the North Metro Manila Skyway, and the Central Metro Manila
Skyway.9cralawred

The TRB reviewed, evaluated and approved the JIP, particularly as it related to Stage 1, Phases
1 and 2; and Stage 2, Phase 1 of the South Metro Manila Skyway.

On 30 August 1995, PNCC and CITRA entered into a Business and Joint Venture
Agreement10 and created the Citra Metro Manila Tollways Corporation (CMMTC). CMMTC was a
joint venture corporation organized under Philippine laws to serve as a channel through which
CITRA shall participate in the construction and development of the project.

On 27 November 1995, the Republic of the Philippines – through the TRB – as Grantor, CMMTC
as Investor, and PNCC as Operator executed a Supplemental Toll Operation Agreement
(STOA)11 covering Stage 1, Phases 1 and 2; and Stage 2, Phase 1 of the South Metro Manila
Skyway. Under the STOA, the design and construction of the project roads became the primary
and exclusive privilege and responsibility of CMMTC. The operation and maintenance of the
project roads became the primary and exclusive privilege and responsibility of the PNCC Skyway
Corporation (PSC), a wholly owned subsidiary of PNCC, which undertook and performed the
latter’s obligations under the STOA.

CMMTC completed the design and construction of Stage 1 of the South Metro Manila Skyway,
which was operated and maintained by PSC.12cralawred

On 18 July 2007, the Republic of the Philippines, through the TRB, CMMTC, and PNCC executed
the assailed Amendment to the Supplemental Toll Operation Agreement (ASTOA).13 The ASTOA
incorporated the amendments, revisions, and modifications necessary to cover the design and
construction of Stage 2 of the South Metro Manila Skyway. Also under the ASTOA, Skyway O &
M Corporation (SOMCO) replaced PSC in performing the operations and maintenance of Stage
1 of the South Metro Manila Skyway.

Pursuant to the authority granted to him under Executive Order No. (E.O.) 49714 dated 24 January
2006, Department of Transportation and Communications (DOTC) Secretary Leandro Mendoza
approved the ASTOA through the challenged Memorandum dated 20 July 2007.15cralawred

On 21 December 2007, PNCC, PSC, and CMMTC entered into the assailed Memorandum of
Agreement (MOA)16 providing for the successful and seamless assumption by SOMCO of the
operations and maintenance of Stage 1 of the South Metro Manila Skyway. Under the MOA, PSC
received the amount of ?320 million which was used for the settlement of its liabilities arising from
the consequent retrenchment or separation of its affected employees.

The TRB issued the challenged Toll Operation Certificate (TOC)17 to SOMCO on 28 December
2007, authorizing the latter to operate and maintain Stage 1 of the South Metro Manila Skyway
effective 10:00 p.m. on 31 December 2007.

Meanwhile, on 28 December 2007, petitioner PNCC Traffic Management and Security

Department Workers Organization (PTMSDWO) filed a Notice of Strike against PSC on the
ground of unfair labor practice, specifically union busting.18 The Secretary of Labor and
Employment19 assumed jurisdiction over the dispute in an Order dated 31 December 2007 and
set the initial hearing of the case on 2 January 2008.20cralawred

On 3 January 2008, petitioners PTMSDWO and PNCC Skyway Corporation Employees Union
(PSCEU) filed before the Regional Trial Court of Parañaque City, Branch 258 (RTC), a complaint
against respondents TRB, PNCC, PSC, CMMTC, and SOMCO. The complaint was for injunction
and prohibition with a prayer for a writ of preliminary injunction and/or a temporary restraining
order, and sought to prohibit the implementation of the ASTOA and the MOA, as well as the
assumption of the toll operations by SOMCO.21 Petitioners PSCEU and PTMSDWO also sought
the subsequent nullification of the ASTOA and the MOA for being contrary to law and for being
grossly disadvantageous to the government.22 They later filed an Amended Complaint23 dated 8
January 2008, additionally praying that PSC be allowed to continue the toll operations. With the
exception of TRB, all defendants therein filed their Opposition.

On 23 January 2008, the RTC issued an Order24 denying the prayer for the issuance of a
temporary restraining order and/or writ of preliminary injunction. According to the RTC, petitioners
were seeking to enjoin a national government infrastructure project. Under Republic Act No. (R.A.)
8975,25 lower courts are prohibited from issuing a temporary restraining order or preliminary
injunction against the government – or any person or entity acting under the government’s
direction – to restrain the execution, implementation, or operation of any such contract or project.
Furthermore, the RTC ruled that it could no longer issue a temporary restraining order or
preliminary injunction, considering that the act sought to be restrained had already been
consummated.26 The ASTOA, the MOA, and the assumption of the toll operations by SOMCO
took effect at 10:00 p.m. on 31 December 2007, while petitioners PSCEU and PTMSDWO sought
to prohibit their implementation only on 3 January 2008.

In view of its denial of the ancillary prayer, the RTC required defendants to file their respective
Answers to the Amended Complaint.27cralawred
On 28 January 2008, petitioners PSCEU and PTMSDWO filed a Notice of Dismissal with Urgent
Ex-Parte Motion for the Issuance of Order Confirming the Dismissal, 28 considering that no
Answers had yet been filed. On the basis thereof, the RTC dismissed the case without prejudice
on 29 January 2008.29cralawred

On 4 February 2008, petitioners filed the instant Petition30 before this Court. On 13 February 2008,
we required respondents to comment on the same.31cralawred

Meanwhile, defendants PNCC32 and PSC33 filed their respective Motions for Partial
Reconsideration of the Order of the RTC dismissing the case without prejudice. Both argued that
the RTC should have dismissed the case with prejudice. They pointed out that petitioners PSCEU
and PTMSDWO had acted in bad faith by filing the complaint before the RTC, despite the
pendency of a labor case over which the Secretary of Labor and Employment had assumed
jurisdiction. Defendant CMMTC joined PNCC and PSC in moving for a partial reconsideration of
the RTC Order.34cralawred

The RTC denied the Motions for Partial Reconsideration in an Order dated 13 June
2008.35cralawred

Before this Court, SOMCO,36 PSC,37 PNCC,38 CMMTC,39 and TRB40 filed their respective
Comments on the Petition.

