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G.R. No. L-28120 November 25, 1976
RICARDO A. NAVA, petitioner-appellant.
vs.
PEERS MARKETING CORPORATION, RENATO R. CUSI and AMPARO CUSI, respondents-appellees.
Rolando M. Medalla, for appellant.
Jose Y. Montalvo, for appellees.
AQUINO, J:
This is a mandamus case, Teofilo Po as an incorporator subscribed to eighty shares of Peers Marketing
Corporation at one hundred pesos a share or a total par value of eight thousand pesos. Po paid two
thousand pesos or twenty-five percent of the amount of his subscription. No certificate of stock was issued
to him or, for that matter, to any incorporator, subscriber or stockholder.
On April 2, 1966 Po sold to Ricardo A. Nava for two thousand pesos twenty of his eighty shares. In the deed
of sale Po represented that he was "the absolute and registered owner of twenty shares" of Peers
Marketing Corporation.
Nava requested the officers of the corporation to register the sale in the books of the corporation. The
request was denied because Po has not paid fully the amount of his subscription. Nava was informed that
Po was delinquent in the payment of the balance due on his subscription and that the corporation had a
claim on his entire subscription of eighty shares which included the twenty shares that had been sold to
Nava.
On December 21, 1966 Nava filed this mandamus action in the Court of First Instance of Negros Occidental,
Bacolod City Branch to compel the corporation and Renato R. Cusi and Amparo Cusi, its executive vice-
president and secretary, respectively, to register the said twenty shares in Nava's name in the corporation's
transfer book.
The respondents in their answer pleaded the defense that no shares of stock against which the corporation
holds an unpaid claim are transferable in the books of the corporation.
After hearing, the trial court dismissed the petition. Nava appealed on the ground that the decision "is
contrary to law ". His sole assignment of error is that the trial court erred in applying the ruling in Fua Cun
vs. Summers and China Banking Corporation, 44 Phil. 705 to justify respondents' refusal in registering the
twenty shares in Nava's name in the books of the corporation.
The rule enunciated in the Fua Cun case is that payment of one-half of the subscription does not entitle the
subscriber to a certificate of stock for one-half of the number of shares subscribed.
Appellant Nava contends that the Fua Cun case was decided under section 36 of the Corporation Law
which provides that "no certificate of stock shall be issued to a subscriber as fully paid up until the full par
value thereof has been paid by him to the corporation". Section 36 was amended by Act No. 3518. It is now
section 37. Section 37 provides that "no certificate of stock shall be issued to a subscriber as fully paid up
until the full par value thereof, or the full subscription in case of no par stock, has been paid by him to the
corporation".
The issue is whether the officers of Peers Marketing Corporation can be compelled by mandamus to enter
in its stock and transfer book the sale made by Po to Nava of the twenty shares forming part of Po's
subscription of eighty shares, with a total par value of P8,000 and for which Po had paid only P2,000, it
being admitted that the corporation has an unpaid claim of P6,000 as the balance due on Po's subscription
and that the twenty shares are not covered by any stock certificate.
Apparently, no provision of the by-laws of the corporation covers that situation. The parties did not bother
to submit in evidence the by-laws nor invoke any of its provisions. The corporation can include in its by-
laws rules, not inconsistent with law, governing the transfer of its shares of stock (Sec. 137 , Act No. 1459;
Fleischer vs. Botica Nolasco Co., 47 Phil. 583, 589).
We hold that the transfer made by Po to Nava is not the "alienation, sale, or transfer of stock" that is
supposed to be recorded in the stock and transfer book, as contemplated in section 52 of the Corporation
Law.
As a rule, the shares which may be alienated are those which are covered by certificates of stock, as shown
in the following provisions of the Corporation Law and as intimated in Hager vs. Bryan,  19 Phil. 138
(overruling the decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil. 616, notes, and Hodges vs. Lezama, 14
SCRA 1030).
SEC. 35. The capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or the vice-president, countersigned by
the secretary or clerk 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 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 entered and noted upon 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, and the number of shares transferred.
No share of stock against which the corporation holds any unpaid claim shall be
transferable on the books of the corporation.
SEC. 36. (re voting trust agreement) ...
The certificates of stock so transferred shall be surrendered and cancelled, and
new certificates therefor issued to such person or persons, or corporation, as such
trustee or trustees, in which new certificates it shall appear that they are issued
pursuant to said agreement.
x x x           x x x          x x x
(Emphasis supplied).
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(In the case of nonstock corporations a membership certificate is usually issued. Lee E. Won vs. Wack Wack In the Baltazar case, it was held that where a stockholder subscribed to a certain number of shares with
Golf & Country Club, Inc., 104 Phil. 466; Wack Wack Golf & Country Club, Inc. vs. Won, L-23851, March 26, par value and he made a partial payment and was issued a certificate for the shares covered by his partial
1976, 70 SCRA 165). payment, he is entitled to vote the said shares, although he has not paid the balance of his subscription and
a call or demand had been made for the payment of the par value of the delinquent shares.

As prescribed in section 35, shares of stock may be transferred by delivery to the transferee of the
certificate properly indorsed. "Title may be vested in the transferee by delivery of the certificate with a As already stressed, in this case no stock certificate was issued to Po. Without stock certificate, which is the
written assignment or indorsement thereof" (18 C.J.S. 928). There should be compliance with the mode of evidence of ownership of corporate stock, the assignment of corporate shares is effective only between the
transfer prescribed by law (18 C.J.S. 930). parties to the transaction (Davis vs. Wachter, 140 So. 361).

The usual practice is for the stockholder to sign the form on the back of the stock certificate. The certificate The delivery of the stock certificate, which represents the shares to be alienated , is essential for the
may thereafter be transferred from one person to another. If the holder of the certificate desires to assume protection of both the corporation and its stockholders (Smallwood vs. Moretti, 128 So. 2d 628).
the legal rights of a shareholder to enable him to vote at corporate elections and to receive dividends, he
fills up the blanks in the form by inserting his own name as transferee. Then he delivers the certificate to
the secretary of the corporation so that the transfer may be entered in the corporation's books. The In view of the foregoing considerations, the trial court's judgment dismissing the petition for mandamus is
certificate is then surrendered and a new one issued to the transferee. (Hager vs. Bryan, 19 Phil. 138, 143- affirmed. Costs against the petitioner-appellant.
4).
SO ORDERED.
That procedure cannot be followed in the instant case because, as already noted, the twenty shares in
question are not covered by any certificate of stock in Po's name. Moreover, the corporation has a claim on
the said shares for the unpaid balance of Po's subscription. A stock subscription is a subsisting liability from
the time the subscription is made. The subscriber is as much bound to pay his subscription as he would be
to pay any other debt. The right of the corporation to demand payment is no less incontestable. (Velasco
vs. Poizat, 37 Phil. 802; Lumanlan vs. Cura, 59 Phil. 746).

A corporation cannot release an original subscriber from paying for his shares without a valuable
consideration (Philippine National Bank vs. Bitulok Sawmill, Inc.,
L-24177-85, June 29, 1968, 23 SCRA 1366) or without the unanimous consent of the stockholders (Lingayen
Gulf Electric Power Co., Inc. vs. Baltazar, 93 Phil 404).

Under the facts of this case, there is no clear legal duty on the part of the officers of the corporation to
register the twenty shares in Nava's name, Hence, there is no cause of action for mandamus. G.R. No. 126891 August 5, 1998

Nava argues that under section 37 a certificate of stock may be issued for shares the par value of which LIM TAY, petitioner,
have already been paid for although the entire subscription has not been fully paid. He contends that Peers vs.
Marketing Corporation should issue a certificate of stock for the twenty shares, notwithstanding that Po COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE OF ALFONSO LIM, respondents.
had not paid fully his subscription for the eighty shares, because section 37 requires full payment for the
subscription, as a condition precedent for the issuance of the certificate of stock, only in the case of no par
stock.

Nava relies on Baltazar v Lingayen Gulf Electric Power Co., Inc., L-16236-38, June 30, 1965, 14 SCRA 522,
where it was held that section 37 "requires as a condition before a shareholder can vote his shares that
his full subscription be paid in the case of no par value stock; and in case of stock corporation with par
value, the stockholder can vote the shares fully paid by him only, irrespective of the unpaid delinquent
shares".
There is no parallelism between this case and the Baltazar case. It is noteworthy that in the Baltazar case
the stockholder, an incorporator, was the holder of a certificate of stock for the shares the par value of
which had been paid by him. The issue was whether the said shares had voting rights although the
incorporator had not paid fully the total amount of his subscription. That is not the issue in this case.
PANGANIBAN, J.:
The duty of a corporate secretary to record transfers of stocks is ministerial. However, he cannot be
compelled to do so when the transferee's title to said shares has no  prima facie validity or is uncertain.
More specifically, a pledgor, prior to foreclosure and sale, does not acquire ownership rights over the
pledged shares and thus cannot compel the corporate secretary to record his alleged ownership of such
shares on the basis merely of the contract of pledge. Similarly, the SEC does not acquire jurisdiction over a
dispute when a party's claim to being a shareholder is, on the face of the complaint, invalid or inadequate
or is otherwise negated by the very allegations of such complaint. Mandamus will not issue to establish a
right, but only to enforce one that is already established.
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Statement of the Case PLEDGEE may be the purchaser at his option; and the
PLEDGEE is hereby authorized and empowered at his
option to transfer the said shares of stock on the books
There are the principles, used by this Court in resolving this Petition for Review on Certiorari before us, of the corporation to his own name and to hold the
assailing the October 24, 1996 Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40832, the dispositive certificate issued in lieu thereof under the terms of this
portion of which reads: pledge, and to sell the said shares to issue to him and to
apply the proceeds of the sale to the payment of the
IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench is DENIED DUE said sum and interest, in the manner hereinabove
COURSE and is hereby DISMISSED. With costs against the [p]etitioner. 3 provided;

By the foregoing disposition, the Court of Appeals effectively affirmed the March 7, 1996 Decision 4 of the 4. In the event of the foreclosure of this pledge and the
Securities and Exchange Commission (SEC) en banc: sale of the pledged certificate, any surplus remaining in
the hands of the PLEDGEE after the payment of the said
sum and interest, and the expenses, if any, connected
WHEREFORE, in view of all the foregoing, judgment is hereby rendered dismissing with the foreclosure sale, shall be paid by the PLEDGEE
the appeal on the ground that mandamus will only issue upon a clear showing of to the PLEDGOR;
ownership over the assailed shares of stock, [t]he determination of which, on the
basis of the foregoing facts, is within the jurisdiction of the regular courts and not
with the SEC. 5 5. Upon payment of the said amount and interest in full,
the PLEDGEE will, on demand of the PLEDGOR, redeliver
to him the said shares of stock by surrendering the
The SEC en banc upheld the August 16, 1993 Decision 6 of SEC Hearing Officer Rolando C. Malabonga, which certificate delivered to him by the PLEDGOR or by
dismissed the action for mandamus filed by petitioner. retransferring each share to the PLEDGOR, in the event
that the PLEDGEE, under the option hereby granted,
shall have caused such shares to be transferred to him
The Facts
upon the books of the issuing company."(idem, supra)