THE PARTIES’ POSITIONS

Petitioners argue that the franchise for toll operations was exclusively vested by P.D. 1113 in
PNCC, which exercised the powers under its franchise through PSC in accordance with the
STOA. By agreeing to the arrangement whereby SOMCO would replace PSC in the toll operations
and management, PNCC seriously breached the terms and conditions of its undertaking under
the franchise and effectively abdicated its rights and privileges in favor of SOMCO.

Furthermore, the TOC granted to SOMCO was highly irregular and contrary to law, because 1) it
did not indicate the conditions that shall be imposed on SOMCO as provided under P.D. 1112;41 2)
none of the requirements on public bidding, negotiations, or even publication was complied with
before the issuance of the TOC to SOMCO; 3) applying the stricter “grandfather rule,” SOMCO
does not qualify as a facility operator as defined under R.A. 6957,42 as amended by R.A.
7718;43 and 4) there were no public notices and hearings conducted wherein all legitimate issues
and concerns about the transfer of the toll operations would have been properly ventilated.

Petitioners also claim that the approval by the DOTC Secretary of the ASTOA could not take the
place of the presidential approval required under P.D. 111344 and P.D. 189445 concerning the
franchise granted to PNCC.

Finally, petitioners claim that the assumption of the toll operations by SOMCO was grossly
disadvantageous to the government, because 1) for a measly capital investment of P2.5 million,
SOMCO stands to earn P400 million in gross revenues based on official and historical records;
2) with its measly capital, SOMCO would not be able to cover the direct overhead for personal
services in the amount of P226 million as borne out by Commission on Audit reports; 3) the net
revenue from toll operations would go to private shareholders of SOMCO, whereas all earnings
of PSC when it was still in charge of the toll operations went to PNCC – the mother company
whose earnings, as an “acquired-asset corporation,” formed part of the public treasury; 4) the new
arrangement would result in the poor delivery of toll services by SOMCO, which had no proven
track record; 5) PSC received only P320 million as settlement for the transfer of toll operations to
SOMCO.

All respondents counter that petitioners do not have the requisite legal standing to file the petition.
According to respondents, petitioner Hontiveros-Baraquel filed the instant petition as a legislator
in her capacity as party-list representative of Akbayan. As such, she was only allowed to sue to
question the validity of any official action when it infringed on her prerogative as a
legislator.46 Presently, she has cited no such prerogative, power, or privilege that is adversely
affected by the assailed acts.47cralawred

While suing as citizens, the individual petitioners have not shown any personal or substantial
interest in the case indicating that they sustained or will sustain direct injury as a result of the
implementation of the assailed acts.48 The maintenance of the suit by petitioners as taxpayers
has no merit either because the assailed acts do not involve the disbursement of public
funds.49 Finally, the bringing of the suit by petitioners as people’s organizations does not
automatically confer legal standing, especially since petitioner-organizations do not even allege
that they represent their members,50 nor do they cite any particular constitutional provision that
has been violated or disregarded by the assailed acts.51 In fact, the suit raises only issues of
contract law, and none of the petitioners is a party or is privy to the assailed agreements and
issuances.52cralawred

Respondents also argue that petitioners violate the hierarchy of courts. In particular, it is alleged
that while lower courts are prohibited from issuing temporary restraining orders or preliminary
injunctions against national government projects under R.A. 8975, the law does not preclude them
from assuming jurisdiction over complaints that seek the nullification of a national government
project as ultimate relief.53cralawred

As a final procedural challenge to the petition, respondents aver that petitioners are guilty of forum
shopping. When petitioners filed the instant petition, the case before the RTC seeking similar
reliefs was still pending, as respondents PNCC, PSC and CMMTC had moved for the partial
reconsideration of the RTC’s Order of dismissal within the reglementary period.54 Furthermore,
the instant case and the one before the RTC were filed while petitioners’ labor grievances seeking
similar reliefs were also being heard before the Department of Labor and Employment.55cralawred

On the merits of the arguments in the petition, respondents argue that nothing in the ASTOA, the
approval thereof by the DOTC Secretary, the MOA, or the TOC was violative of the Constitution.

It is argued that the authority to operate a public utility can be granted by administrative agencies
when authorized by law.56 Under P.D. 1112, the TRB is empowered to grant authority and enter
into contracts for the construction, operation, and maintenance of a toll facility, 57 such as the
ASTOA in this case. Also, the ASTOA was an amendment, not to the legislative franchise of
PNCC, but to the STOA previously executed between the Republic of the Philippines through the
TRB, PNCC, and CMMTC.58 In fact, PNCC’s franchise was never sold, transferred, or otherwise
assigned to SOMCO59 in the same way that PSC’s previous assumption of the operation and
maintenance of the South Metro Manila Skyway did not amount to a sale, transfer or assignment
of PNCC’s franchise.60cralawred

There can be no valid objection to the approval of the ASTOA by the DOTC Secretary, because
he was authorized by the President to do so by virtue of E.O. 497. 61 Also, the phrase “subject to
the approval of the President of the Philippines” in P.D. 1112 and 1113 does not in any way mean
that the presidential approval must be obtained prior to the execution of a contract, or that the
approval be made personally by the President.62 The presidential approval may be obtained under
the doctrine of qualified political agency.63cralawred

Respondents argue that there is no merit in the claim that the TOC granted to SOMCO was highly
irregular and contrary to law. First, the TOC clearly states that the toll operation and maintenance
by SOMCO shall be regulated by the Republic of the Philippines in accordance with P.D. 1112,
the STOA, the toll operations and maintenance rules and regulations, and lawful orders,
instructions, and conditions that may be imposed from time to time.64 Second, there is no need to
comply with the public bidding and negotiation requirements, because the South Metro Manila
Skyway is an ongoing project, not a new one.65 Furthermore, the STOA, which was the basis for
the ASTOA, was concluded way before the effectivity of R.A. 918466 in 2003.67cralawred

Third, SOMCO is a Filipino corporation with substantial 72% Filipino ownership.68 Fourth, the law
requires prior notice and hearing only in an administrative body’s exercise of quasi-judicial
functions.69 In this case, the transfer of the toll operations and maintenance to SOMCO was a
contractual arrangement entered into in accordance with law.70cralawred

Finally, the assumption of the toll operation and maintenance by SOMCO is not disadvantageous
to the government. Petitioners belittle the P2.5 million capitalization of SOMCO, considering that
PSC’s capitalization at the time it was incorporated was merely P500,000.71cralawred

Respondents claim that under the ASTOA, PNCC shall get a direct share in the toll revenues
without any corollary obligation, unlike the arrangement in the STOA whereby PNCC’s 10% share
in the toll revenues was intended primarily for the toll operation and maintenance by
PSC.72cralawred

Finally, respondents assert that there is no reason to fear that the assumption by SOMCO would
result in poor delivery of toll services. CITRA and the other shareholders of SOMCO are entities
with experience and proven track record in toll operations.73 Also, SOMCO hired or absorbed
more than 300 PSC employees,74 who brought with them their work expertise and
experience.chanroblesvirtuallawlibrary

ISSUES

The instant case shall be resolved on the basis of the following issues:

Procedural:

I. Whether petitioners have standing;

II. Whether petitioners are guilty of forum-shopping;

Substantive:

III. Whether the TRB has the power to grant authority to operate a toll facility;
IV. Whether the TOC issued to SOMCO was valid;
V. Whether the approval of the ASTOA by the DOTC Secretary was valid; and
VI. Whether the assumption of toll operations by SOMCO is disadvantageous to the
government.

Our Ruling

I
Not all petitioners have
personality to sue.

Standing is a constitutional law concept allowing suits to be brought not necessarily by parties
personally injured by the operation of a law or official action, but by concerned citizens, taxpayers,
or voters who sue in the public interest.75 Determining the standing of concerned citizens,
taxpayers, or voters requires a partial consideration of the substantive merit of the constitutional
question,76 or at least a preliminary estimate thereof.77cralawred

In this case, petitioners raise the power of Congress to grant franchises as a constitutional
question. They allege that the execution of the ASTOA and the MOA, the approval of the ASTOA
by the DOTC Secretary and the issuance of the TOC infringed on the constitutional power of
Congress, which has the sole authority to grant franchises for the operation of public utilities.

This Court has had a few occasions to rule that a franchise from Congress is not required before
each and every public utility may operate.78 Unless there is a law that specifically requires a
franchise for the operation of a public utility, particular agencies in the executive branch may issue
authorizations and licenses for the operation of certain classes of public utilities. 79 In the instant
case, there is no law that states that a legislative franchise is necessary for the operation of toll
facilities.

In PAL v. Civil Aeronautics Board,80 this Court enunciated:chanRoblesvirtualLawlibrary

Congress has granted certain administrative agencies the power to grant licenses for, or to
authorize the operation of certain public utilities. With the growing complexity of modern life, the
multiplication of the subjects of governmental regulation, and the increased difficulty of
administering the laws, there is a constantly growing tendency towards the delegation of greater
powers by the legislature, and towards the approval of the practice by the courts. It is generally
recognized that a franchise may be derived indirectly from the state through a duly designated
agency, and to this extent, the power to grant franchises has frequently been delegated, even to
agencies other than those of a legislative nature. In pursuance of this, it has been held that
privileges conferred by grant by local authorities as agents for the state constitute as much a
legislative franchise as though the grant had been made by an act of the
Legislature.81cralawlawlibrary

It is thus clear that Congress does not have the sole authority to grant franchises for the operation
of public utilities. Considering the foregoing, we find that the petition raises no issue of
constitutional import. More particularly, no legislative prerogative, power, or privilege has been
impaired. Hence, legislators have no standing to file the instant petition, for they are only allowed
to sue to question the validity of any official action when it infringes on their prerogatives as
members of Congress.82 Standing is accorded to them only if there is an unmistakable showing
that the challenged official act affects or impairs their rights and prerogatives as
legislators.83cralawred

In line with our ruling in Kilosbayan, Inc. v. Morato,84 the rule concerning a real party in interest –
which is applicable to private litigation – rather than the liberal rule on standing, should be applied
to petitioners.

A real party in interest is one who stands to be benefited or injured by the judgment in the suit, or
the party entitled to the avails of the suit.85 One’s interest must be personal and not one based on
a desire to vindicate the constitutional right of some third and unrelated party. 86 The purposes of
the rule are to prevent the prosecution of actions by persons without any right or title to or interest
in the case; to require that the actual party entitled to legal relief be the one to prosecute the
action; to avoid a multiplicity of suits; and to discourage litigation and keep it within certain bounds,
pursuant to sound public policy.87cralawred

At bottom, what is being questioned in the petition is the relinquishment by PSC of the toll
operations in favor of SOMCO, effectively leading to the cessation of the former’s business. In
this case, we find that among petitioners, the only real parties in interest are the labor unions
PSCEU and PTMSDWO.

PSCEU and PTMSDWO filed the petition not as a representative suit on behalf of their members
who are rank-and-file employees of PSC, but as people’s organizations “invested with a public
duty to defend the rule of law.”88 PSCEU and PTMSDWO cite Kilosbayan v. Ermita89 as authority
to support their standing to file the instant suit.

It is well to point out that the Court, in Ermita, accorded standing to people’s organizations to file
the suit, because the matter involved therein was the qualification of a person to be appointed as
a member of this Court – “an issue of utmost and far-reaching constitutional importance.”90 As
discussed, the instant petition raises no genuine constitutional issues.