As found by the Court of Appeals, the facts of the case are as follows:
Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank
and delivered the same to the [p]etitioner. 7
. . . On January 8, 1980, Respondent-Appellee Sy Guiok secured a loan from the
[p]etitioner in the amount of P40,000 payable within six (6) months. To secure the
However, Respondent Guiok and Sy Lim failed to pay their respective loans and
payment of the aforesaid loan and interest thereon, Respondent Guiok executed
the accrued interests thereon to the [p]etitioner. In October, 1990, the
a Contract of Pledge in favor of the [p]etitioner whereby he pledged his three
[p]etitioner filed a "Petition for Mandamus" against Respondent Corporation,
hundred (300) shares of stock in the Go Fay & Company Inc., Respondent
with the SEC entitled "Lim Tay versus Go Fay & Company. Inc., SEC Case No.
Corporation, for brevity's sake. Respondent Guiok obliged himself to pay interest
03894", praying that:
on said loan at the rate of 10% per annum from the date of said contract of
pledge. On the same date, Alfonso Sy Lim secured a loan from the [p]etitioner in
the amount of P40,000 payable in six (6) months. To secure the payment of his PRAYER
loan, Sy Lim executed a "Contract of Pledge" covering his three hundred (300)
shares of stock in Respondent Corporation. Under said contract, Sy Lim obliged
himself to pay interest on his loan at the rate of 10% per annum from the date of WHEREFORE, premises considered, it is respectfully
the execution of said contract. prayed that an order be issued directing the corporate
secretary of [R]espondent Go Fay & Co., Inc. to register
the stock transfers and issue new certificates in favor of
Under said "Contracts of Pledge," Respondent[s] Guiok and Sy Lim Lim Tay. It is likewise prayed that [R]espondent Go Fay &
covenanted,  inter alia, that: Co., Inc[.] be ordered to pay all dividends due and
unclaimed on the said certificates to [P]laintiff Lim Tay.
3. In the event of the failure of the PLEDGOR to pay the
amount within a period of six (6) months from the date Plaintiff further prays for such other relief just and
hereof, the PLEDGEE is hereby authorized to foreclose equitable in the premises. (  page 34, Rollo)
the pledge upon the said shares of stock hereby created
by selling the same at public or private sale with or
without notice to the PLEDGOR, at which sale the
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The [p]etitioner alleged, inter alia, in his Petition that the controversy between
him as stockholder and the Respondent Corporation was intra-corporate in view
of the obstinate refusal of the corporate secretary of Respondent Corporation to
record the transfer of the shares of stock of Respondent Guiok and Sy Lim in favor
of and under the name of the [p]etitioner and to issue new certificates of stock to
the [p]etitioner.
The Respondent Corporation filed its Answer to the Complaint and alleged, as
Affirmative Defense, that:
AFFIRMATIVE DEFENSE
7. Respondent repleads and incorporates herein by
reference the foregoing allegations.
8. The Complaint states no cause of action against
[r]espondent.
9. Complainant is not a stockholder of [r]espondent.
Hence, the Honorable Commission has no jurisdiction to
enter the present controversy since their [sic] is no
intracorporate relationship between complainant and
respondent.
10. Granting arguendo that a pledge was constituted
over the shareholdings of Sy Guiok in favor of the
complainant and that the former defaulted in the
payment of his obligations to the latter, the same did
not automatically vest [i]n complainant ownership of the
pledged shares. (  pace 37, Rollo)
In the interim, Sy Lim died. Respondents Guiok and the Intestate Estate of Alfonso
Sy Lim, represented by Conchita Lim, filed their Answer-In-Intervention with the
SEC alleging, inter alia, that:
x x x           x x x          x x x
3. Deny specifically the allegation under paragraph 5 of
the Complaint that, failure to pay the loan within the
contract period automatically foreclosed the pledged
shares of stocks and that the share of stocks are
automatically purchased by the plaintiff, for being false
and distorted, the truth being that pursuant to the [sic]
paragraph 3 of the contract of pledges, Annexes "A" and
"B", it is clear that upon failure to pay the amount within
the stipulated period, the pledgee is authorized to
foreclose the pledge and thereafter, to sell the same to
satisfy the loan. [H]owever, to this point in time, plaintiff
has not performed any operative act of foreclosing the
shares of stocks of [i]ntervenors in accordance with the
Chattel Mortgage law, [n]either was there any sale of
stocks — by way of public or private auction — made
after foreclosure in favor of the plaintiff to speak about,
and therefore, the respondent company could not be
force[d] to [sic] by way of mandamus, to transfer the
subject shares of stocks from the name of your
[i]ntervenors to that of the plaintiff in the absence of
clear and legal basis for such;
4. DENY specifically the allegations under paragraphs 6,
7 and 8 of the complaint as to the existence of the
alleged intracorporate dispute between plaintiff and
company for being without proper and legal basis. In the
first place, plaintiff is not a stockholder of the
respondent corporation; there was no foreclosure of
shares executed in accordance with the Chattel
Mortgage Law whatsoever; there were no sales
consummated that would transfer to the plaintiff the
subject shares of stocks and therefore, any demand to
transfer the shares of stocks to the name of the plaintiff
has no legal basis. In the second place, [i]ntervenors had
been in the past negotiating possible compromise and at
the same time, had tendered payment of the loan
secured by the subject pledges but plaintiff refused
unjustifiably to oblige and accept payment o[r] even
agree on the computation of the principal amount of the
loan and interest on top of a substantial amount
offered just to settle and compromise the indebtedness
of [i]ntervenors;
II. SPECIAL AFFIRMATIVE DEFENSES
Intervenors replead by way of reference all the
foregoing allegations to form part of the special
affirmative defenses;
5. This Honorable Commission has no jurisdiction over
the person of the respondent and nature of the action,
plaintiff having no personality at all to compel
respondent by way of mandamus to perform certain
corporate function[s];
6. The complaint states no cause of action;
7. That respondent is not [a] real party in interest;
8. The appropriation of the subject shares of stocks by
plaintiff, without compliance with the formality of law,
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amounted to "[p]actum commis[s]orium" therefore, null
and void;
9. Granting for the sake of argument only that there was
a valid foreclosure and sale of the subject st[o]cks in
favor of the plaintiff — which [i]ntervenors deny — still
paragraph 5 of the contract allows redemption, for
which intervenors are willing to redeem the share of
stocks pledged;
10. Even the Chattel Mortgage law allowed redemption
of the [c]hattel foreclosed;
11. As a matter of fact, on several occasions,
[i]ntervenors had made representations with the
plaintiff for the compromise and settlement of all the
obligations secured by the subject pledges — even
offering to pay compensation over and above the value
of the obligations, interest[s] and dividends accruing to
the share of stocks but, plaintiff unjustly refused to
accept the offer of payment; (  pages 39-42, Rollo)
The [r]espondents-[i]ntervenors prayed the SEC that judgment be rendered in
their favor, as follows:
IV. PRAYER
It is respectfully prayed to this Honorable Commission
after due hearing, to dismiss the case for lack of merit,
ordering plaintiff to accept payment for the loans
secured by the subject shares of stocks and to pay
plaintiff:
1. The sum of P50,000.00, as moral damages;
2. the sum of P50,000.00, as attorneys fees; and,
3. costs of suit.
Other reliefs just and equitable [are] likewise prayed for.
(  pages 42-43,  Rollo)
After due proceedings, the [h]earing [o]fficer promulgated a Decision dismissing
[p]etitioner's Complaint on the ground that although the SEC had jurisdiction over
the action, pursuant to the Decision of the Supreme Court in the case of "Rural
Bank of Salinas, et al. vs. Court of Appeals, et al., 210 SCRA 510", he failed to
prove the legal basis for the secretary of the Respondent Corporation to be
compelled to register stock transfers in favor of the [p]etitioner and to issue new
certificates of stock under his name (  pages 67-77, Rollo). The [p]etitioner
appealed the Decision of the [h]earing [o]fficer to the SEC, but, on March 7, 1996,
the SEC promulgated a Decision, dismissing [p]etitioner's appeal on the grounds
that: (a) the issue between the [p]etitioner and the [r]espondents being one
involving the ownership of the shares of stock pledged by Respondent Guiok and
Sy Lim, the SEC had no jurisdiction over the action filed by the [p]etitioner; (b) the
latter had no cause of action for mandamus against the Respondent Corporation,
the right of ownership of the [p]etitioner over the 300 shares of stock pledged by
Respondent Guiok and Sy Lim not having been as yet, established, preparatory to
the institution of said Petition for Mandamus with the SEC.
Ruling of the Court of Appeals
On the issue of jurisdiction, the Court of Appeals ruled:
In ascertaining whether or not the SEC had exclusive jurisdiction over
[p]etitioner's action, the [a]ppellate [c]ourt must delve into and ascertain: (a)
whether or not there is a need to enlist the expertise and technical know-how of
the SEC in resolving the issue of the ownership of the shares of stock; (b) the
status of the relationships of the parties; [and] (c) the nature of the question that
is the subject of the controversy. Where the controversy is purely a civil matter
resoluble by civil law principles and there is no need for the application of the
expertise and technical know-how of the SEC, then the regular courts have
jurisdiction over the action. 8 [citations omitted]
On the issue of whether mandamus can be availed of by the petitioner, the Court of Appeals agreed with
the SEC, viz.:
. . . [T]he [p]etitioner failed to establish a clear and legal right to the writ of
mandamus prayed for by him. . . . Mandamus will not issue to enforce a right
which is in substantial dispute or to which a substantial doubt exists . . . . The
principal function of the writ of mandamus is to command and expedite, and not
to inquire and adjudicate and, therefore it is not the purpose of the writ to
establish a legal right, but to enforce one which has already been
established. 9 [citations omitted]
The Court of Appeals debunked petitioner's claim that he had acquired ownership over the shares by virtue
of novation, holding that respondents' indorsement and delivery of the shares were pursuant to Articles
2093 and 2095 of the Civil Code and that petitioner's receipt of dividends was in compliance with Article
2102 of the same Code. Petitioner's claim that he had acquired ownership of the shares by virtue of
prescription was likewise dismissed by Respondent Court in this wise:
The prescriptive period for the action of Respondent[s] Guiok and Sy Lim to
recover the shares of stock from the [p]etitioner accrued only from the time they
paid their loans and the interests thereon and [made] a demand for their
return. 10
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Hence, the petitioner brought before us this Petition for Review on Certiorari in accordance with Rule 45 of
the Rules of Court. 11
Assignment of Errors
Petitioner submits, for the consideration of this Court, these issues: 12
(a) Whether the Securities and Exchange Commission had jurisdiction over the
complaint filed by the petitioner; and
(b) Whether the petitioner is entitled to the relief of mandamus as against the
respondent Go Fay & Co., Inc.
In addition, petitioner contends that it has acquired ownership of the shares "through extraordinary
prescription," pursuant to Article 1132 of the Civil Code, and through respondents' subsequent acts, which
amounted to a novation of the contracts of pledge. Petitioner also claims that there was dacion en pago, in
which the shares of stock were deemed sold to petitioner, the consideration for which was the
extinguishment of the loans and the interests thereon. Petitioner likewise claims that laches bars
respondents from recovering the subject shares.
The Court's Ruling
The petition has no merit.
First Issue:  Jurisdiction of the SEC
Claiming that the present controversy is intra-corporate and falls within the exclusive jurisdiction of the
SEC, petitioner relies heavily on Abejo v. De la Cruz, 13 which upheld the jurisdiction of the SEC over a suit
filed by an unregistered stockholder seeking to enforce his rights. He also seeks support from Rural Bank of
Salinas, Inc. v. Court of Appeals, 14 which ruled that the right of a transferee or an assignee to have stocks
transferred to his name was an inherent right flowing from his ownership of the said stocks.
The registration of shares in a stockholder's name, the issuance of stock certificates, and the right to
receive dividends which pertain to the said shares are all rights that flow from ownership. The
determination of whether or not a shareholder is entitled to exercise the above-mentioned rights falls
within the jurisdiction of the SEC. However, if ownership of the shares is not clearly established and is still
unresolved at the time the action for mandamus is filed, then jurisdiction lies with the regular courts.
Sec. 5 of Presidential Decree No. 902-A sets forth the jurisdiction of the SEC as follows:
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities
and Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving:
(a) Devices or schemes employed by or any acts of the board of directors,
business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public and/or
of 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;
(c) Controversies in the election or appointment of directors, trustees, officers or
managers of such corporations, partnerships or associations.
(d) Petitions of corporations, partnerships or associations to be declared in the
state of suspension of payments in cases where the corporation, partnership or
association possesses property to cover all its debts but foresees the impossibility
of meeting them when they respectively fall due or in cases where the
corporation, partnership or association has no sufficient assets to cover its
liabilities, but is under the Management Committee created pursuant to this
decree. 15
Thus, a controversy "among stockholders, partners or associates themselves" 16 is intra-corporate in nature
and falls within the jurisdiction of the SEC.
As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by the
allegations in the complaint. 17 In the present case, however, petitioner's claim that he was the owner of
the shares of stock in question has no  prima facie basis.
In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he became the owner of the
shares when the term for the loans expired. The Complaint contained the following pertinent averments:
x x x           x x x          x x x
3. On [J]anuary 8, 1990, under a Contract of Pledge, Lim Tay received three
hundred (300) shares of stock of Go Fay & Co., Inc., from Sy Guiok as security for
the payment of a loan of [f]orty [t]housand [p]esos (P40,000.00) Philippine
currency, the sum of which was payable within six (6) months [with interest] at
ten percentum (10%) per annum from the date of the execution of the contract; a
copy of this Contract of Pledge is attached as Annex  "A" and made part hereof;
4. On the same date January 8, 1980, under a similar Contract of Pledge, Lim Tay
received three hundred (300) shares of stock of Go Pay & Co., Inc. from Alfonso Sy
Lim as security for the payment of a loan of [f]orty [t]housand [p]esos
(P40,000.00) Philippine currency, the sum of which was payable within six (6)
months [with interest] at ten percentum (10%) per annum from the date of the
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execution of the contract; a copy of this Contract of Pledge is attached as
Annex  "B" and made part hereof;
5. By the express terms of the agreements, upon failure of the borrowers to pay
the stated amounts within the contract period, the pledge is foreclosed and the
shares of stock are purchased by [p]laintiff, who is expressly authorized and
empowered to transfer the duly endorsed shares of stock on the books of the
corporation to his own name; . . . 18 (emphasis supplied)
However, the contracts of pledge, which were made integral parts of the Complaint, contain this common
proviso:
3. In the event of the failure of the PLEDGOR to pay the amount within a period of
six (6) months from the date hereof, the PLEDGEE is hereby authorized to
foreclose the pledge upon the said shares of stock hereby created by selling the
same at public or private sale with or without notice to the PLEDGOR, at which
sale the PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby
authorized and empowered at his option, to transfer the said shares of stock on
the books of the corporation to his own name and to hold the certificate issued in
lieu thereof under the terms of this pledge, and to sell the said shares to issue to
him and to apply the proceeds of the sale to the payment of the said sum and
interest, in the manner hereinabove provided;
This contractual stipulation, which was part of the Complaint, shows that plaintiff was merely  authorized to
foreclose the pledge upon maturity of the loans, not to own them. Such foreclosure is not automatic, for it
must be done in a public or private sale. Nowhere did the Complaint mention that petitioner had in fact
foreclosed the pledge and purchased the shares after such foreclosure. His status as a mere pledgee does
not, under civil law, entitle him to ownership of the subject shares. It is also noteworthy that petitioner's
Complaint did not aver that said shares were acquired through extraordinary prescription, novation or
laches. Moreover, petitioner's claim, subsequent to the filing of the Complaint, that he acquired ownership
of the said shares through these three modes is not indubitable and still has to be resolved. In fact, as will
be shown, such allegation-has no merit. Manifestly, the Complaint by itself did not contain any  prima
facie showing that petitioner was the owner of the shares of stocks. Quite the contrary, it demonstrated
that he was merely a pledgee, not an owner. Accordingly, it failed to lay down a sufficient basis for the SEC
to exercise jurisdiction over the controversy. In fact, the very allegations of the Complaint and its annexes
negated the jurisdiction of the SEC.
Petitioner's reliance on the doctrines set forth in Abejo v. De la Cruz and Rural Bank of Salinas, Inc. v. Court
of Appeals is misplaced. In Abejo, he Abejo spouses sold to Telectronic Systems, Inc. shares of stock in
Pocket Bell Philippines, Inc. Subsequent to such contract of sale, the corporate secretary, Norberto Braga,
refused to record the transfer of the shares in the corporate books and instead asked for the annulment of
the sale, claiming that he and his wife had a preemptive right over some of the shares, and that his wife's
shares were sold without consideration or consent.
At the time the Bragas questioned the validity of the sale, the contract had already been perfected, thereby
demonstrating that Telectronic Systems, Inc. was already the  prima facie owner of the shares and,
consequently, a stockholder of Pocket Bell Philippines, Inc. Even if the sale were to be annulled later on,
Telectronic Systems, Inc. had, in the meantime, title over the shares from the time the sale was perfected
until the time such sale was annulled. The effects of an annulment operate prospectively and do not, as a
rule, retroact to the time the sale was made. Therefore, at the time the Bragas questioned the validity of
the tranfers made by the Abejos, Telectronic Systems, Inc. was already a  prima facie shareholder of the
corporation, thus making the dispute between the Bragas and the Abejos "intra-corporate" in nature.
Hence, the Court held that "the issue is not on ownership of shares but rather the non-performance by the
corporate secretary of the ministerial duty of recording transfers of shares of stock of the corporation of
which he is secretary." 19
Unlike Abejo, however, petitioner's ownership over the shares in this case was not yet perfected when the
Complaint was filed. The contract of pledge certainly does not make him the owner of the shares pledged.
Further, whether prescription effectively transferred ownership of the shares, whether there was a
novation of the contracts of pledge, and whether laches had set in were difficult legal issues, which were
unpleaded and unresolved when herein petitioner asked the corporate secretary of Go Fay to effect the
transfer, in his favor, of the shares pledged to him.
In Rural Bank of Salinas, Melenia Guerrero executed deeds of assignment for the shares in favor of the
respondents in that case. When the corporate secretary refused to register the transfer, an action for
mandamus was instituted. Subsequently, a motion for intervention was filed, seeking the annulment of the
deeds of assignment on the grounds that the same were fictitious and antedated, and that they were in
fact donations because the considerations therefor were below the book value of the shares.
Like the Abejo spouses, the respondents in Rural Bank of Salinas were already  prima facie shareholders
when the deeds of assignment were questioned. If the said deeds were to be annulled later on,
respondents would still be considered shareholders of the corporation from the time of the assignment
until the annulment of such contracts.
Second Issue: Mandamus Will Not
Issue to Establish a Right
Petitioner prays for the issuance of a writ of mandamus, directing the corporate secretary of respondent
corporation to have the shares transferred to his name in the corporate books, to issue new certificates of
stock and to deliver the corresponding dividends to him. 20
In order that a writ of mandamus may issue, it is essential that the person petitioning for the same has a
clear legal right to the thing demanded and that it is the imperative duty of the respondent to perform the
act required. It neither confers powers nor imposes duties and is never issued in doubtful cases. It is simply
a command to exercise a power already possessed and to perform a duty already imposed. 21
In the present case, petitioner has failed to establish a clear legal right. Petitioner's contention that he is
the owner of the said shares is completely without merit. Quite the contrary and as already shown, he does
not have any ownership rights at all. At the time petitioner instituted his suit at the SEC, his ownership
claim had no  prima facie leg to stand on. At best, his contention was disputable and uncertain Mandamus
will not issue to establish a legal right, but only to enforce one that is already clearly established.
Without Foreclosure and
Purchase at Auction, Pledgor
Is Not the Owner of Pledged Shares
Petitioner initially argued that ownership of the shares pledged had passed to him, upon Respondents Sy
Guiok and Sy Lim's failure to pay their respective loans. But on appeal, petitioner claimed that ownership
8
over the shares had passed to him, not via the contracts of pledge, but by virtue of prescription and by
respondents' subsequent acts which amounted to a novation of the contracts of pledge. We do not agree.
At the outset, it must be underscored that petitioner did not acquire ownership of the shares by virtue of
the contracts of pledge. Article 2112 of the Civil Code states:
The creditor to whom the credit has not been satisfied in due time, may proceed
before a Notary Public to the sale of the thing pledged. This sale shall be made at
a public auction, and with notification to the debtor and the owner of the thing
pledged in a proper case, stating the amount for which the public sale is to be
held. If at the first auction the thing is not sold, a second one with the same
formalities shall be held; and if at the second auction there is no sale either, the
creditor may appropriate the thing pledged. In this case he shall be obliged to give
an acquittance for his entire claim.
Furthermore, the contracts of pledge contained a common proviso, which we quote again for the sake of
clarity:
3. In the event of the failure of the PLEDGOR to pay the amount within a period of
six (6) months from the date hereof, the PLEDGEE is hereby authorized to
foreclose the pledge upon the said shares of stock hereby created by selling the
same at public or private sale with or without notice to the PLEDGOR, at which
sale the PLEDGEE may be the purchaser at his option; and "the PLEDGEE is hereby
authorized and empowered at his option to transfer the said shares of stock on
the books of the corporation to his own name, and to hold the certificate issued
in lieu thereof under the terms of this pledge, and to sell the said shares to issue
to him and to apply the proceeds of the sale to the payment of the said sum and
interest, in the manner hereinabove
provided; 22
There is no showing that petitioner made any attempt to foreclose or sell the shares through public or
private auction, as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code.
Therefore, ownership of the shares could not have passed to him. The pledgor remains the owner during
the pendency of the pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the
same Code:
Unless the thing pledged is expropriated, the debtor continues to be the owner
thereof.
Nevertheless, the creditor may bring the actions which pertain to the owner of
the thing pledged in order to recover it from, or defend it against a third person.
No Ownership
by Prescription
Petitioner did not acquire the shares by prescription either. The period of prescription of any cause of
action is reckoned only from the date the cause of action accrued.
Since a cause of action requires as an essential element not only a legal right of the plaintiff and a
correlative obligation of the defendant, but also an act or omission of the defendant in violation of said
legal right, the cause of action does not accrue until the party obligated refuses, expressly or impliedly, to
comply with its duty." 23 Accordingly, a cause of action on a written contract accrues when a breach or
violation thereof occurs.
Under the contracts of pledge, private respondents would have a right to ask for the redelivery of their
certificates of stock upon payment of their debts to petitioner, consonant with Article 2105 of the Civil
Code, which reads:
The debtor cannot ask for the return of the thing pledged against the will of the
creditor, unless and until he has paid the debt and its interest, with expenses in a
proper case. 24
Thus, the right to recover the shares based on the written contract of pledge between petitioner and
respondents would arise only upon payment of their respective loans. Therefore, the prescriptive period
within which to demand the return of the thing pledged should begin to run only after the payment of the
loan and a demand for the thing has been made, because it is only then that respondents acquire a cause
of action for the return of the thing pledged.
Prescription should not begin to run on the action to demand the return of the thing pledged while the
loan still exists. This is because the right to ask for the return of the thing pledged will not arise so long as
the loan subsists. In the present case, the prescriptive period did not begin to run when the loan became
due. On the other hand, it is petitioner's right to demand payment that may be in danger of prescription.
Petitioner contends that he can be deemed to have acquired ownership over the certificates of stock
through extraordinary prescription, as provided for in Article 1132 of the Civil Code which states:
Art. 1132. The ownership of movables prescribes through uninterrupted
possession for four years in good faith.
The ownership of personal property also prescribes through uninterrupted
possession for eight years, without need of any other condition. . . . .
Petitioner's argument is untenable. What is required by Article 1132 is possession in the concept of an
owner. In the present case, petitioner's possession of the stock certificates came about because they were
delivered to him pursuant to the contracts of pledge. His possession as a pledgee cannot ripen into
ownership by prescription. As aptly pointed out by Justice Jose C. Vitug:
Acquisitive prescription is a mode of acquiring ownership by a possessor through
the requisite lapse of time. In order to ripen into ownership, possession must be
in the concept of an owner, public, peaceful and uninterrupted. Thus, possession
with a juridical title, such as by a usufructory, a trustee, a lessee, agent or a
pledgee, not being in the concept of an owner, cannot ripen into ownership by
acquisitive prescription unless the juridical relation is first expressly repudiated
and such repudiation has been communicated to the other party. 25
9
Petitioner expressly repudiated the pledge, only when he filed his Complaint and claimed that he was not a
mere pledgee, but that he was already the owner of the shares. Based on the foregoing, petitioner has not
acquired the certificates of stock through extraordinary prescription.
No Novation
in Favor of Petitioner
Neither did petitioner acquire the shares by virtue of a novation of the contract of pledge. Novation is
defined as "the extinguishment of an obligation by a subsequent one which terminates it, either by
changing its object or principal conditions, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor." 26 Novation of a contract must not be presumed.
"In the absence of an express agreement, novation takes place only when the old and the new obligations
are incompatible on every point." 27
In the present case, novation cannot be presumed by (a) respondents' indorsement and delivery of the
certificates of stock covering the 600 shares, (b) petitioner's receipt of dividends from 1980 to 1983, and (c)
the fact that respondents have not instituted any action to recover the shares since 1980.
Respondents' indorsement and delivery of the certificates of stock were pursuant to paragraph 2 of the
contract of pledge which reads:
2. The said certificates had been delivered by the PLEDGOR endorsed in blank to
be held by the PLEDGEE under the pledge as security for the payment of the
aforementioned sum and interest thereon
accruing. 28
This stipulation did not effect the transfer of ownership to petitioner. It was merely in compliance with
Article 2093 of the Civil Code, 29 which requires that the thing pledged be placed in the possession of the
creditor or a third person of common agreement; and Article 2095, 30 which states that if the thing pledged
are shares of stock, then the "instrument proving the right pledged" must be delivered to the creditor.
Moreover, the fact that respondents allowed the petitioner to receive dividends pertaining to the shares
was not meant to relinquish ownership thereof. As stated by respondent corporation, the same was done
pursuant to an agreement between the petitioner and Respondents Sy Guiok and Sy Lim, following Article
2102 of the civil Code which provides:
It the pledge earns or produces fruits, income, dividends, or interests, the creditor
shall compensate what he receives with those which are owing him; but if none
are owing him, or insofar as the amount may exceed that which is due, he shall
apply it to the principal. Unless there is a stipulation to the contrary, the pledge
shall extend to the interest and the earnings of the right pledged.
Novation cannot be inferred from the mere fact that petitioner has not, since 1980, instituted any action to
recover the shares. Such action is in fact premature, as the loan is still outstanding. Besides, as already
pointed out, novation is never presumed or inferred.
No Dacion en Pago
in Favor of Petitioner
Neither can there be dacion en pago, in which the certificates of stock are deemed sold to petitioner, the
consideration for which is the extinguishment of the loans and the accrued interests thereon. Dacion en
pago is a form of novation in which a change takes place in the object involved in the original contract.
Absent an explicit agreement, petitioner cannot simply presume dacion en pago.
Laches Not
a Bar to Petitioner
Petitioner submits that "the inaction of the individual respondents with respect to the recovery of the
shares of stock serves to bar them from asserting rights over said shares on the basis of laches." 31
Laches has been defined as "the failure or neglect, for an unreasonable length of time, to do that which by
exercising due diligence could or should have been done earlier; it is negligence or omission to assert a
right within a reasonable time, warranting a presumption that the party entitled to assert it either has
abandoned it or declined to assert it." 32
In this case, it is in fact petitioner who may be guilty of laches. Petitioner had all the time to demand
payment of the debt. More important, under the contracts of pledge, petitioner could have foreclosed the
pledges as soon as the loans became due. But for still unknown or unexplained reasons, he failed to do so,
preferring instead to pursue his baseless claim to ownership.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. Costs against
petitioner.
SO ORDERED.
G.R. No. 124535            September 28, 2001
THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS, BERNARDO BAUTISTA, JAIME
CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO CUSTODIO, and JUANITA BAUTISTA OF THE RURAL BANK OF
LIPA CITY, INC., petitioners,
vs.
HONORABLE COURT OF APPEALS, HONORABLE COMMISSION EN BANC, SECURITIES AND EXCHANGE
COMMISSION, HONORABLE ENRIQUE L. FLORES, JR., in his capacity as Hearing Officer, REYNALDO
VILLANUEVA, SR, AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES GONZALES, AURORA
LACERNA, CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN and ELENA USI, respondents.
YNARES-SANTIAGO, J.:
Before us is a petition for review on certiorari assailing the Decision of the Court of Appeals dated February
27, 1996, as well as the Resolution dated March 29, 1996, in CA-G.R. SP No. 38861.
10