Nevertheless, for a different reason, we accord standing to PSCEU and PTMSDWO to file the
instant suit. With the transfer of toll operations to SOMCO and the resulting cessation of PSC’s
business comes the retrenchment and separation of all its employees. The existence of petitioner
labor unions would terminate with the dissolution of its employer and the separation of its
members. This is why the petition also prays that this Court issue an order “that would smoothly
preserve the toll operations services of respondent PNCC and/or respondent PSC under its
legislative franchise.”91 We have recognized that the right of self-preservation is inherent in every
labor union or any organization for that matter.92 Thus, PSCEU and PTMSDWO, as real parties
in interest, have the personality to question the assumption of the toll operations by SOMCO.

II
PSCEU and PTMSDWO are not
guilty of forum-shopping.

Forum shopping refers to the act of availing of several remedies in different courts and/or
administrative agencies, either simultaneously or successively, when these remedies are
substantially founded on the same material facts and circumstances and raise basically the same
issues either pending in or already resolved by some other court or administrative agency.93 What
is pivotal in determining whether forum shopping exists is the vexation caused to the courts and
litigants and the possibility of conflicting decisions being rendered by different courts and/or
administrative agencies upon the same issues.94cralawred

The elements of forum shopping are as follows: a) identity of parties or at least such parties that
represent the same interests in both actions; b) identity of rights asserted and the relief prayed
for, the relief founded on the same facts; and c) identity of the two preceding particulars, such that
any judgment rendered in one action will amount to res judicata in the other.95cralawred

Respondents argue that petitioners PSCEU and PTMSDWO committed forum shopping by filing
the complaint for injunction and prohibition before the RTC during the pendency of NCMB-NCR-
NS-12-188-07 entitled In Re: Labor Dispute at PNCC Skyway Corporation. It was a case they
also filed, over which the Secretary of Labor and Employment has assumed jurisdiction.

The case involves a Notice of Strike filed against PSC on the ground of unfair labor practice.
While the specific act in question is not specified, the prohibited acts constituting unfair labor
practice96 essentially relate to violations concerning the workers’ right to self-organization.97 When
compared with the complaint filed with the RTC for injunction and prohibition seeking to prohibit
the implementation of the ASTOA and the MOA, as well as the assumption of the toll operations
by SOMCO for being unconstitutional, contrary to law and disadvantageous to the government, it
is easily discernible that there is no identity of rights asserted and relief prayed for. These cases
are distinct and dissimilar in their nature and character.

For the sake of argument, let us assume that, in order to hurt the unions, PSC feigned a cessation
of business that led to the retrenchment and separation of all employees. That is an unfair labor
practice. In that complaint, the unions cannot be expected to ask for, or the Secretary of Labor
and Employment to grant, the annulment of the ASTOA and the MOA and the continuation of toll
operations by PSC. The Secretary would only focus on the legality of the retrenchment and
separation, and on the presence or absence of bad faith in PSC’s cessation of business. On the
other hand, the complaint before the RTC would require it to focus on the legality of the ASTOA,
the MOA and the transfer of toll operations. Ultimately, even if the Secretary of Labor and
Employment makes a finding of unfair labor practice, this determination would not amount to res
judicata as regards the case before the RTC.

We also reject the claim of respondents that petitioners PSCEU and PTMSDWO committed forum
shopping by filing the instant petition before this Court while the motion for partial reconsideration
of the RTC’s Order of dismissal without prejudice was still pending. Section 1, Rule 17 of the
Rules of Court states:chanRoblesvirtualLawlibrary

SECTION 1. Dismissal upon notice by plaintiff. – A complaint may be dismissed by the plaintiff
by filing a notice of dismissal at any time before service of the answer or of a motion for summary
judgment. Upon such notice being filed, the court shall issue an order confirming the dismissal.
Unless otherwise stated in the notice, the dismissal is without prejudice, except that a notice
operates as an adjudication upon the merits when filed by a plaintiff who has once dismissed in
a competent court an action based on or including the same claim.cralawlawlibrary

In this case, petitioners PSCEU and PTMSDWO had filed a notice of dismissal of the complaint
before the RTC on 28 January 2008, before respondents filed their Answers. The following day,
the RTC issued an order confirming the dismissal. Under the above-cited rule, this confirmation
is the only qualification imposed on the right of a party to dismiss the action before the adverse
party files an answer.98 In this case, the dismissal of the action therefore became effective upon
that confirmation by the RTC despite the subsequent filing of the motions for partial
reconsideration.

Thus, when the instant petition was filed on 4 February 2008, the complaint before the RTC was
no longer pending. The complaint was dismissed without prejudice by virtue of the notice of
dismissal filed by petitioners PSCEU and PTMSDWO. Consequently, there was not even any
need for petitioners to mention the prior filing and dismissal of the complaint in the certificate of
non-forum shopping in the instant petition,99 but they did so anyway.100cralawred

Parenthetically, in their motions for partial reconsideration, respondents PNCC and PSC insisted
that the dismissal should have been with prejudice, because petitioners allegedly acted in bad
faith in filing the notice of dismissal, were guilty of forum shopping, and did not notify respondents
of their intention to file a notice of dismissal. With regard to the first and the third allegation,
petitioners may ask for dismissal at any time before the filing of the answer as a matter of right,
even if the notice cites “the most ridiculous of grounds for dismissal.”101 As to the second, we have
already ruled that there was no forum shopping as regards the successive filings of the labor case
and the complaint before the RTC.chanroblesvirtuallawlibrary

III
TRB has the power to grant
authority to operate a toll facility.

This matter has already been settled by the Court in Francisco, Jr. v. TRB,102 which ruled
thus:chanRoblesvirtualLawlibrary

It is abundantly clear that Sections 3 (a) and (e) of P.D. 1112 in relation to Section 4 of P.D. 1894
have invested the TRB with sufficient power to grant a qualified person or entity with authority to
construct, maintain, and operate a toll facility and to issue the corresponding toll operating permit
or TOC.

Sections 3 (a) and (e) of P.D. 1112 and Section 4 of P.D. 1894 amply provide the power to grant
authority to operate toll facilities:chanRoblesvirtualLawlibrary

Section 3. Powers and Duties of the Board. – The Board shall have in addition to its general
powers of administration the following powers and duties:

(a) Subject to the approval of the President of the Philippines, to enter into contracts in behalf of
the Republic of the Philippines with persons, natural or juridical, for the construction, operation
and maintenance of toll facilities such as but not limited to national highways, roads, bridges, and
public thoroughfares. Said contract shall be open to citizens of the Philippines and/or to
corporations or associations qualified under the Constitution and authorized by law to engage in
toll operations;ChanRoblesVirtualawlibrary

x x x x

(e) To grant authority to operate a toll facility and to issue therefore the necessary “Toll Operation
Certificate” subject to such conditions as shall be imposed by the Board including inter alia the
following:

(1) That the Operator shall desist from collecting toll upon the expiration of the Toll Operation
Certificate.
(2) That the entire facility operated as a toll system including all operation and maintenance
equipment directly related thereto shall be turned over to the government immediately upon
the expiration of the Toll Operation Certificate.
(3) That the toll operator shall not lease, transfer, grant the usufruct of, sell or assign the rights
or privileges acquired under the Toll Operation Certificate to any person, firm, company,
corporation or other commercial or legal entity, nor merge with any other company or
corporation organized for the same purpose, without the prior approval of the President of
the Philippines. In the event of any valid transfer of the Toll Operation Certificate, the
Transferee shall be subject to all the conditions, terms, restrictions and limitations of this
Decree as fully and completely and to the same extent as if the Toll Operation Certificate
has been granted to the same person, firm, company, corporation or other commercial or
legal entity.
(4) That in time of war, rebellion, public peril, emergency, calamity, disaster or disturbance of
peace and order, the President of the Philippines may cause the total or partial closing of the
toll facility or order to take over thereof by the Government without prejudice to the payment
of just compensation.
(5) That no guarantee, Certificate of Indebtedness, collateral, securities, or bonds shall be
issued by any government agency or government-owned or controlled corporation on any
financing program of the toll operator in connection with his undertaking under the Toll
Operation Certificate.
(6) The Toll Operation Certificate may be amended, modified or revoked whenever the public
interest so requires.
 (a) The Board shall promulgate rules and regulations governing the procedures for the
grant of Toll Certificates. The rights and privileges of a grantee under a Toll Operation
Certificate shall be defined by the Board.
(b) To issue rules and regulations to carry out the purposes of this Decree.

SECTION 4. The Toll Regulatory Board is hereby given jurisdiction and supervision over the
GRANTEE with respect to the Expressways, the toll facilities necessarily appurtenant thereto and,
subject to the provisions of Section 8 and 9 hereof, the toll that the GRANTEE will charge the
users thereof.
By explicit provision of law, the TRB was given the power to grant administrative franchise
for toll facility projects.103 (Emphases supplied)cralawlawlibrary

We cannot abide by the contention of petitioners that the franchise for toll operations was
exclusively vested in PNCC, which effectively breached its franchise when it transferred the toll
operations to SOMCO. First, there is nothing in P.D. 1113 or P.D. 1894 that states that the
franchise granted to PNCC is to the exclusion of all others.

Second, if we were to go by the theory of petitioners, it is only the operation and maintenance of
the toll facilities that is vested with PNCC. This interpretation is contrary to the wording of P.D.
1113 and P.D. 1894 granting PNCC the right, privilege and authority to construct, operate and
maintain the North Luzon, South Luzon and Metro Manila Expressways and their toll facilities.

It appears that petitioners have confused the franchise granted under P.D. 1113 and P.D. 1894
with particular provisions in the STOA. To clarify, the operation and maintenance of the project
roads were the primary and exclusive privilege and responsibility of PNCC through PSC under
the STOA. On the other hand, the design and construction of the project roads were the primary
and exclusive privilege and responsibility of CMMTC. However, with the execution of the ASTOA,
the parties agreed that SOMCO shall replace PSC in undertaking the operations and maintenance
of the project roads. Thus, the “exclusivity clause” was a matter of agreement between the parties,
which amended it in a later contract; it was not a matter provided under the law.

Third, aside from having been granted the power to grant administrative franchises for toll facility
projects, TRB is also empowered to modify, amend, and impose additional conditions on the
franchise of PNCC in an appropriate contract, particularly when public interest calls for it. This is
provided under Section 3 of P.D. 1113 and Section 6 of P.D. 1894, to
wit:chanRoblesvirtualLawlibrary

SECTION 3. This franchise is granted subject to such conditions as may be imposed by the [Toll
Regulatory] Board in an appropriate contract to be executed for this purpose, and with the
understanding and upon the condition that it shall be subject to amendment, alteration or repeal
when public interest so requires.chanrobleslaw

x x x

SECTION 6. This franchise is granted subject to such conditions, consistent with the provisions
of this Decree, as may be imposed by the Toll Regulatory Board in the Toll Operation Agreement
and such other modifications or amendments that may be made thereto, and with the
understanding and upon the condition that it shall be subject to amendment or alteration when
public interest so dictates.cralawlawlibrary

Section 6 of P.D. 1894 specifically mentions the Toll Operation Agreement. The STOA was one
such modification or amendment of the franchise of PNCC. So was the ASTOA, which further
modified the franchise. PNCC cannot be said to have breached its franchise when it transferred
the toll operations to SOMCO. PNCC remained the franchise holder for the construction,
operation, and maintenance of the project roads; it only opted to partner with investors in the
exercise of its franchise leading to the organization of companies such as PSC and SOMCO.

Again, considering that PNCC was granted the right, privilege, and authority to construct, operate,
and maintain the North Luzon, South Luzon, and Metro Manila Expressways and their toll
facilities, we have not heard petitioners decrying the “breach” by PNCC of its franchise when it
agreed to make CMMTC responsible for the design and construction of the project roads under
the STOA.
IV
The TOC issued to SOMCO was not irregular.