The instant controversy arose from a dispute between the Rural Bank of Lipa City, Incorporated In their joint Answer,7 the respondents therein raised the following defenses:
(hereinafter referred to as the Bank), represented by its officers and members of its Board of Directors, and
certain stockholders of the said bank. The records reveal the following antecedent facts:
1) The petitioners have no legal capacity to sue;

Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City, executed a Deed
of Assignment,1 wherein he assigned his shares, as well as those of eight (8) other shareholders under his 2) The petition states no cause of action;
control with a total of 10,467 shares, in favor of the stockholders of the Bank represented by its directors
Bernardo Bautista, Jaime Custodio and Octavio Katigbak. Sometime thereafter, Reynaldo Villanueva, Sr. 3) The complaint is insufficient;
and his wife, Avelina, executed an Agreement2 wherein they acknowledged their indebtedness to the Bank
in the amount of Four Million Pesos (P4,000,000.00), and stipulated that said debt will be paid out of the
proceeds of the sale of their real property described in the Agreement. 4) The petitioners' claims had already been paid, waived, abandoned, or otherwise
extinguished;

At a meeting of the Board of Directors of the Bank on November 15, 1993, the Villanueva spouses assured
the Board that their debt would be paid on or before December 31 of that same year; otherwise, the Bank 5) The petitioners are estopped from challenging the conversion of their shares.
would be entitled to liquidate their shareholdings, including those under their control. In such an event,
should the proceeds of the sale of said shares fail to satisfy in full the obligation, the unpaid balance shall
Petitioners, respondents therein, thus moved for the lifting of the temporary restraining order and the
be secured by other collateral sufficient therefor.
dismissal of the petition for lack of merit, and for the upholding of the validity of the stockholders' meeting
and election of directors and officers held on January 15, 1994. By way of counterclaim, petitioners prayed
When the Villanueva spouses failed to settle their obligation to the Bank on the due date, the Board sent for actual, moral and exemplary damages.
them a letter3 demanding: (1) the surrender of all the stock certificates issued to them; and (2) the delivery
of sufficient collateral to secure the balance of their debt amounting to P3,346,898.54. The Villanuevas
On April 6, 1994, the Villanuevas' application for the issuance of a writ of preliminary injunction was denied
ignored the bank's demands, whereupon their shares of stock were converted into Treasury Stocks. Later,
by the SEC Hearing Officer on the ground of lack of sufficient basis for the issuance thereof. However, a
the Villanuevas, through their counsel, questioned the legality of the conversion of their shares. 4
motion for reconsideration8 was granted on December 16, 1994, upon finding that since the Villanuevas'
have not disposed of their shares, whether voluntarily or involuntarily, they were still stockholders entitled
On January 15, 1994, the stockholders of the Bank met to elect the new directors and set of officers for the to notice of the annual stockholders' meeting was sustained by the SEC. Accordingly, a writ of preliminary
year 1994. The Villanuevas were not notified of said meeting. In a letter dated January 19, 1994, Atty. injunction was issued enjoining the petitioners from acting as directors and officers of the bank. 9
Amado Ignacio, counsel for the Villanueva spouses, questioned the legality of the said stockholders'
meeting and the validity of all the proceedings therein. In reply, the new set of officers of the Bank
Thereafter, petitioners filed an urgent motion to quash the writ of preliminary injunction,10 challenging the
informed Atty. Ignacio that the Villanuevas were no longer entitled to notice of the said meeting since they
propriety of the said writ considering that they had not yet received a copy of the order granting the
had relinquished their rights as stockholders in favor of the Bank.
application for the writ of preliminary injunction.

Consequently, the Villanueva spouses filed with the Securities and Exchange Commission (SEC), a petition
With the impending 1995 annual stockholders' meeting only nine (9) days away, the Villanuevas filed an
for annulment of the stockholders' meeting and election of directors and officers on January 15, 1994, with
Omnibus Motion11 praying that the said meeting and election of officers scheduled on January 14, 1995 be
damages and prayer for preliminary injunction5 , docketed as SEC Case No. 02-94-4683. Joining them as co-
suspended or held in abeyance, and that the 1993 Board of Directors be allowed, in the meantime, to act
petitioners were Catalino Villanueva, Andres Gonzales, Aurora Lacerna, Celso Laygo, Edgardo Reyes,
as such. One (1) day before the scheduled stockholders meeting, the SEC Hearing Officer granted the
Alejandro Tonogan, and Elena Usi. Named respondents were the newly-elected officers and directors of the
Omnibus Motion by issuing a temporary restraining order preventing petitioners from holding the
Rural Bank, namely: Bernardo Bautista, Jaime Custodio, Octavio Katigbak, Francisco Custodio and Juanita
stockholders meeting and electing the board of directors and officers of the Bank. 12
Bautista.