Petitioners argue that the conditions provided under Section 3(e) of P.D. 1112104 were not
imposed on SOMCO, because these do not appear on the face of the TOC. Petitioners are
mistaken.

The TOC, as a grant of authority from the government, is subject to the latter’s control insofar as
the grant affects or concerns the public.105 Like all other franchises or licenses issued by the
government, the TOC is issued subject to terms, conditions, and limitations under existing laws
and agreements. This rule especially holds true in this instance since the TRB has the power to
issue “the necessary ‘Toll Operation Certificate’ subject to such conditions as shall be imposed
by the Board including inter alia” those specified under Section 3(e) of P.D. 1112. Thus, impliedly
written into every TOC are the conditions prescribed therein.

In any case, part of the TOC issued to SOMCO reads:chanRoblesvirtualLawlibrary

Pursuant to Section 3(e) of Presidential Decree No. 1112 or the Toll Operation Decree, Skyway
O & M Corporation is hereby given authority to operate and maintain Stage 1 of the South Metro
Manila Skyway effective as of 10:00 p.m. of 31 December 2007.

This authorization is issued upon the clear understanding that the operation and maintenance of
Stage 1 of the South Metro Manila Skyway as a toll facility and the collection of toll fees shall be
closely supervised and regulated by the Grantor, by and through the Board of Directors, in
accordance with the terms and conditions set forth in the STOA, as amended, the rules and
regulations duly promulgated by the Grantor for toll road operations and maintenance, as well as
the lawful orders, instructions and conditions which the Grantor, through the TRB, may impose
from time to time in view of the public nature of the facility.cralawlawlibrary

As regards the allegation that none of the requirements for public bidding was observed before
the TOC was issued to SOMCO, this matter was also squarely answered by the Court
in Francisco, Jr. v. TRB,106 to wit:chanRoblesvirtualLawlibrary

Where, in the instant case, a franchisee undertakes the tollway projects of construction,
rehabilitation and expansion of the tollways under its franchise, there is no need for a public
bidding. In pursuing the projects with the vast resource requirements, the franchisee can partner
with other investors, which it may choose in the exercise of its management prerogatives. In this
case, no public bidding is required upon the franchisee in choosing its partners as such process
was done in the exercise of management prerogatives and in pursuit of its right of delectus
personae. Thus, the subject tollway projects were undertaken by companies, which are the
product of the joint ventures between PNCC and its chosen partners.107cralawlawlibrary

Under the STOA in this case, PNCC partnered with CMMTC in Stages 1 and 2 of the South Metro
Manila Skyway. The STOA gave birth to PSC, which was put in charge of the operation and
maintenance of the project roads. The ASTOA had to be executed for Stage 2 to accommodate
changes and modifications in the original design. The ASTOA then brought forth the incorporation
of SOMCO to replace PSC in the operations and maintenance of Stage 1 of the South Metro
Manila Skyway. Clearly, no public bidding was necessary because PNCC, the franchisee, merely
exercised its management prerogative when it decided to undertake the construction, operation,
and maintenance of the project roads through companies which are products of joint ventures
with chosen partners.

Petitioners also insist that SOMCO is not qualified to operate a toll facility, because it does not
meet the nationality requirement for a corporation when scrutinized under the “grandfather rule.”
Other than advancing this argument, however, petitioners have not shown how SOMCO fails to
meet the nationality requirement for a public utility operator. Petitioners only aver in their petition
that 40% of SOMCO is owned by CMMTC, a foreign company, while the rest is owned by the
following: a) Toll Road Operation and Maintenance Venture Corporation (TROMVC), almost 40%
of which is owned by a Singaporean company; b) Assetvalues Holding Company, Inc. (AHCI), of
which almost 40% is Dutch-owned; and c) Metro Strategic Infrastructure Holdings, Inc. (MSIHI),
40% of which is owned by Metro Pacific Corporation, whose ownership or nationality was not
specified.108cralawred
Section 11, Article XII of the Constitution provides that “[n]o franchise, certificate, or any other
form of authorization for the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at least
sixty per centum of whose capital is owned by such citizens x x x.” Clearly, under the Constitution,
a corporation at least 60% of whose capital is owned by Filipinos is of Philippine nationality.
Considering this constitutional provision, petitioners’ silence on the ownership of the remaining
60% of the corporations cited is very telling.

In order to rebut petitioners’ allegations, respondents readily present matrices showing the
itemization of percentage ownerships of the subscribed capital stock of SOMCO, as well as that
of TROMVC, AHCI, and MSIHI. Respondents attempt to show that all these corporations are of
Philippine nationality, with 60% of their capital stock owned by Filipino citizens. We need not
reproduce the itemization here. Suffice it to say that in their Consolidated Reply,109 petitioners did
not refute the unanimous claim of respondents. It is axiomatic that one who alleges a fact has the
burden of proving it. On this matter, we find that petitioners have failed to prove their allegation
that SOMCO is not qualified to operate a toll facility for failure to meet the nationality requirement
under the Constitution.

Finally, no public notices and hearings were necessary prior to the issuance of the TOC to
SOMCO. For the same reason that a public bidding is not necessary, PNCC cannot be required
to call for public hearings concerning matters within its prerogative. At any rate, we have studied
P.D. 1112 and the Implementing Rules and Regulations Authorizing the Establishment of Toll
Facilities and found no provision requiring the issuance of public notices and the conduct of public
hearings prior to the issuance of a TOC.chanroblesvirtuallawlibrary

V
Approval of the ASTOA by the
DOTC Secretary was approval by
the President.

The doctrine of qualified political agency declares that, save in matters on which the Constitution
or the circumstances require the President to act personally, executive and administrative
functions are exercised through executive departments headed by cabinet secretaries, whose
acts are presumptively the acts of the President unless disapproved by the latter.110 As explained
in Villena v. Executive Secretary,111 this doctrine is rooted in the
Constitution:chanRoblesvirtualLawlibrary

x x x With reference to the Executive Department of the government, there is one purpose which
is crystal-clear and is readily visible without the projection of judicial searchlight, and that is, the
establishment of a single, not plural, Executive. The first section of Article VII of the Constitution,
dealing with the Executive Department, begins with the enunciation of the principle that “The
executive power shall be vested in a President of the Philippines.” This means that the President
of the Philippines is the Executive of the Government of the Philippines, and no other. The heads
of the executive departments occupy political positions and hold office in an advisory capacity,
and, in the language of Thomas Jefferson, “should be of the President's bosom confidence,” and,
in the language of Attorney-General Cushing, “are subject to the direction of the President.”
Without minimizing the importance of the heads of the various departments, their personality is in
reality but the projection of that of the President. Stated otherwise, and as forcibly characterized
by Chief Justice Taft of the Supreme Court of the United States, “each head of a department is,
and must be, the President’s alter ego in the matters of that department where the President is
required by law to exercise authority.” Secretaries of departments, of course, exercise certain
powers under the law but the law cannot impair or in any way affect the constitutional power of
control and direction of the President. As a matter of executive policy, they may be granted
departmental autonomy as to certain matters but this is by mere concession of the executive, in
the absence of valid legislation in the particular field. If the President, then, is the authority in the
Executive Department, he assumes the corresponding responsibility. The head of a department
is a man of his confidence; he controls and directs his acts; he appoints him and can remove him
at pleasure; he is the executive, not any of his secretaries.112 x x x (Citations
omitted)cralawlawlibrary

Applying the doctrine of qualified political agency, we have ruled that the Secretary of
Environment and Natural Resources can validly order the transfer of a regional office by virtue of
the power of the President to reorganize the national government.113 In Constantino v.
Cuisia,114 the Court upheld the authority of the Secretary of Finance to execute debt-relief
contracts. The authority emanates from the power of the President to contract foreign loans under
Section 20, Article VII of the Constitution. In Angeles v. Gaite,115 the Court ruled that there can be
no issue with regard to the President’s act of limiting his power to review decisions and orders of
the Secretary of Justice, especially since the decision or order was issued by the secretary, the
President’s “own alter ego.”116cralawred

There can be no question that the act of the secretary is the act of the President, unless repudiated
by the latter. In this case, approval of the ASTOA by the DOTC Secretary had the same effect as
approval by the President. The same would be true even without the issuance of E.O. 497, in
which the President, on 24 January 2006, specifically delegated to the DOTC Secretary the
authority to approve contracts entered into by the TRB.

Petitioners are unimpressed. They cite Section 8 of P.D. 1113 and Section 13 of P.D. 1894 as
follows:chanRoblesvirtualLawlibrary

SECTION 8. The GRANTEE shall not lease, transfer, grant the usufruct of, sell or assign this
franchise nor the rights or privileges acquired hereby, to any person, firm, company, corporation
or other commercial or legal entity, nor merge with any other company or corporation without the
prior approval of the President of the Philippines. In the event that this franchise is sold,
transferred or assigned, the transferee shall be subject to all the conditions, terms, restrictions
and limitations of this Decree as fully and completely and to the same extents as if the franchise
has been granted to the same person, firm, company, corporation or other commercial or legal
entity. (Emphasis supplied)

SECTION 13. The GRANTEE shall not lease, transfer, grant the usufruct of, sell or assign this
franchise nor the rights or privileges required hereby, to any person, firm, company, corporation
or other legal entity, nor merge with any other company or corporation without the prior approval
of the President of the Philippines.

In the event that this franchise is sold, transferred or assigned, the transferee shall be subject to
all the conditions, terms, restrictions and limitations of this Decree as fully and completely and to
the same extent as if the franchise has been granted to the said person, firm, company,
corporation or other legal entity. (Emphasis supplied)
cralawlawlibrary

Petitioners insist that based on the above provisions, it is the President who should give personal
approval considering that the power to grant franchises was exclusively vested in Congress.
Hence, to allow the DOTC Secretary to exercise the power of approval would supposedly dilute
that legislative prerogative.

The argument of petitioners is founded on the assumption that PNCC in some way leased,
transferred, granted the usufruct of, sold, or assigned to SOMCO its franchise or the rights or
privileges PNCC had acquired by it. Here lies the error in petitioners’ stand. First, as discussed
above, the power to grant franchises or issue authorizations for the operation of a public utility is
not exclusively exercised by Congress. Second, except where the situation falls within that special
class that demands the exclusive and personal exercise by the President of constitutionally vested
power,117 the President acts through alter egos whose acts are as if the Chief Executive’s own.

Third, no lease, transfer, grant of usufruct, sale, or assignment of franchise by PNCC or its merger
with another company ever took place.

The creation of the TRB and the grant of franchise to PNCC were made in the light of the
recognition on the part of the government that the private sector had to be involved as an
alternative source of financing for the pursuance of national infrastructure projects. As the
franchise holder for the construction, maintenance and operation of infrastructure toll facilities,
PNCC was equipped with the right and privilege, but not necessarily the means, to undertake the
project. This is where joint ventures with private investors become necessary.

A joint venture is an association of companies jointly undertaking a commercial endeavor, with all
of them contributing assets and sharing risks, profits, and losses.118 It is hardly distinguishable
from a partnership considering that their elements are similar and, thus, generally governed by
the law on partnership.119cralawred

In joint ventures with investor companies, PNCC contributes the franchise it possesses, while the
partner contributes the financing – both necessary for the construction, maintenance, and
operation of the toll facilities. PNCC did not thereby lease, transfer, grant the usufruct of, sell, or
assign its franchise or other rights or privileges. This remains true even though the partnership
acquires a distinct and separate personality from that of the joint venturers or leads to the
formation of a new company that is the product of such joint venture, such as PSC and SOMCO
in this case.