A petition for Certiorari and Annulment with Damages was filed by the Rural Bank, its directors and officers
The Villanuevas' main contention was that the stockholders' meeting and election of officers and directors
before the SEC en banc,13 naming as respondents therein SEC Hearing Officer Enrique L. Flores, Jr., and the
held on January 15, 1994 were invalid because: (1) they were conducted in violation of the by-laws of the
Villanuevas, erstwhile petitioners in SEC Case No. 02-94-4683. The said petition alleged that the orders
Rural Bank; (2) they were not given due notice of said meeting and election notwithstanding the fact that
dated December 16, 1994 and January 13, 1995, which allowed the issuance of the writ of preliminary
they had not waived their right to notice; (3) they were deprived of their right to vote despite their being
injunction and prevented the bank from holding its 1995 annual stockholders' meeting, respectively, were
holders of common stock with corresponding voting rights; (4) their names were irregularly excluded from
issued by the SEC Hearing Officer with grave abuse of discretion amounting to lack or excess of jurisdiction.
the list of stockholders; and (5) the candidacy of petitioner Avelina Villanueva for directorship was
Corollarily, the Bank, its directors and its officers questioned the SEC Hearing Officer's right to restrain the
arbitrarily disregarded by respondent Bernardo Bautista and company during the said meeting
stockholders' meeting and election of officers and directors considering that the Villanueva spouses and
the other petitioners in SEC Case No. 02-94-4683 were no longer stockholders with voting rights, having
On February 16, 1994, the SEC issued a temporary restraining order enjoining the respondents, petitioners already assigned all their shares to the Bank.
herein, from acting as directors and officers of the Bank, and from performing their duties and functions as
such.6
11
In their Comment/Opposition, the Villanuevas and other private respondents argued that the filing of the
petition for certiorari was premature and there was no grave abuse of discretion on the part of the SEC
Hearing Officer, nor did he act without or in excess of his jurisdiction.
On June 7, 1995, the SEC en banc denied the petition for certiorari in an Order,14 which stated:
In the case now before us, petitioners could not show any proof of despotic or arbitrary
exercise of discretion committed by the hearing officer in issuing the assailed orders save and
except the allegation that the private respondents have already transferred their
stockholdings in favor of the stockholders of the Bank. This, however, is the very issue of the
controversy in the case a quo and which, to our mind, should rightfully be litigated and proven
before the hearing officer. This is so because of the undisputed fact the (sic) private
respondents are still in possession of the stock certificates evidencing their stockholdings and
as held by the Supreme Court in Embassy Farms, Inc. v. Court of Appeals, et al., 188 SCRA 492,
citing Nava v. Peers Marketing Corp., the non-delivery of the stock certificate does not make
the transfer of the shares of stock effective. For an effective transfer of stock, the mode of
transfer as prescribed by law must be followed.
We likewise find that the provision of the Corporation Code cited by the herein petitioner,
particularly Section 83 thereof, to support the claim that the private respondents are no longer
stockholders of the Bank is misplaced. The said law applies to acquisition of shares of stock by
the corporation in the exercise of a stockholder's right of appraisal or when the said
stockholder opts to dissent on a specific corporate act in those instances provided by law and
demands the payment of the fair value of his shares. It does not contemplate a "transfer"
whereby the stockholder, in the exercise of his right to dispose of his shares (jus disponendi)
sells or assigns his stockholdings in favor of another person where the provisions of Section 63
of the same Code should be complied with.
The hearing officer, therefore, had a basis in issuing the questioned orders since the private
respondents' rights as stockholders may be prejudiced should the writ of injunction not be
issued. The private respondents are presumably stockholders of the Bank in view of the fact
that they have in their possession the stock certificates evidencing their stockholdings. Until
proven otherwise, they remain to be such and the hearing officer, being the one directly
confronted with the facts and pieces of evidence in the case, may issue such orders and
resolutions which may be necessary or reasonable relative thereto to protect their rights and
interest in the meantime that the said case is still pending trial on the merits.
A subsequent motion for reconsideration15 was likewise denied by the SEC en banc in a Resolution16 dated
September 29, 1995.
A petition for review was thus filed before the Court of Appeals, which was docketed as CA-G.R. SP No.
38861, assailing the Order dated June 7, 1995 and the Resolution dated September 29, 1995 of the SEC en
banc in SEC EB No. 440. The ultimate issue raised before the Court of Appeals was whether or not the
SEC en banc erred in finding:
1. That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did not commit any grave abuse
of discretion that would warrant the filing of a petition for certiorari;
2. That the private respondents are still stockholders of the subject bank and further stated
that "it does not contemplate a transfer" whereby the stockholders, in the exercise of his right
to dispose of his shares (Jus Disponendi) sells or assigns his stockholdings in favor of another
person where the provisions of Sec. 63 of the same Code should be complied with; and
3. That the private respondents are presumably stockholders of the bank in view of the fact
that they have in their possession the stock certificates evidencing their stockholdings.
On February 27, 1996, the Court of Appeals rendered the assailed Decision 17 dismissing the petition for
review for lack of merit. The appellate court found that:
The public respondent is correct in holding that the Hearing Officer did not commit grave
abuse of discretion. The officer, in exercising his judicial functions, did not exercise his
judgment in a capricious, whimsical, arbitrary or despotic manner. The questioned Orders
issued by the Hearing Officer were based on pertinent law and the facts of the case.
Section 63 of the Corporation Code states: "x x x Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates indorsed by the
owner x x x. No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation so as to show the names of the parties to
the transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred."
In the case at bench, when private respondents executed a deed of assignment of their shares
of stocks in favor of the Stockholders of the Rural Bank of Lipa City, represented by Bernardo
Bautista, Jaime Custodio and Octavio Katigbak, title to such shares will not be effective unless
the duly indorsed certificate of stock is delivered to them. For an effective transfer of shares of
stock, the mode and manner of transfer as prescribed by law should be followed. Private
respondents are still presumed to be the owners of the shares and to be stockholders of the
Rural Bank.
We find no reversible error in the questioned orders.
Petitioners' motion for reconsideration was likewise denied by the Court of Appeals in an Order 18 dated
March 29, 1996.
Hence, the instant petition for review seeking to annul the Court of Appeals' decision dated February 27,
1996 and the resolution dated March 29, 1996. In particular, the decision is challenged for its ruling that
notwithstanding the execution of the deed of assignment in favor of the petitioners, transfer of title to such
shares is ineffective until and unless the duly indorsed certificate of stock is delivered to them. Moreover,
petitioners faulted the Court of Appeals for not taking into consideration the acts of disloyalty committed
by the Villanueva spouses against the Bank.
We find no merit in the instant petition.
The Court of Appeals did not err or abuse its discretion in affirming the order of the SEC en banc, which in
turn upheld the order of the SEC Hearing Officer, for the said rulings were in accordance with law and
jurisprudence.
12

The Corporation Code specifically 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 stocks 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.
No shares of stock against which the corporation holds any unpaid claim shall be transferable
in the books of the corporation. (Emphasis ours)
19
Petitioners argue that by virtue of the Deed of Assignment,  private respondents had relinquished to them
any and all rights they may have had as stockholders of the Bank. While it may be true that there was an
assignment of private respondents' shares to the petitioners, said assignment was not sufficient to effect
the transfer of shares since there was no endorsement of the certificates of stock by the owners, their
attorneys-in-fact or any other person legally authorized to make the transfer. Moreover, petitioners admit
that the assignment of shares was not coupled with delivery, the absence of which is a fatal defect. The
rule is that the delivery of the stock certificate duly endorsed by the owner is the operative act of transfer
of shares from the lawful owner to the transferee. 20 Thus, title may be vested in the transferee only by
delivery of the duly indorsed certificate of stock.21
To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect their directors, the
temporary restraining order issued by the SEC Hearing Officer on January 13, 1995 must be lifted. However,
private respondents shall be notified of the meeting and be allowed to exercise their rights as stockholders
thereat.
While this case was pending, Republic Act No. 879924 was enacted, transferring to the courts of general
jurisdiction or the appropriate Regional Trial Court the SEC's jurisdiction over all cases enumerated under
Section 5 of Presidential Decree No. 902-A.25 One of those cases enumerated is any controversy "arising out
of intra-corporate or partnership relations, between and among stockholders, members, or associates,
between any and/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."
The instant controversy clearly falls under this category of cases which are now cognizable by the Regional
Trial Court.
Pursuant to Section 5.2 of R.A. No. 8799, this Court designated specific branches of the Regional Trial
Courts to try and decide cases formerly cognizable by the SEC. For the Fourth Judicial Region, specifically in
the Province of Batangas, the RTC of Batangas City, Branch 32 is the designated court. 26
WHEREFORE, in view of all the foregoing, the instant petition for review on certiorari is DENIED. The
Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 38861 are hereby AFFIRMED. The case is
ordered REMANDED to the Regional Trial Court of Batangas City, Branch 32, for proper disposition. The
temporary restraining order issued by the SEC Hearing Officer dated January 13, 1995 is ordered LIFTED.
SO ORDERED.

We have uniformly held that for a valid transfer of stocks, there must be strict compliance with the mode
of transfer prescribed by law.22 The requirements are: (a) There must be delivery of the stock certificate: (b) G.R. NO. 139802           December 10, 2002
The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to
make the transfer; and (c) To be valid against third parties, the transfer must be recorded in the books of VICENTE C. PONCE, petitioner,
the corporation. As it is, compliance with any of these requisites has not been clearly and sufficiently vs.
shown. ALSONS CEMENT CORPORATION, and FRANCISCO M. GIRON, JR., respondents.

It may be argued that despite non-compliance with the requisite endorsement and delivery, the DECISION
assignment was valid between the parties, meaning the private respondents as assignors and the
petitioners as assignees. While the assignment may be valid and binding on the petitioners and private
respondents, it does not necessarily make the transfer effective. Consequently, the petitioners, as mere QUISUMBING, J.:
assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted for, and will not be entitled
to dividends, insofar as the assigned shares are concerned Parenthetically, the private respondents cannot,
This petition for review seeks to annul the decision1 of the Court of Appeals, in CA-G.R. SP No. 46692, which
as yet, be deprived of their rights as stockholders, until and unless the issue of ownership and transfer of
set aside the decision2 of the Securities and Exchange Commission (SEC) En Banc in SEC-AC No. 545 and
the shares in question is resolved with finality.
reinstated the order3 of the Hearing Officer dismissing herein petitioner’s complaint. Also assailed is the
CA’s resolution4 of August 10, 1999, denying petitioner’s motion for reconsideration.
There being no showing that any of the requisites mandated by law23 was complied with, the SEC Hearing
Officer did not abuse his discretion in granting the issuance of the preliminary injunction prayed for by
On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed a complaint5 with the SEC for
petitioners in SEC Case No. 02-94-4683 (herein private respondents). Accordingly, the order of the SEC en
mandamus and damages against defendants (now respondents) Alsons Cement Corporation and its
banc affirming the ruling of the SEC Hearing Officer, and the Court of Appeals decision upholding the
corporate secretary Francisco M. Giron, Jr. In his complaint, petitioner alleged, among others, that:
SEC en banc order, are valid and in accordance with law and jurisprudence, thus warranting the denial of
the instant petition for review.
xxx
13
5. The late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), having
subscribed to and fully paid 239,500 shares of said corporation.
6. On February 8, 1968, plaintiff and Fausto Gaid executed a "Deed of Undertaking" and
"Indorsement" whereby the latter acknowledges that the former is the owner of said shares
and he was therefore assigning/endorsing the same to the plaintiff. A copy of the said
deed/indorsement is attached as Annex "A".
7. On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for brevity).
8. On October 22, 1990, FCC was renamed Alsons Cement Corporation (ACC for brevity) as
shown by the Amended Articles of Incorporation of ACC, a copy of which is attached as Annex
"B".
9. From the time of incorporation of VCC up to the present, no certificates of stock
corresponding to the 239,500 subscribed and fully paid shares of Gaid were issued in the name
of Fausto G. Gaid and/or the plaintiff.
10. Despite repeated demands, the defendants refused and continue to refuse without any
justifiable reason to issue to plaintiff the certificates of stocks corresponding to the 239,500
shares of Gaid, in violation of plaintiff’s right to secure the corresponding certificate of stock in
his name.6
Attached to the complaint was the Deed of Undertaking and Indorsement 7 upon which petitioner based his
petition for mandamus. Said deed and indorsement read as follows:
DEED OF UNDERTAKING
KNOW ALL MEN BY THESE PRESENTS:
I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid with Victory Cement Corporation
in the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED (P239,500.00) PESOS and
that Fausto Gaid does not have any liability whatsoever on the subscription agreement in favor of Victory
Cement Corporation.
(SGD.) VICENTE C. PONCE
February 8, 1968
CONFORME:
(SGD.) FAUSTO GAID
INDORSEMENT
I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED
(239,500.00) stocks of Victory Cement Corporation to VICENTE C. PONCE.
(SGD.) FAUSTO GAID
With these allegations, petitioner prayed that judgment be rendered ordering respondents (a) to issue in
his name certificates of stocks covering the 239,500 shares of stocks and its legal increments and (b) to pay
him damages.8
Instead of filing an answer, respondents moved to dismiss the complaint on the grounds that: (a) the
complaint states no cause of action; mandamus is improper and not available to petitioner; (b) the
petitioner is not the real party in interest; (c) the cause of action is barred by the statute of limitations; and
(d) in any case, the petitioner’s cause of action is barred by laches. 9 They argued, inter alia, that there being
no allegation that the alleged "INDORSEMENT" was recorded in the books of the corporation, said
indorsement by Gaid to the plaintiff of the shares of stock in question—assuming that the indorsement was
in fact a transfer of stocks—was not valid against third persons such as ALSONS under Section 63 of the
Corporation Code.10 There was, therefore, no specific legal duty on the part of the respondents to issue the
corresponding certificates of stock, and mandamus will not lie.11
Petitioner filed his opposition to the motion to dismiss on February 19, 1996 contending that: (1)
mandamus is the proper remedy when a corporation and its corporate secretary wrongfully refuse to
record a transfer of shares and issue the corresponding certificates of stocks; (2) he is the proper party in
interest since he stands to be benefited or injured by a judgment in the case; (3) the statute of limitations
did not begin to run until defendant refused to issue the certificates of stock in favor of the plaintiff on April
13, 1992.
After respondents filed their reply, SEC Hearing Officer Enrique L. Flores, Jr. granted the motion to dismiss
in an Order dated February 29, 1996, which held that:
xxx
Insofar as the issuance of certificates of stock is concerned, the real party in interest is Fausto G. Gaid, or
his estate or his heirs. Gaid was an incorporator and an original stockholder of the defendant corporation
who subscribed and fully paid for 239,500 shares of stock (Annex "B"). In accordance with Section 37 of the
old Corporation Law (Act No. 1459) obtaining in 1968 when the defendant corporation was incorporated,
as well as Section 64 of the present Corporation Code (Batas Pambansa Blg. 68), a stockholder who has
fully paid for his subscription together with interest and expenses in case of delinquent shares, is entitled
to the issuance of a certificate of stock for his shares. According to paragraph 9 of the Complaint, no stock
certificate was issued to Gaid.
Comes now the plaintiff who seeks to step into the shoes of Gaid and thereby become a stockholder of the
defendant corporation by demanding issuance of the certificates of stock in his name. This he cannot do,
for two reasons: there is no record of any assignment or transfer in the books of the defendant
corporation, and there is no instruction or authority from the transferor (Gaid) for such assignment or
transfer. Indeed, nothing is alleged in the complaint on these two points.
xxx
14
In the present case, there is not even any indorsement of any stock certificate to speak of. What the
plaintiff possesses is a document by which Gaid supposedly transferred the shares to him. Assuming the
document has this effect, nevertheless there is neither any allegation nor any showing that it is recorded in
the books of the defendant corporation, such recording being a prerequisite to the issuance of a stock
certificate in favor of the transferee.12
Petitioner appealed the Order of dismissal. On January 6, 1997, the Commission En Banc reversed the
appealed Order and directed the Hearing Officer to proceed with the case. In ruling that a transfer or
assignment of stocks need not be registered first before it can take cognizance of the case to enforce the
petitioner’s rights as a stockholder, the Commission En Banc cited our ruling in Abejo vs. De la Cruz, 149
SCRA 654 (1987) to the effect that:
xxx As the SEC maintains, "There is no requirement that a stockholder of a corporation must be a registered
one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce
his rights as such stockholder". This is because the SEC by express mandate has "absolute jurisdiction,
supervision and control over all corporations" and is called upon to enforce the provisions of the
Corporation Code, among which is the stock purchaser’s right to secure the corresponding certificate in his
name under the provisions of Section 63 of the Code. Needless to say, any problem encountered in
securing the certificates of stock representing the investment made by the buyer must be expeditiously
dealt with through administrative mandamus proceedings with the SEC, rather than through the usual
tedious regular court procedure. xxx
Applying this principle in the case on hand, a transfer or assignment of stocks need not be registered first
before the Commission can take cognizance of the case to enforce his rights as a stockholder. Also, the
problem encountered in securing the certificates of stock made by the buyer must be expeditiously taken
up through the so-called administrative mandamus proceedings with the SEC than in the regular courts. 13
The Commission En Banc also found that the Hearing Officer erred in holding that petitioner is not the real
party in interest.
xxx
As appearing in the allegations of the complaint, plaintiff-appellant is the transferee of the shares of stock
of Gaid and is therefore entitled to avail of the suit to obtain the proper remedy to make him the rightful
owner and holder of a stock certificate to be issued in his name. Moreover, defendant-appellees failed to
show that the transferor nor his heirs have refuted the ownership of the transferee. Assuming these
allegations to be true, the corporation has a mere ministerial duty to register in its stock and transfer book
the shares of stock in the name of the plaintiff-appellant subject to the determination of the validity of the
deed of assignment in the proper tribunal. 14
Their motion for reconsideration having been denied, herein respondents appealed the decision 15 of the
SEC En Banc and the resolution16 denying their motion for reconsideration to the Court of Appeals.
In its decision, the Court of Appeals held that in the absence of any allegation that the transfer of the
shares between Fausto Gaid and Vicente C. Ponce was registered in the stock and transfer book of ALSONS,
Ponce failed to state a cause of action. Thus, said the CA, "the complaint for mandamus should be
dismissed for failure to state a cause of action."17 petitioner’s motion for reconsideration was likewise
denied in a resolution18 dated August 10, 1999.
Hence, the instant petition for review on certiorari alleging that:
I. … THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPLAINT FOR
ISSUANCE OF A CERTIFICATE OF STOCK FILED BY PETITIONER FAILED TO STATE A CAUSE OF
ACTION BECAUSE IT DID NOT ALLEGE THAT THE TRANSFER OF THE SHARES (SUBJECT MATTER
OF THE COMPLAINT) WAS REGISTERED IN THE STOCK AND TRANSFER BOOK OF THE
CORPORATION, CITING SECTION 63 OF THE CORPORATION CODE.
II. … THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE CASES OF "ABEJO VS.
DE LA CRUZ", 149 SCRA 654 AND "RURAL BANK OF SALINAS, INC., ET AL VS. COURT OF
APPEALS, ET AL.", G.R. NO. 96674, JUNE 26, 1992.
III. … THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A 1911 CASE, "HAGER VS.
BRYAN", 19 PHIL. 138, TO DISMISS THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF
STOCK.19
At issue is whether the Court of Appeals erred in holding that herein petitioner has no cause of action for a
writ of mandamus.
Petitioner first contends that the act of recording the transfer of shares in the stock and transfer book and
that of issuing a certificate of stock for the transferred shares involves only one continuous process. Thus,
when a corporate secretary is presented with a document of transfer of fully paid shares, it is his duty to
record the transfer in the stock and transfer book of the corporation, issue a new stock certificate in the
name of the transferee, and cancel the old one. A transferee who requests for the issuance of a stock
certificate need not spell out each and every act that needs to be done by the corporate secretary, as a
request for issuance of stock certificates necessarily includes a request for the recording of the transfer.
Ergo, the failure to record the transfer does not mean that the transferee cannot ask for the issuance of
stock certificates.
Secondly, according to petitioner, there is no law, rule or regulation requiring a transferor of shares of
stock to first issue express instructions or execute a power of attorney for the transfer of said shares before
a certificate of stock is issued in the name of the transferee and the transfer registered in the books of the
corporation. He contends that Hager vs. Bryan, 19 Phil. 138 (1911), and Rivera vs. Florendo, 144 SCRA 643
(1986), cited by respondents, do not apply to this case. These cases contemplate a situation where a
certificate of stock has been issued by the company whereas in this case at bar, no stock certificates have
been issued even in the name of the original stockholder, Fausto Gaid.
Finally, petitioner maintains that since he is under no compulsion to register the transfer or to secure stock
certificates in his name, his cause of action is deemed not to have accrued until respondent ALSONS denied
his request.
Respondents, in their comment, maintain that the transfer of shares of stock not recorded in the stock and
transfer book of the corporation is non-existent insofar as the corporation is concerned and no certificate
of stock can be issued in the name of the transferee. Until the recording is made, the transfer cannot be
the basis of issuance of a certificate of stock. They add that petitioner is not the real party in interest, the
real party in interest being Fausto Gaid since it is his name that appears in the records of the corporation.
They conclude that petitioner’s cause of action is barred by prescription and laches since 24 years elapsed
before he made any demand upon ALSONS.
15
We find the instant petition without merit. The Court of Appeals did not err in ruling that petitioner had no
cause of action, and that his petition for mandamus was properly dismissed.
There is no question that Fausto Gaid was an original subscriber of respondent corporation’s 239,500
shares. This is clear from the numerous pleadings filed by either party. It is also clear from the Amended
Articles of Incorporation20 approved on August 9, 199521 that each share had a par value of P1.00 per share.
And, it is undisputed that petitioner had not made a previous request upon the corporate secretary of
ALSONS, respondent Francisco M. Giron Jr., to record the alleged transfer of stocks.
The Corporation Code states that:
SEC. 63. Certificate of stock and transfer of shares.–The capital stock of stock corporations shall be divided
into shares for which certificates signed by the president or vice-president, countersigned by the secretary
or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate
or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded
in the books of the corporation so as to show the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books
of the corporation.
Pursuant to the foregoing provision, a transfer of shares of stock not recorded in the stock and transfer
book of the corporation is non-existent as far as the corporation is concerned. 22 As between the
corporation on the one hand, and its shareholders and third persons on the other, the corporation looks
only to its books for the purpose of determining who its shareholders are. 23 It is only when the transfer has
been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one
of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize
such rights as it is mandated by law to recognize arises.
Hence, without such recording, the transferee may not be regarded by the corporation as one among its
stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the
transferee even when there has been compliance with the requirements of Section 64 24 of the Corporation
Code. This is the import of Section 63 which states that "No transfer, however, shall be valid, except
between the parties, until the transfer is recorded in the books of the corporation showing 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." The situation would be different if the petitioner was himself the registered
owner of the stock which he sought to transfer to a third party, for then he would be entitled to the
remedy of mandamus.25
From the corporation’s point of view, the transfer is not effective until it is recorded. Unless and until such
recording is made the demand for the issuance of stock certificates to the alleged transferee has no legal
basis. As between the corporation on the one hand, and its shareholders and third persons on the other,
the corporation looks only to its books for the purpose of determining who its shareholders are. 26 In other
words, the stock and transfer book is the basis for ascertaining the persons entitled to the rights and
subject to the liabilities of a stockholder. Where a transferee is not yet recognized as a stockholder, the
corporation is under no specific legal duty to issue stock certificates in the transferee’s name.
It follows that, as held by the Court of Appeals:
x x x until registration is accomplished, the transfer, though valid between the parties, cannot be effective
as against the corporation. Thus, in the absence of any allegation that the transfer of the shares between
Gaid and the private respondent [herein petitioner] was registered in the stock and transfer book of the
petitioner corporation, the private respondent has failed to state a cause of action. 27
Petitioner insists that it is precisely the duty of the corporate secretary, when presented with the
document of fully paid shares, to effect the transfer by recording the transfer in the stock and transfer
book of the corporation and to issue stock certificates in the name of the transferee. On this point, the SEC
En Banc cited Rural Bank of Salinas, Inc. vs. Court of Appeals, 28 where we held that:
For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and
transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and
intent of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did not err in upholding
the decision of respondent SEC affirming the Decision of its Hearing Officer directing the registration of the
473 shares in the stock and transfer book in the names of private respondents. At all events, the
registration is without prejudice to the proceedings in court to determine the validity of the Deeds of
Assignment of the shares of stock in question.
In Rural Bank of Salinas, Inc., however, private respondent Melania Guerrero had a Special Power of
Attorney executed in her favor by Clemente Guerrero, the registered stockholder. It gave Guerrero full
authority to sell or otherwise dispose of the 473 shares of stock registered in Clemente’s name and to
execute the proper documents therefor. Pursuant to the authority so given, Melania assigned the 473
shares of stock owned by Guerrero and presented to the Rural Bank of Salinas the deeds of assignment
covering the assigned shares. Melania Guerrero prayed for the transfer of the stocks in the stock and
transfer book and the issuance of stock certificates in the name of the new owners thereof. Based on those
circumstances, there was a clear duty on the part of the corporate secretary to register the 473 shares in
favor of the new owners, since the person who sought the transfer of shares had express instructions from
and specific authority given by the registered stockholder to cause the disposition of stocks registered in
his name.
That cannot be said of this case. The deed of undertaking with indorsement presented by petitioner does
not establish, on its face, his right to demand for the registration of the transfer and the issuance of
certificates of stocks. In Hager vs. Bryan, 19 Phil. 138 (1911), this Court held that a petition for mandamus
fails to state a cause of action where it appears that the petitioner is not the registered stockholder and
there is no allegation that he holds any power of attorney from the registered stockholder, from whom he
obtained the stocks, to make the transfer, thus:
It appears, however, from the original as well as the amended petition, that this petitioner is not the
registered owner of the stock which he seeks to have transferred, and except in so far as he alleges that he
is the owner of the stock and that it was "indorsed" to him on February 5 by the Bryan-Landon Company, in
whose name it is registered on the books of the Visayan Electric Company, there is no allegation that the
petitioner holds any power of attorney from the Bryan-Landon Company authorizing him to make demand
on the secretary of the Visayan Electric Company to make the transfer which petitioner seeks to have made
through the medium of the mandamus of this court.
Without discussing or deciding the respective rights of the parties which might be properly asserted in an
ordinary action or an action in the nature of an equitable suit, we are all agreed that in a case such as that
at bar, a mandamus should not issue to compel the secretary of a corporation to make a transfer of the
16
stock on the books of the company, unless it affirmatively appears that he has failed or refused so to do,
upon the demand either of the person in whose name the stock is registered, or of some person holding a
power of attorney for that purpose from the registered owner of the stock. There is no allegation in the
petition that the petitioner or anyone else holds a power of attorney from the Bryan-Landon Company
authorizing a demand for the transfer of the stock, or that the Bryan-Landon Company has ever itself made
such demand upon the Visayan Electric Company, and in the absence of such allegation we are not able to
say that there was such a clear indisputable duty, such a clear legal obligation upon the respondent, as to
justify the issuance of the writ to compel him to perform it.
Under the provisions of our statute touching the transfer of stock (secs. 35 and 36 of Act No. 1459), 29 the
mere indorsement of stock certificates does not in itself give to the indorsee such a right to have a transfer
of the shares of stock on the books of the company as will entitle him to the writ of mandamus to compel
the company and its officers to make such transfer at his demand, because, under such circumstances the
duty, the legal obligation, is not so clear and indisputable as to justify the issuance of the writ. As a general
rule and especially under the above-cited statute, as between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the purpose of
determining who its shareholders are, so that a mere indorsee of a stock certificate, claiming to be the
owner, will not necessarily be recognized as such by the corporation and its officers, in the absence of
express instructions of the registered owner to make such transfer to the indorsee, or a power of attorney
authorizing such transfer.30
In Rivera vs. Florendo, 144 SCRA 643, 657 (1986), we reiterated that a mere indorsement by the supposed
owners of the stock, in the absence of express instructions from them, cannot be the basis of an action for
mandamus and that the rights of the parties have to be threshed out in an ordinary action. That Hager and
Rivera involved petitions for mandamus to compel the registration of the transfer, while this case is one for
issuance of stock, is of no moment. It has been made clear, thus far, that before a transferee may ask for
the issuance of stock certificates, he must first cause the registration of the transfer and thereby enjoy the
status of a stockholder insofar as the corporation is concerned. A corporate secretary may not be
compelled to register transfers of shares on the basis merely of an indorsement of stock certificates. With
more reason, in our view, a corporate secretary may not be compelled to issue stock certificates without
such registration.31
Petitioner’s reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987), that notice given to the
corporation of the sale of the shares and presentation of the certificates for transfer is equivalent to
registration is misplaced. In this case there is no allegation in the complaint that petitioner ever gave notice
to respondents of the alleged transfer in his favor. Moreover, that case arose between and among the
principal stockholders of the corporation, Pocket Bell, due to the refusal of the corporate secretary to
record the transfers in favor of Telectronics of the corporation’s controlling 56% shares of stock which were
covered by duly endorsed stock certificates. As aforesaid, the request for the recording of a transfer is
different from the request for the issuance of stock certificates in the transferee’s name. Finally, in Abejo
we did not say that transfer of shares need not be recorded in the books of the corporation before the
transferee may ask for the issuance of stock certificates. The Court’s statement, that "there is no
requirement that a stockholder of a corporation must be a registered one in order that the Securities and
Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder
among which is the stock purchaser’s right to secure the corresponding certificate in his name," 32 was
addressed to the issue of jurisdiction, which is not pertinent to the issue at hand.
Absent an allegation that the transfer of shares is recorded in the stock and transfer book of respondent
ALSONS, there appears no basis for a clear and indisputable duty or clear legal obligation that can be
imposed upon the respondent corporate secretary, so as to justify the issuance of the writ of mandamus to
compel him to perform the transfer of the shares to petitioner. The test of sufficiency of the facts alleged in
a petition is whether or not, admitting the facts alleged, the court could render a valid judgment thereon in
accordance with the prayer of the petition.33 This test would not be satisfied if, as in this case, not all the
elements of a cause of action are alleged in the complaint.34 Where the corporate secretary is under no
clear legal duty to issue stock certificates because of the petitioner’s failure to record earlier the transfer of
shares, one of the elements of the cause of action for mandamus is clearly missing.
That petitioner was under no obligation to request for the registration of the transfer is not in issue. It has
no pertinence in this controversy. One may own shares of corporate stock without possessing a stock
certificate. In Tan vs. SEC, 206 SCRA 740 (1992), we had occasion to declare that a certificate of stock is not
necessary to render one a stockholder in a corporation. But a certificate of stock is the tangible evidence of
the stock itself and of the various interests therein. The certificate is the evidence of the holder’s interest
and status in the corporation, his ownership of the share represented thereby. The certificate is in law, so
to speak, an equivalent of such ownership. It expresses the contract between the corporation and the
stockholder, but it is not essential to the existence of a share in stock or the creation of the relation of
shareholder to the corporation.35 In fact, it rests on the will of the stockholder whether he wants to be
issued stock certificates, and a stockholder may opt not to be issued a certificate. In Won vs. Wack Wack
Golf and Country Club, Inc., 104 Phil. 466 (1958), we held that considering that the law does not prescribe a
period within which the registration should be effected, the action to enforce the right does not accrue
until there has been a demand and a refusal concerning the transfer. In the present case, petitioner’s
complaint for mandamus must fail, not because of laches or estoppel, but because he had alleged no cause
of action sufficient for the issuance of the writ.
WHEREFORE, the petition is DENIED for lack of merit. The decision of the Court of Appeals, in CA-G.R. SP
No. 46692, which set aside that of the Securities and Exchange Commission En Banc in SEC-AC No. 545 and
reinstated the order of the Hearing Officer, is hereby AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
G.R. No. L-33320 May 30, 1983
RAMON A. GONZALES, petitioner,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.
VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a special civil
action for mandamus against the herein respondent praying that the latter be ordered to allow him to look
into the books and records of the respondent bank in order to satisfy himself as to the truth of the
published reports that the respondent has guaranteed the obligation of Southern Negros Development
Corporation in the purchase of a US$ 23 million sugar-mill to be financed by Japanese suppliers and
financiers; that the respondent is financing the construction of the P 21 million Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron Philippines,
Inc., as well as to inquire into the validity of Id transactions. The petitioner has alleged hat his written
request for such examination was denied by the respondent. The trial court having dismissed the petition
for mandamus, the instant appeal to review the said dismissal was filed.
17
The facts that gave rise to the subject controversy have been set forth by the trial court in the decision
herein sought to be reviewed, as follows:
Briefly stated, the following facts gathered from the stipulation of the parties
served as the backdrop of this proceeding.
Previous to the present action, the petitioner instituted several cases in this Court
questioning different transactions entered into by the Bark with other parties.
First among them is Civil Case No. 69345 filed on April 27, 1967, by petitioner as a
taxpayer versus Sec. Antonio Raquiza of Public Works and Communications, the
Commissioner of Public Highways, the Bank, Continental Ore Phil., Inc.,
Continental Ore, Huber Corporation, Allis Chalmers and General Motors
Corporation In the course of the hearing of said case on August 3, 1967, the
personality of herein petitioner to sue the bank and question the letters of credit
it has extended for the importation by the Republic of the Philippines of public
works equipment intended for the massive development program of the
President was raised. In view thereof, he expressed and made known his intention
to acquire one share of stock from Congressman Justiniano Montano which, on
the following day, August 30, 1967, was transferred in his name in the books of
the Bank.
Subsequent to his aforementioned acquisition of one share of stock of the Bank,
petitioner, in his dual capacity as a taxpayer and stockholder, filed the following
cases involving the bank or the members of its Board of Directors to wit:
l. On October l8,1967, Civil Case No. 71044 versus the Board of Directors of the
Bank; the National Investment and Development Corp., Marubeni Iida Co., Ltd.,
and Agro-Inc. Dev. Co. or Saravia;
2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and other
Directors of the Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar
Mill Integrated Farming, Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and
Batangas Sugar Central Inc.;
3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and the
Directors of both the PNB and DBP;
On January 11, 1969, however, petitioner addressed a letter to the President of
the Bank (Annex A, Pet.), requesting submission to look into the records of its
transactions covering the purchase of a sugar central by the Southern Negros
Development Corp. to be financed by Japanese suppliers and financiers; its
financing of the Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc. and the
construction of the Passi Sugar Mills in Iloilo. On January 23, 1969, the Asst. Vice-
President and Legal Counsel of the Bank answered petitioner's letter denying his
request for being not germane to his interest as a one-share stockholder and for
the cloud of doubt as to his real intention and purpose in acquiring said share.
(Annex B, Pet.) In view of the Bank's refusal the petitioner instituted this action.'
(Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court in its brief which he
characterized as having been "correctly stated." (Petitioner-Appellant"s Brief, pp. 57.)
The court a quo denied the prayer of the petitioner that he be allowed to examine and inspect the books
and records of the respondent bank regarding the transactions mentioned on the grounds that the right of
a stockholder to inspect the record of the business transactions of a corporation granted under Section 51
of the former Corporation Law (Act No. 1459, as amended) is not absolute, but is limited to purposes
reasonably related to the interest of the stockholder, must be asked for in good faith for a specific and
honest purpose and not gratify curiosity or for speculative or vicious purposes; that such examination
would violate the confidentiality of the records of the respondent bank as provided in Section 16 of its
charter, Republic Act No. 1300, as amended; and that the petitioner has not exhausted his administrative
remedies.
Assailing the conclusions of the lower court, the petitioner has assigned the single error to the lower court
of having ruled that his alleged improper motive in asking for an examination of the books and records of
the respondent bank disqualifies him to exercise the right of a stockholder to such inspection under Section
51 of Act No. 1459, as amended. Said provision reads in part as follows:
Sec. 51. ... The record of all business transactions of the corporation and the
minutes of any meeting shall be open to the inspection of any director, member
or stockholder of the corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify the qualification made by the lower
court that the inspection of corporate records may be denied on the ground that it is intended for an
improper motive or purpose, the law having granted such right to a stockholder in clear and unconditional
terms. He further argues that, assuming that a proper motive or purpose for the desired examination is
necessary for its exercise, there is nothing improper in his purpose for asking for the examination and
inspection herein involved.
Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as amended, regarding
the right of a stockholder to inspect and examine the books and records of a corporation. The former
Corporation Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwise
known as the "Corporation Code of the Philippines."
The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has been retained, but
with some modifications. The second and third paragraphs of Section 74 of Batas Pambansa Blg. 68 provide
the following:
The records of all business transactions of the corporation and the minutes of any
meeting shag be open to inspection by any director, trustee, stockholder or
member of the corporation at reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said records or minutes, at his
expense.
Any officer or agent of the corporation who shall refuse to allow any director,
trustee, stockholder or member of the corporation to examine and copy excerpts
from its records or minutes, in accordance with the provisions of this Code, shall
be liable to such director, trustee, stockholder or member for damages, and in
addition, shall be guilty of an offense which shall be punishable under Section 144
18
of this Code: Provided, That if such refusal is made pursuant to a resolution or
order of the board of directors or trustees, the liability under this section for such
action shall be imposed upon the directors or trustees who voted for such refusal;
and Provided, further, That it shall be a defense to any action under this section
that the person demanding to examine and copy excerpts from the corporation's
records and minutes has improperly used any information secured through any
prior examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making
his demand.
As may be noted from the above-quoted provisions, among the changes introduced in the new Code with
respect to the right of inspection granted to a stockholder are the following the records must be kept at the
principal office of the corporation; the inspection must be made on business days; the stockholder may
demand a copy of the excerpts of the records or minutes; and the refusal to allow such inspection shall
subject the erring officer or agent of the corporation to civil and criminal liabilities. However, while
seemingly enlarging the right of inspection, the new Code has prescribed limitations to the same. It is now
expressly required as a condition for such examination that the one requesting it must not have been guilty
of using improperly any information through a prior examination, and that the person asking for such
examination must be "acting in good faith and for a legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously contained in Section 51, Act No. 1459, as
amended, no longer holds true under the provisions of the present law. The argument of the petitioner
that the right granted to him under Section 51 of the former Corporation Law should not be dependent on
the propriety of his motive or purpose in asking for the inspection of the books of the respondent bank
loses whatever validity it might have had before the amendment of the law. If there is any doubt in the
correctness of the ruling of the trial court that the right of inspection granted under Section 51 of the old
Corporation Law must be dependent on a showing of proper motive on the part of the stockholder
demanding the same, it is now dissipated by the clear language of the pertinent provision contained in
Section 74 of Batas Pambansa Blg. 68.
Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of
the respondent bank, he has not set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of published reports regarding certain transactions
entered into by the respondent bank and to inquire into their validity. The circumstances under which he
acquired one share of stock in the respondent bank purposely to exercise the right of inspection do not
argue in favor of his good faith and proper motivation. Admittedly he sought to be a stockholder in order to
pry into transactions entered into by the respondent bank even before he became a stockholder. His
obvious purpose was to arm himself with materials which he can use against the respondent bank for acts
done by the latter when the petitioner was a total stranger to the same. He could have been impelled by a
laudable sense of civic consciousness, but it could not be said that his purpose is germane to his interest as
a stockholder.
We also find merit in the contention of the respondent bank that the inspection sought to be exercised by
the petitioner would be violative of the provisions of its charter. (Republic Act No. 1300, as amended.)
Sections 15, 16 and 30 of the said charter provide respectively as follows:
Sec. 15. Inspection by Department of Supervision and Examination of the Central
Bank. — The National Bank shall be subject to inspection by the Department of
Supervision and Examination of the Central Bank'
Sec. 16. Confidential information. —The Superintendent of Banks and the Auditor
General, or other officers designated by law to inspect or investigate the
condition of the National Bank, shall not reveal to any person other than the
President of the Philippines, the Secretary of Finance, and the Board of Directors
the details of the inspection or investigation, nor shall they give any information
relative to the funds in its custody, its current accounts or deposits belonging to
private individuals, corporations, or any other entity, except by order of a Court of
competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act.— Any director, officer,
employee, or agent of the Bank, who violates or permits the violation of any of
the provisions of this Act, or any person aiding or abetting the violations of any of
the provisions of this Act, shall be punished by a fine not to exceed ten thousand
pesos or by imprisonment of not more than five years, or both such fine and
imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not governed,
as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides:
SEC. 4. Corporations created by special laws or charters. — Corporations created
by special laws or charters shall be governed primarily by the provisions of the
special law or charter creating them or applicable to them. supplemented by the
provisions of this Code, insofar as they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to the
right of a stockholder to demand an inspection or examination of the books of the corporation may not be
reconciled with the abovequoted provisions of the charter of the respondent bank. It is not correct to
claim, therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a
supplementary capacity to the charter of the respondent bank.
WHEREFORE, the petition is hereby DISMISSED, without costs.
G.R. No. 123793 June 29, 1998
ASSOCIATED BANK, petitioner,
vs.
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.
PANGANIBAN, J.:
In a merger, does the surviving corporation have a right to enforce a contract entered into by the absorbed
company subsequent to the date of the merger agreement, but prior to the issuance of a certificate of
merger by the Securities and Exchange Commission?
The Case
19
This is a petition for review under Rule 45 of the Rules of Court, seeking to set aside the Decision 1 of the
Court of Appeals 2 in CA-GR CV No. 26465 promulgated on January 30, 1996, which answered the above
question in the negative. The challenged Decision reversed and set aside the October 17, 1986 Decision 3 in
Civil Case No. 85-32243, promulgated by the Regional Trial Court of Manila, Branch 48, which disposed of
the controversy in favor of herein petitioner as follows: 4
WHEREFORE, judgment is hereby rendered in favor of the plaintiff Associated
Bank. The defendant Lorenzo Sarmiento, Jr. is ordered to pay plaintiff:
1. The amount of P4,689,413.63 with interest thereon at 14% per annum until
fully paid;
2. The amount of P200,000.00 as and for attorney's fees; and
3. The costs of suit.
On the other hand, the Court of Appeals resolved the case in this wise: 5
WHEREFORE, premises considered, the decision appealed from, dated October
17, 1986 is REVERSED and SET ASIDE and another judgment rendered DISMISSING
plaintiff-appellee's complaint, docketed as Civil Case No. 85-32243. There is no
pronouncement as to costs.
The Facts
The undisputed factual antecedents, as narrated by the trial court and adopted by public respondent, are
as follows: 6
. . . [O]n or about September 16, 1975 Associated Banking Corporation and
Citizens Bank and Trust Company merged to form just one banking corporation
known as Associated Citizens Bank, the surviving bank. On or about March 10,
1981, the Associated Citizens Bank changed its corporate name to Associated
Bank by virtue of the Amended Articles of Incorporation. On September 7, 1977,
the defendant executed in favor of Associated Bank a promissory note whereby
the former undertook to pay the latter the sum of P2,500,000.00 payable on or
before March 6, 1978. As per said promissory note, the defendant agreed to pay
interest at 14% per annum, 3% per annum in the form of liquidated damages,
compounded interests, and attorney's fees, in case of litigation equivalent to 10%
of the amount due. The defendant, to date, still owes plaintiff bank the amount of
P2,250,000.00 exclusive of interest and other charges. Despite repeated demands
the defendant failed to pay the amount due.
x x x           x x x          x x x
. . . [T]he defendant denied all the pertinent allegations in the complaint and
alleged as affirmative and[/]or special defenses that the complaint states no valid
cause of action; that the plaintiff is not the proper party in interest because the
promissory note was executed in favor of Citizens Bank and Trust Company; that
the promissory note does not accurately reflect the true intention and agreement
of the parties; that terms and conditions of the promissory note are onerous and
must be construed against the creditor-payee bank; that several partial payments
made in the promissory note are not properly applied; that the present action is
premature; that as compulsory counterclaim the defendant prays for attorney's
fees, moral damages and expenses of litigation.
On May 22, 1986, the defendant was declared as if in default for failure to appear
at the Pre-Trial Conference despite due notice.
A Motion to Lift Order of Default and/or Reconsideration of Order dated May 22,
1986 was filed by defendant's counsel which was denied by the Court in [an]
order dated September 16, 1986 and the plaintiff was allowed to present its
evidence before the Court ex-parte on October 16, 1986.
At the hearing before the Court ex-parte, Esteban C. Ocampo testified that . . . he
is an accountant of the Loans and Discount Department of the plaintiff bank; that
as such, he supervises the accounting section of the bank, he counterchecks all
the transactions that transpired during the day and is responsible for all the
accounts and records and other things that may[ ]be assigned to the Loans and
Discount Department; that he knows the [D]efendant Lorenzo Sarmiento, Jr.
because he has an outstanding loan with them as per their records; that Lorenzo
Sarmiento, Jr. executed a promissory note No. TL-2649-77 dated September 7,
1977 in the amount of P2,500,000.00 (Exhibit A); that Associated Banking
Corporation and the Citizens Bank and Trust Company merged to form one
banking corporation known as the Associated Citizens Bank and is now known as
Associated Bank by virtue of its Amended Articles of Incorporation; that there
were partial payments made but not full; that the defendant has not paid his
obligation as evidenced by the latest statement of account (Exh. B); that as per
statement of account the outstanding obligation of the defendant is
P5,689,413.63 less P1,000,000.00 or P4,689,413.63 (Exh. B, B-1); that a demand
letter dated June 6, 1985 was sent by the bank thru its counsel (Exh. C) which was
received by the defendant on November 12, 1985 (Exh. C, C-1, C-2, C-3); that the
defendant paid only P1,000,000.00 which is reflected in the Exhibit C.
Based on the evidence presented by petitioner, the trial court ordered Respondent Sarmiento to pay the
bank his remaining balance plus interests and attorney's fees. In his appeal, Sarmiento assigned to the trial
court several errors, namely: 7
I The [trial court] erred in denying appellant's motion to dismiss appellee bank's
complaint on the ground of lack of cause of action and for being barred by
prescription and laches.
II The same lower court erred in admitting plaintiff-appellee bank's amended
complaint while defendant-appellant's motion to dismiss appelle bank's original
complaint and using/availing [itself of] the new additional allegations as bases in
denial of said appellant's motion and in the interpretation and application of the
agreement of merger and Section 80 of BP Blg. 68, Corporation Code of the
Philippines.
20