Hence, when we say that the approval by the DOTC Secretary in this case was approval by the
President, it was not in connection with the franchise of PNCC, as required under Section 8 of
P.D. 1113 and Section 13 of P.D. 1894. Rather, the approval was in connection with the powers
of the TRB to enter into contracts on behalf of the government as provided under Section 3(a) of
P.D. 1112, which states:chanRoblesvirtualLawlibrary

SECTION 3. Powers and Duties of the Board. – The Board shall have in addition to its general
powers of administration the following powers and duties:

(a) Subject to the approval of the President of the Philippines, to enter into contracts in behalf
of the Republic of the Philippines with persons, natural or juridical, for the construction, operation
and maintenance of toll facilities such as but not limited to national highways, roads, bridges, and
public thoroughfares. Said contract shall be open to citizens of the Philippines and/or to
corporations or associations qualified under the Constitution and authorized by law to engage in
toll operations; (Emphasis supplied)
cralawlawlibrary

VI
Petitioners have not shown that the
transfer of toll operations to SOMCO was
grossly disadvantageous to the government.

In support of their contention that the transfer of toll operations from PSC to SOMCO was grossly
disadvantageous to the government, petitioners belittle the initial capital investment, private
ownership, and track record of SOMCO.

When one uses the term “grossly disadvantageous to the government,” the allegations in support
thereof must reflect the meaning accorded to the phrase. “Gross” means glaring, reprehensible,
culpable, flagrant, and shocking.120 It requires that the mere allegation shows that the
disadvantage on the part of the government is unmistakable, obvious, and certain.

In this case, we find that the allegations of petitioners are nothing more than speculations,
apprehensions, and suppositions. They speculate that with its “measly” capital investment,
SOMCO would not be able to cover the overhead expenses for personal services alone. They
fear that the revenue from toll operations would go to “private pockets” in exchange for a small
settlement amount to be given to PSC. Given that SOMCO has no proven track record, petitioners
deduce that its assumption of the toll operations would lead to poor delivery of toll services to the
public.

The aim in the establishment of toll facilities is to draw from private resources the financing of
government infrastructure projects. Naturally, these private investors would want to receive
reasonable return on their investments. Thus, the collection of toll fees for the use of public
improvements has been authorized, subject to supervision and regulation by the national
government.121 As regards the P320 million settlement given to PSC, the amount was to be used
principally for the payment of its liabilities of PSC arising from the retrenchment of its employees.
We note that under the MOA, the residual assets of PSC shall still be offered for sale to CMMTC,
subject to valuation.122 Thus, it would be inaccurate to say that PSC would receive only P320
million for the entire arrangement.

It is quite understandable that SOMCO does not yet have a proven track record in toll operations,
considering that it was only the ASTOA and the MOA that gave birth to it. We are not prepared to
rule that this lack of track record would result in poor delivery of toll services, especially because
most of the former employees of PSC have been rehired by SOMCO, an allegation of respondents
that was never refuted by petitioners. Neither are we prepared to take the amount of SOMCO’s
initial capital investment against it, as it is considerably higher than ?500,000, the authorized
capital stock of PSC as of 2002.123cralawred

A FINAL NOTE

R.A. 8975 prohibits lower courts from issuing any temporary restraining order, preliminary
injunction, or preliminary mandatory injunction against the government – or any of its subdivisions,
officials or any person or entity, whether public or private, acting under the government’s direction
– to restrain, prohibit or compel acts related to the implementation and completion of government
infrastructure projects.

The rationale for the law is easily discernible. Injunctions and restraining orders tend to derail the
expeditious and efficient implementation and completion of government infrastructure projects;
increase construction, maintenance and repair costs; and delay the enjoyment of the social and
economic benefits therefrom. Thus, unless the matter is of extreme urgency involving a
constitutional issue, judges of lower courts who shall issue injunctive writs or restraining orders in
violation of the law shall be administratively liable.

The law is clear that what is prohibited is merely the issuance of provisional orders enjoining the
implementation of a national government project. R.A. 8975 does not bar lower courts from
assuming jurisdiction over complaints that seek the nullification or implementation of a national
government infrastructure project as ultimate relief. 124cralawred

There is no question that the ultimate prayer in the instant case is the nullification of a national
government project considering that the ASTOA involved the design and construction of Stage 2
of the South Metro Manila Skyway, as well as the operation and maintenance of Stage 1 thereof.
The prayer is grounded on the contract’s alleged unconstitutionality, violation of the law, and gross
disadvantage to the government. Such principal action and relief were within the jurisdiction of
the RTC, which acted correctly when it ordered respondents to file their respective answers to the
complaint, even while it denied the prayer for the issuance of a writ of preliminary injunction and/or
temporary restraining order in observance of R.A. 8975.

It was therefore error on the part of petitioners to come directly before this Court for the sole
reason that the lower courts will not be able to grant the prayer for the issuance of a writ of
preliminary injunction and/or temporary restraining order to enjoin the assumption of toll
operations by SOMCO. The error even takes on a whole new meaning, because SOMCO
assumed responsibility for the operations and maintenance of the South Metro Manila Skyway at
10:00 p.m. on 31 December 2007. On the other hand, the complaint before the RTC seeking to
enjoin the assumption by SOMCO was filed only on 3 January 2008, while the instant petition was
filed on 4 February 2008.

As we held in Aznar Brothers Realty, Inc. v. CA,125 injunction does not lie when the act sought to
be enjoined has already become a fait accompli or an accomplished or consummated act.

Parties must observe the hierarchy of courts before seeking relief from this Court. Observance
thereof minimizes the imposition on the already limited time of this Court and prevents delay,
intended or otherwise, in the adjudication of cases.126 We do not appreciate the litigants’ practice
of directly seeking recourse before this Court, relying on the gravitas of a personality yet making
serious claims without the proof to support them.

WHEREFORE, the petition is DISMISSED. The prayer for the issuance of a writ of preliminary
injunction and/or temporary restraining order is DENIED.

SO ORDERED.cralawlawlibrary