III The [trial court] erred and gravely abuse[d] its discretion in rendering the two
as if in default orders dated May 22, 1986 and September 16, 1986 and in not
reconsidering the same upon technical grounds which in effect subvert the best
primordial interest of substantial justice and equity.
Thus, as earlier stated, Respondent Court set aside the decision of the trial court and dismissed the
complaint. Petitioner now comes to us for a reversal of this ruling. 8
Issues

IV The court a quo erred in issuing the orders dated May 22, 1986 and September
16, 1986 declaring appellant as if in default due to non-appearance of appellant's In its petition, petitioner cites the following "reasons": 9
attending counsel who had resigned from the law firm and while the parties
[were] negotiating for settlement of the case and after a one million peso I The Court of Appeals erred in reversing the decision of the trial court and in
payment had in fact been paid to appellee bank for appellant's account at the declaring that petitioner has no cause of action against respondent over the
start of such negotiation on February 18, 1986 as act of earnest desire to settle promissory note.
the obligation in good faith by the interested parties.

V The lower court erred in according credence to appellee bank's Exhibit B
statement of account which had been merely requested by its counsel during the
trial and bearing date of September 30, 1986.
VI The lower court erred in accepting and giving credence to appellee bank's 27-
year-old witness Esteban C. Ocampo as of the date he testified on October 16,
1986, and therefore, he was merely an eighteen-year-old minor when appellant
supposedly incurred the foisted obligation under the subject PN No. TL-2649-77
dated September 7, 1977, Exhibit A of appellee bank.
II The Court of Appeals also erred in declaring that, since the promissory note was
executed in favor of Citizens Bank and Trust Company two years after the merger
between Associated Banking Corporation and Citizens Bank and Trust Company,
respondent is not liable to petitioner because there is no privity of contract
between respondent and Associated Bank.
III The Court of Appeals erred when it ruled that petitioner, despite the merger
between petitioner and Citizens Bank and Trust Company, is not a real party in
interest insofar as the promissory note executed in favor of the merger.

In a nutshell, the main issue is whether Associated Bank, the surviving corporation, may enforce the
VII The [trial court] erred in adopting appellee bank's Exhibit B dated September promissory note made by private respondent in favor of CBTC, the absorbed company, after the merger
30, 1986 in its decision given in open court on October 17, 1986 which exacted agreement had been signed.
eighteen percent (18%) per annum on the foisted principal amount of P2.5 million
when the subject PN, Exhibit A, stipulated only fourteen percent (14%) per annum
and which was actually prayed for in appellee bank's original and amended The Court's Ruling
complaints.
The petition is impressed with merit.
VIII The appealed decision of the lower court erred in not considering at all
appellant's affirmative defenses that (1) the subject PN No. TL-2649-77 for P2.5
The Main Issue:
million dated September 7, 1977, is merely an accommodation  pour autrui of any
Associated Bank Assumed
actual consideration to appellant himself and (2) the subject PN is a contract of
All Rights of CBTC
adhesion, hence, [it] needs [to] be strictly construed against appellee bank —
assuming for granted that it has the right to enforce and seek collection thereof.
Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives
and continues the combined business, while the rest are dissolved and all their rights, properties and
IX The lower court should have at least allowed appellant the opportunity to
liabilities are acquired by the surviving corporation. 10 Although there is a dissolution of the absorbed
present countervailing evidence considering the huge amounts claimed by
corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving
appellee bank (principal sum of P2.5 million which including accrued interests,
corporation automatically acquires all their rights, privileges and powers, as well as their liabilities. 11
penalties and cost of litigation totaled P4,689,413.63) and appellant's affirmative
defenses — pursuant to substantial justice and equity.
The merger, however, does not become effective upon the mere agreement of the constituent
corporations. The procedure to be followed is prescribed under the Corporation Code. 12 Section 79 of said
The appellate court, however, found no need to tackle all the assigned errors and limited itself to the
Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of merger
question of "whether [herein petitioner had] established or proven a cause of action against [herein private
which, in turn, must have been duly approved by a majority of the respective stockholders of the
respondent]." Accordingly, Respondent Court held that the Associated Bank had no cause of action against
constituent corporations. The same provision further states that the merger shall be effective only upon
Lorenzo Sarmiento Jr., since said bank was not privy to the promissory note executed by Sarmiento in favor
the issuance by the SEC of a certificate of merger. The effectivity date of the merger is crucial for
of Citizens Bank and Trust Company (CBTC). The court ruled that the earlier merger between the two banks
determining when the merged or absorbed corporation ceases to exist; and when its rights, privileges,
could not have vested Associated Bank with any interest arising from the promissory note executed in
properties as well as liabilities pass on to the surviving corporation.
favor of CBTC after such merger.
21
Consistent with the aforementioned Section 79, the September 16, 1975 Agreement of Merger, 13 which
Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC) entered into, provided
that its effectivity "shall, for all intents and purposes, be the date when the necessary papers to carry out
this [m]erger shall have been approved by the Securities and Exchange Commission." 14 As to the transfer of
the properties of CBTC to ABC, the agreement provides:
10. Upon effective date of the Merger, all rights, privileges, powers, immunities,
franchises, assets and property of [CBTC], whether real, personal or mixed, and
including [CBTC's] goodwill and tradename, and all debts due to [CBTC] on
whatever act, and all other things in action belonging to [CBTC] as of the effective
date of the [m]erger shall be vested in [ABC], the SURVIVING BANK, without need
of further act or deed, unless by express requirements of law or of a government
agency, any separate or specific deed of conveyance to legally effect the transfer
or assignment of any kind of property [or] asset is required, in which case such
document or deed shall be executed accordingly; and all property, rights,
privileges, powers, immunities, franchises and all appointments, designations and
nominations, and all other rights and interests of [CBTC] as trustee, executor,
administrator, registrar of stocks and bonds, guardian of estates, assignee,
receiver, trustee of estates of persons mentally ill and in every other fiduciary
capacity, and all and every other interest of [CBTC] shall thereafter be effectually
the property of [ABC] as they were of [CBTC], and title to any real estate, whether
by deed or otherwise, vested in [CBTC] shall not revert or be in any way impaired
by reason thereof;  provided, however, that all rights of creditors and all liens
upon any property of [CBTC] shall be preserved and unimpaired and all debts,
liabilities, obligations, duties and undertakings of [CBTC], whether contractual or
otherwise, expressed or implied, actual or contingent, shall henceforth attach to
[ABC] which shall be responsible therefor and may be enforced against [ABC] to
the same extent as if the same debts liabilities, obligations, duties and
undertakings have been originally incurred or contracted by [ABC], subject,
however, to all rights, privileges, defenses, set-offs and counterclaims which
[CBTC] has or might have and which shall pertain to [ABC]. 15
The records do not show when the SEC approved the merger. Private respondent's theory is that it took
effect on the date of the execution of the agreement itself, which was September 16, 1975. Private
respondent contends that, since he issued the promissory note to CBTC on September 7, 1977 — two
years after the merger agreement had been executed — CBTC could not have conveyed or transferred to
petitioner its interest in the said note, which was not yet in existence at the time of the merger. Therefore,
petitioner, the surviving bank, has no right to enforce the promissory note on private respondent; such
right properly pertains only to CBTC.
Assuming that the effectivity date of the merger was the date of its execution, we still cannot agree that
petitioner no longer has any interest in the promissory note. A closer perusal of the merger agreement
leads to a different conclusion. The provision quoted earlier has this other clause:
Upon the effective date of the [m]erger, all references to [CBTC] in any deed,
documents, or other papers of whatever kind or nature and wherever found shall
be deemed for all intents and purposes, references to [ABC], the SURVIVING BANK,
as if such references were direct references to [ABC]. . . . 6 (Emphasis supplied)
Thus, the fact that the promissory note was executed after the effectivity date of the merger does not
militate against petitioner. The agreement itself clearly provides that all contracts — irrespective of the
date of execution — entered into in the name of CBTC shall be understood as pertaining to the surviving
bank, herein petitioner. Since, in contrast to the earlier aforequoted provision, the latter clause no longer
specifically refers only to contracts existing at the time of the merger, no distinction should be made. The
clause must have been deliberately included in the agreement in order to protect the interests of the
combining banks; specifically, to avoid giving the merger agreement a farcical interpretation aimed at
evading fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC in the note
shall be construed, under the very provisions of the merger agreement, as a reference to petitioner bank,
"as if such reference [was a] direct reference to" the latter "for all intents and purposes."
No other construction can be given to the unequivocal stipulation. Being clear, plain and free of ambiguity,
the provision must be given its literal
meaning 17 and applied without a convoluted interpretation. Verba lelegis non est recedendum. 18
In light of the foregoing, the Court holds that petitioner has a valid cause of action against private
respondent. Clearly, the failure of private respondent to honor his obligation under the promissory note
constitutes a violation of petitioner's right to collect the proceeds of the loan it extended to the former.
Secondary Issues:
Prescription, Laches, Contract
Pour Autrui, Lack of Consideration
No Prescription
or Laches
Private respondent's claim that the action has prescribed, pursuant to Article 1149 of the Civil Code, is
legally untenable. Petitioner's suit for collection of a sum of money was based on a written contract and
prescribes after ten years from the time its right of action arose. 19 Sarmiento's obligation under the
promissory note became due and demandable on March 6, 1978. Petitioner's complaint was instituted on
August 22, 1985, before the lapse of the ten-year prescriptive period. Definitely, petitioner still had every
right to commence suit against the payor/obligor, the private respondent herein.
Neither is petitioner's action barred by laches. The principle of laches is a creation of equity, which is
applied not to penalize neglect or failure to assert a right within a reasonable time, but rather to avoid
recognizing a right when to do so would result in a clearly inequitable situation 20 or in an injustice. 21 To
require private respondent to pay the remaining balance of his loan is certainly not inequitable or unjust.
What would be manifestly unjust and inequitable is his contention that CBTC is the proper party to proceed
against him despite the fact, which he himself asserts, that CBTC's corporate personality has been dissolved
by virtue of its merger with petitioner. To hold that no payee/obligee exists and to let private respondent
enjoy the fruits of his loan without liability is surely most unfair and unconscionable, amounting to unjust
enrichment at the expense of petitioner. Besides, this Court has held that the doctrine of laches is
inapplicable where the claim was filed within the prescriptive period set forth under the law. 22
No Contract
Pour Autrui
Private respondent, while not denying that he executed the promissory note in the amount of P2,500,000
in favor of CBTC, offers the alternative defense that said note was a contract  pour autrui.
22
A stipulation  pour autrui is one in favor of a third person who may demand its fulfillment, provided he
communicated his acceptance to the obligor before its revocation. An incidental benefit or interest, which
another person gains, is not sufficient. The contracting parties must have clearly and deliberately conferred
a favor upon a third person. 23
Florentino vs. Encarnacion Sr. 24 enumerates the requisites for such contract: (1) the stipulation in favor of a
third person must be a part of the contract, and not the contract itself; (2) the favorable stipulation should
not be conditioned or compensated by any kind of obligation; and (3) neither of the contracting parties
bears the legal representation or authorization of the third party. The "fairest test" in determining whether
the third person's interest in a contract is a stipulation  pour autrui or merely an incidental interest is to
examine the intention of the parties as disclosed by their contract. 25
We carefully and thoroughly perused the promissory note, but found no stipulation at all that would even
resemble a provision in consideration of a third person. The instrument itself does not disclose the purpose
of the loan contract. It merely lays down the terms of payment and the penalties incurred for failure to pay
upon maturity. It is patently devoid of any indication that a benefit or interest was thereby created in favor
of a person other than the contracting parties. In fact, in no part of the instrument is there any mention of
a third party at all. Except for his barefaced statement, no evidence was proffered by private respondent to
support his argument. Accordingly, his contention cannot be sustained. At any rate, if indeed the loan
actually benefited a third person who undertook to repay the bank, private respondent could have availed
himself of the legal remedy of a third-party complaint. 26 That he made no effort to implead such third
person proves the hollowness of his arguments.
Consideration
Private respondent also claims that he received no consideration for the promissory note and, in support
thereof, cites petitioner's failure to submit any proof of his loan application and of his actual receipt of the
amount loaned. These arguments deserve no merit. Res ipsa loquitur. The instrument, bearing the
signature of private respondent, speaks for itself. Respondent Sarmiento has not questioned the
genuineness and due execution thereof. No further proof is necessary to show that he undertook to pay
P2,500,000, plus interest, to petitioner bank on or before March 6, 1978. This he failed to do, as testified to
by petitioner's accountant. The latter presented before the trial court private respondent's statement of
account 27 as of September 30, 1986, showing an outstanding balance of P4,689,413.63 after deducting
P1,000,000.00 paid seven months earlier. Furthermore, such partial payment is equivalent to an express
acknowledgment of his obligation. Private respondent can no longer backtrack and deny his liability to
petitioner bank. "A person cannot accept and reject the same instrument." 28
WHEREFORE, the petition is GRANTED. The assailed Decision is SET ASIDE and the Decision of RTC-Manila,
Branch 48, in Civil Case No. 26465 is hereby REINSTATED.
SO ORDERED.
G.R. No. 178618               October 11, 2010
MINDANAO SAVINGS AND LOAN ASSOCIATION, INC., represented by its Liquidator, THE PHILIPPINE
DEPOSIT INSURANCE CORPORATION, Petitioner,
vs.
EDWARD WILLKOM; GILDA GO; REMEDIOS UY; MALAYO BANTUAS, in his capacity as the Deputy Sheriff of
Regional Trial Court, Branch 3, Iligan City; and the REGISTER OF DEEDS of Cagayan de Oro City, Respondent.
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Mindanao Savings and
Loan Association, Inc. (MSLAI), represented by its liquidator, Philippine Deposit Insurance Corporation
(PDIC), against respondents Edward R. Willkom (Willkom); Gilda Go (Go); Remedios Uy (Uy); Malayo
Bantuas (sheriff Bantuas), in his capacity as sheriff of the Regional Trial Court (RTC), Branch 3 of Iligan City;
and the Register of Deeds of Cagayan de Oro City. MSLAI seeks the reversal and setting aside of the Court
of Appeals1 (CA) Decision2 dated March 21, 2007 and Resolution3 dated June 1, 2007 in CA-G.R. CV No.
58337.
The controversy stemmed from the following facts:
The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan Association, Inc.
(DSLAI) are entities duly registered with the Securities and Exchange Commission (SEC) under Registry Nos.
34869 and 32388, respectively, primarily engaged in the business of granting loans and receiving deposits
from the general public, and treated as banks. 4
Sometime in 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving corporation. 5 The
articles of merger were not registered with the SEC due to incomplete documentation. 6 On August 12,
1985, DSLAI changed its corporate name to MSLAI by way of an amendment to Article 1 of its Articles of
Incorporation, but the amendment was approved by the SEC only on April 3, 1987. 7
Meanwhile, on May 26, 1986, the Board of Directors of FISLAI passed and approved Board Resolution No.
86-002, assigning its assets in favor of DSLAI which in turn assumed the former’s liabilities. 8
The business of MSLAI, however, failed. Hence, the Monetary Board of the Central Bank of the Philippines
ordered its closure and placed it under receivership per Monetary Board Resolution No. 922 dated August
31, 1990. The Monetary Board found that MSLAI’s financial condition was one of insolvency, and for it to
continue in business would involve probable loss to its depositors and creditors. On May 24, 1991, the
Monetary Board ordered the liquidation of MSLAI, with PDIC as its liquidator. 9
It appears that prior to the closure of MSLAI, Uy filed with the RTC, Branch 3 of Iligan City, an action for
collection of sum of money against FISLAI, docketed as Civil Case No. 111-697. On October 19, 1989, the
RTC issued a summary decision in favor of Uy, directing defendants therein (which included FISLAI) to pay
the former the sum of ₱136,801.70, plus interest until full payment, 25% as attorney’s fees, and the costs
of suit. The decision was modified by the CA by further ordering the third-party defendant therein to
reimburse the payments that would be made by the defendants. The decision became final and executory
on February 21, 1992. A writ of execution was thereafter issued. 10
On April 28, 1993, sheriff Bantuas levied on six (6) parcels of land owned by FISLAI located in Cagayan de
Oro City, and the notice of sale was subsequently published. During the public auction on May 17, 1993,
Willkom was the highest bidder. A certificate of sale was issued and eventually registered with the Register
of Deeds of Cagayan de Oro City. Upon the expiration of the redemption period, sheriff Bantuas issued the
sheriff’s definite deed of sale. New certificates of title covering the subject properties were issued in favor
of Willkom. On September 20, 1994, Willkom sold one of the subject parcels of land to Go. 11
23

On June 14, 1995, MSLAI, represented by PDIC, filed before the RTC, Branch 41 of Cagayan de Oro City, a
complaint for Annulment of Sheriff’s Sale, Cancellation of Title and Reconveyance of Properties against
respondents.12 MSLAI alleged that the sale on execution of the subject properties was conducted without
notice to it and PDIC; that PDIC only came to know about the sale for the first time in February 1995 while
discharging its mandate of liquidating MSLAI’s assets; that the execution of the RTC decision in Civil Case
No. 111-697 was illegal and contrary to law and jurisprudence, not only because PDIC was not notified of
the execution sale, but also because the assets of an institution placed under receivership or liquidation
such as MSLAI should be deemed in custodia legis and should be exempt from any order of garnishment,
levy, attachment, or execution.13
(1)
IT PASSED UPON THE EXISTENCE AND STATUS OF DSLAI (now MSLAI) AS THE SURVIVING
ENTITY IN THE MERGER BETWEEN DSLAI AND FISLAI AS A DEFENSE IN AN ACTION OTHER
THAN IN A QUO WARRANTO PROCEEDING UPON THE INSTITUTION OF THE SOLICITOR
GENERAL AS MANDATED UNDER SECTION 20 OF BATAS PAMBANSA BLG. 68.
(2)

In answer, respondents averred that MSLAI had no cause of action against them or the right to recover the
subject properties because MSLAI is a separate and distinct entity from FISLAI. They further contended that
the "unofficial merger" between FISLAI and DSLAI (now MSLAI) did not take effect considering that the
merging companies did not comply with the formalities and procedure for merger or consolidation as
prescribed by the Corporation Code of the Philippines. Finally, they claimed that FISLAI is still a SEC
registered corporation and could not have been absorbed by petitioner. 14
On March 13, 1997, the RTC issued a resolution dismissing the case for lack of jurisdiction. The RTC
declared that it could not annul the decision in Civil Case No. 111-697, having been rendered by a court of
coordinate jurisdiction.15
On appeal, MSLAI failed to obtain a favorable decision when the CA affirmed the RTC resolution. The
dispositive portion of the assailed CA Decision reads:
WHEREFORE, premises considered, the instant appeal is DENIED. The decision assailed is AFFIRMED.
We REFER Sheriff Malayo B. Bantuas’ violation of the Supreme Court Administrative Circular No. 12 to the
Office of the Court Administrator for appropriate action. The Division Clerk of Court is hereby DIRECTED to
furnish the Office of the Court Administrator a copy of this decision.
IT REFUSED TO RECOGNIZE THE MERGER BETWEEN F[I]SLAI AND DSLAI WITH DSLAI AS THE
SURVIVING CORPORATION.
(3)
IT HELD THAT THE PROPERTIES SUBJECT OF THE CASE ARE NOT IN CUSTODIA LEGIS AND
THEREFORE, EXEMPT FROM GARNISHMENT, LEVY, ATTACHMENT OR EXECUTION. 19
To resolve this petition, we must address two basic questions: (1) Was the merger between FISLAI and
DSLAI (now MSLAI) valid and effective; and (2) Was there novation of the obligation by substituting the
person of the debtor?
We answer both questions in the negative.
Ordinarily, in the merger of two or more existing corporations, one of the corporations survives and
continues the combined business, while the rest are dissolved and all their rights, properties, and liabilities
are acquired by the surviving corporation.20 Although there is a dissolution of the absorbed or merged
corporations, there is no winding up of their affairs or liquidation of their assets because the surviving
corporation automatically acquires all their rights, privileges, and powers, as well as their liabilities. 21

SO ORDERED.16
The merger, however, does not become effective upon the mere agreement of the constituent
corporations.22 Since a merger or consolidation involves fundamental changes in the corporation, as well as
The appellate court sustained the dismissal of petitioner’s complaint not because it had no jurisdiction over in the rights of stockholders and creditors, there must be an express provision of law authorizing them. 23
the case, as held by the RTC, but on a different ground. Citing Associated Bank v. CA, 17 the CA ruled that
there was no merger between FISLAI and MSLAI (formerly DSLAI) for their failure to follow the procedure
laid down by the Corporation Code for a valid merger or consolidation. The CA then concluded that the two The steps necessary to accomplish a merger or consolidation, as provided for in Sections
corporations retained their separate personalities; consequently, the claim against FISLAI is warranted, and 76,24 77,25 78,26 and 7927 of the Corporation Code, are:
the subsequent sale of the levied properties at public auction is valid. The CA went on to say that even if
there had been a de facto merger between FISLAI and MSLAI (formerly DSLAI), Willkom, having relied on
(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must
the clean certificates of title, was an innocent purchaser for value, whose right is superior to that of MSLAI.
include any amendment, if necessary, to the articles of incorporation of the surviving
Furthermore, the alleged assignment of assets and liabilities executed by FISLAI in favor of MSLAI was not
corporation, or in case of consolidation, all the statements required in the articles of
binding on third parties because it was not registered. Finally, the CA said that the validity of the auction
incorporation of a corporation.
sale could not be invalidated by the fact that the sheriff had no authority to conduct the execution sale. 18

(2) Submission of plan to stockholders or members of each corporation for approval. A

Petitioner’s motion for reconsideration was denied in a Resolution dated June 1, 2007. Hence, the instant
meeting must be called and at least two (2) weeks’ notice must be sent to all stockholders or
petition anchored on the following grounds:
members, personally or by registered mail. A summary of the plan must be attached to the
notice. Vote of two-thirds of the members or of stockholders representing two-thirds of the
THE HONORABLE COURT OF APPEALS, CAGAYAN DE ORO COMMITTED GRAVE AND outstanding capital stock will be needed. Appraisal rights, when proper, must be respected.
REVERSIBLE ERROR WHEN:
24
(3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation,
by the corporate officers of each constituent corporation. These take the place of the articles
of incorporation of the consolidated corporation, or amend the articles of incorporation of the
surviving corporation.
(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two
weeks before.
(6) Issuance of certificate of merger or consolidation.28
Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the SEC, subject
to its prior determination that the merger is not inconsistent with the Corporation Code or existing
laws.29 Where a party to the merger is a special corporation governed by its own charter, the Code
particularly mandates that a favorable recommendation of the appropriate government agency should first
be obtained.30
In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not registered with
the SEC due to incomplete documentation. Consequently, the SEC did not issue the required certificate of
merger. Even if it is true that the Monetary Board of the Central Bank of the Philippines recognized such
merger, the fact remains that no certificate was issued by the SEC. Such merger is still incomplete without
the certification.
The issuance of the certificate of merger is crucial because not only does it bear out SEC’s approval but it
also marks the moment when the consequences of a merger take place. By operation of law, upon the
effectivity of the merger, the absorbed corporation ceases to exist but its rights and properties, as well as
liabilities, shall be taken and deemed transferred to and vested in the surviving corporation. 31
The same rule applies to consolidation which becomes effective not upon mere agreement of the members
but only upon issuance of the certificate of consolidation by the SEC. 32 When the SEC, upon processing and
examining the articles of consolidation, is satisfied that the consolidation of the corporations is not
inconsistent with the provisions of the Corporation Code and existing laws, it issues a certificate of
consolidation which makes the reorganization official.33 The new consolidated corporation comes into
existence and the constituent corporations are dissolved and cease to exist. 34
There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as respondents, the
two corporations shall not be considered as one but two separate corporations. A corporation is an
artificial being created by operation of law. It possesses the right of succession and such powers, attributes,
and properties expressly authorized by law or incident to its existence.35 It has a personality separate and
distinct from the persons composing it, as well as from any other legal entity to which it may be
related.36 Being separate entities, the property of one cannot be considered the property of the other.
Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI remain as its assets and
cannot be considered as belonging to DSLAI and MSLAI, notwithstanding the Deed of Assignment wherein
FISLAI assigned its assets and properties to DSLAI, and the latter assumed all the liabilities of the former. As
provided in Article 1625 of the Civil Code, "an assignment of credit, right or action shall produce no effect
as against third persons, unless it appears in a public instrument, or the instrument is recorded in the
Registry of Property in case the assignment involves real property." The certificates of title of the subject
properties were clean and contained no annotation of the fact of assignment. Respondents cannot,
therefore, be faulted for enforcing their claim against FISLAI on the properties registered under its name.
Accordingly, MSLAI, as the successor-in-interest of DSLAI, has no legal standing to annul the execution sale
over the properties of FISLAI. With more reason can it not cause the cancellation of the title to the subject
properties of Willkom and Go.
Petitioner cannot also anchor its right to annul the execution sale on the principle of
novation.1avvphi1 While it is true that DSLAI (now MSLAI) assumed all the liabilities of FISLAI, such
assumption did not result in novation as would release the latter from liability, thereby exempting its
properties from execution. Novation is the extinguishment of an obligation by the substitution or change of
the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object
or principal conditions, by substituting another in place of the debtor, or by subrogating a third person in
the rights of the creditor.37
It is a rule that novation by substitution of debtor must always be made with the consent of the
creditor.38 Article 1293 of the Civil Code is explicit, thus:
Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237.
In this case, there was no showing that Uy, the creditor, gave her consent to the agreement that DSLAI
(now MSLAI) would assume the liabilities of FISLAI. Such agreement cannot prejudice Uy. Thus, the assets
that FISLAI transferred to DSLAI remained subject to execution to satisfy the judgment claim of Uy against
FISLAI. The subsequent sale of the properties by Uy to Willkom, and of one of the properties by Willkom to
Go, cannot, therefore, be questioned by MSLAI.
The consent of the creditor to a novation by change of debtor is as indispensable as the creditor’s consent
in conventional subrogation in order that a novation shall legally take place. 39 Since novation implies a
waiver of the right which the creditor had before the novation, such waiver must be express. 40
WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated March 21,
2007 and Resolution dated June 1, 2007 in CA-G.R. CV No. 58337 are AFFIRMED.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
G.R. No. 99398 & 104625       January 26, 2001
CHESTER BABST, petitioner,
vs.
COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, ELIZALDE STEEL CONSOLIDATED, INC., and
PACIFIC MULTI-COMMERCIAL CORPORATION, respondents.
x ------------------------------------------------ x
ELIZALDE STEEL CONSOLIDATED, INC., petitioner,
vs.
25
COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, PACIFIC MULTI-COMMERCIAL CORPORATION
and CHESTER BABST, respondents.
YNARES-SANTIAGO, J.:
These consolidated petitions seek the review of the Decision dated April 29, 1991 of the Court of Appeals in
CA-G.R. CV No. 17282 1 entitled, "Bank of the Philippine Islands, Plaintiff-Appellee  versus Elizalde Steel
Consolidated, Inc., Pacific Multi-Commercial Corporation, and Chester G. Babst, Defendants-Appellants."
The complaint was commenced principally to enforce payment of a promissory note and three domestic
letters of credit which Elizalde Steel Consolidated, Inc. (ELISCON) executed and opened with the
Commercial Bank and Trust Company (CBTC).
On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of P 8,015,900.84, with interest at the
rate of 14% per annum, evidenced by a promissory note. 2 ELISCON defaulted in its payments, leaving an
outstanding indebtedness in the amount of P2,795,240.67 as of October 31, 1982. 3
The letters of credit, on the other hand, were opened for ELISCON by CBTC using the credit facilities of
Pacific Multi-Commercial Corporation (MULTI) with the said bank, pursuant to the Resolution of the Board
of Directors of MULTI adopted on August 31, 1977 which reads:
WHEREAS, at least 90% of the Company's gross sales is generated by the sale of tin-plates
manufactured by Elizalde Steel Consolidated, Inc.;
WHEREAS, it is to the best interests of the Company to continue handling said tin-plate line;
WHEREAS, Elizalde Steel Consolidated, Inc. has requested the assistance of the Company in
obtaining credit facilities to enable it to maintain the present level of its tin-plate
manufacturing output and the Company is willing to extend said requested assistance;
NOW, THEREFORE, for and in consideration of the foregoing premises ---
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT & GENERAL MANAGER,
ANTONIO ROXAS CHUA, be, as he is hereby empowered to allow and authorize ELIZALDE STEEL
CONSOLIDATED, INC. to avail and make use of the Credit Line of PACIFIC MULTI-COMMERCIAL
CORPORATION with the COMMERCIAL BANK & TRUST COMPANY OF THE PHILIPPINES, Makati,
Metro Manila;
RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation guarantee, as it does
hereby guarantee, solidarily, the payment of the corresponding Letters of Credit upon
maturity of the same;
RESOLVED, FINALLY, That copies of this resolution be furnished the Commercial Bank & Trust
Company of the Philippines, Makati, Metro Manila, for their information. 4
Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst executed a Continuing
Suretyship,5 whereby they bound themselves jointly and severally liable to pay any existing indebtedness of
MULTI to CBTC to the extent of P8,000,000.00 each.1âwphi1.nêt
Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel Corporation three (3)
domestic letters of credit in the amounts of P1,946,805.73, 6 P1,702,869.327 and P200,307.72,8 respectively,
which ELISCON used to purchase tin black plates from National Steel Corporation. ELISCON defaulted in its
obligation to pay the amounts of the letters of credit, leaving an outstanding account, as of October 31,
1982, in the total amount of P3,963,372.08. 9
On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into a merger, wherein
BPI, as the surviving corporation, acquired all the assets and assumed all the liabilities of CBTC. 10
Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the Development
Bank of the Philippines (DBP). In order to settle its obligations, ELISCON proposed to convey to DBP by way
of dacion en pago  all its fixed assets mortgaged with DBP, as payment for its total indebtedness in the
amount of P201,181,833.16. On December 28, 1978, ELISCON and DBP executed a Deed of Cession of
Property in Payment of Debt.11
In June 1981, ELISCON called its creditors to a meeting to announce the take-over by DBP of its assets.
In October 1981, DBP formally took over the assets of ELISCON, including its indebtedness to BPI.
Thereafter, DBP proposed formulas for the settlement of all of ELISCON's obligations to its creditors, but
BPI expressly rejected the formula submitted to it for not being acceptable. 12
Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC, instituted with the Regional Trial
Court of Makati, Branch 147, a complaint13 for sum of money against ELISCON, MULTI and Babst, which was
docketed as Civil Case No. 49226.
ELISCON, in its Answer,14 argued that the complaint was premature since DBP had made serious efforts to
settle its obligations with BPI.
Babst also filed his Answer alleging that he signed the Continuing Suretyship on the understanding that it
covers only obligations which MULTI incurred solely for its benefit and not for any third party liability, and
he had no knowledge or information of any transaction between MULTI and ELISCON. 15
MULTI, for its part, denied knowledge of the merger between BPI and CBTC, and averred that the guaranty
under its board resolution did not cover purchases made by ELISCON in the form of trust receipts. It set up
a cross-claim against ELISCON alleging that the latter should be held liable for any judgment which the
court may render against it in favor of BPI.16
On February 20, 1987, the trial court rendered its Decision, 17 the dispositive portion of which reads:
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor of the
plaintiff and against all the defendants:
26
1) Ordering defendant ELISCON to pay the plaintiff the amount of P2,795,240.67 due on the
promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of
P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982;
2) Ordering defendant ELISCON to pay the plaintiff interests and related charges on the
principal of said promissory note of P2,102,232.02 at the rates provided in said note from and
after 31 October 1982 until full payment thereof, and on the principal of the three (3)
domestic letters of credit of P3,564,349.25 interests and related charges at the rates provided
in said letters of credit, from and after 31 October 1982 until full payment;
3) Ordering defendant ELISCON to pay interests at the legal rate on all interests and related
charges but unpaid as of the filing of this complaint, until full payment thereof;
4) Ordering defendant ELISCON to pay attorney's fees equivalent to 10% of the total amount
due under the preceding paragraphs;
5) Ordering defendants Pacific Multi-Commercial Corporation and defendant Chester Babst to
pay, jointly and severally with defendant ELISCON, the total sum of P3,963,372.08 due on the
three (3) domestic letters of credit as of 31 October 1982 with interests and related charges on
the principal amount of P3,963,372.08 at the rates provided in said letters of credit from 30
October 1982 until fully paid, but to the extent of not more than P8,000,000.00 in the case of
defendant Chester Babst;
6) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to
pay, jointly and severally plaintiff interests at the legal rate on all interests and related charges
already accrued but unpaid on said three (3) domestic letters of credit as of the date of the
filing of this Complaint until full payment thereof;
7) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to
pay, jointly and severally, attorney's fees of not less than 10% of the total amount due under
paragraphs 5 and 6 hereof. With costs.
SO ORDERED.
18
In due time, ELISCON, MULTI and Babst filed their respective notices of appeal.
On April 29, 1991, the Court of Appeals rendered the appealed Decision as follows:
WHEREFORE, the judgment appealed from is MODIFIED, to now read (with the underlining to
show the principal changes from the decision of the lower court) thus:
1) Ordering appellant ELISCON to pay the appellee BPI the amount of P2,731,005.60 due on
the promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of
P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982;
2) Ordering appellant ELISCON to pay the appellee BPI interests and related charges on the
principal of said promissory note of P2,102,232.02 at the rates provided in said note from and
after 31 October 1982 until full payment thereof, and on the principal of the three (3)
domestic letters of credit of P3,564,349.25 interests and related charges at the rates provided
in said letters of credit, from and after 31 October 1982 until full payment;
3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate on all interests and
related charges but unpaid as of the filing of this complaint, until full payment thereof;
4) Ordering appellant Pacific Multi-Commercial Corporation and appellant Chester G. Babst to
pay appellee BPI, jointly and severally with appellant ELISCON, the total sum of P3,963,372.08
due on the three (3) domestic letters of credit as of 31 October 1982 with interest and .related
charges on the principal amount of P3,963,372.08 at the rates provided in said letters of credit
from 30 October 1982 until fully paid, but to the extent of not more than P8,000,000.00 in the
case of defendant Chester Babst;
5) Ordering appellant Pacific Multi-Commercial Corporation and defendant Chester Babst to
pay, jointly and severally, appellee BPI interests at the legal rate on all interests and related
charges already accrued but unpaid on said three (3) domestic letters of credit as of the date
of the filing of this Complaint until full payment thereof and the plaintiff's lawyer's fees in the
nominal amount of P200.000.00;
6) Ordering appellant ELISCON to reimburse appellants Pacific Multi-Commercial Corporation
and Chester Babst whatever amount they shall have paid in said Eliscon's behalf particularly
referring to the three (3) letters of credit as of 31 October 1982 and other related charges.
No costs.
SO ORDERED.19
ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which was, however,
denied in a Resolution dated March 9, 1992. 20 Subsequently, ELISCON filed a petition for review on
certiorari, docketed as G.R. No. 104625, on the following grounds:
A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO RECOVER FROM PETITIONER
ELISCON THE LATTER'S OBLIGATION WITH COMMERCIAL BANK AND TRUST COMPANY (CBTC)
B. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN ELISCON AND BPI THERE
BEING A PRIOR CONSENT TO AND APPROVAL BY BPI OF THE SUBSTITUTION BY DBP AS DEBTOR
IN LIEU OF THE ORIGINAL DEBTOR, ELISCON, THEREBY RELEASING ELISCON FROM ITS
OBLIGATION TO BPI.
C. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER BABST CANNOT LAWFULLY
RECOVER FROM ELISCON WHATEVER AMOUNT THEY MAY BE REQUIRED TO PAY TO BPI AS
SURETIES OF ELISCON'S OBLIGATION TO BPI; THEIR CAUSE OF ACTION MUST BE DIRECTED
AGAINST DBP AS THE NEWLY SUBSTITUTED DEBTOR IN PLACE OF ELISCON.
27
D. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO AN ACT OF GOVERNMENT
WHICH WAS A FORTUITOUS EVENT EXCULPATING ELISCON FROM FURTHER LIABILITIES TO
RESPONDENT BPI.
E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY RESPONDENT BPI THE
AMOUNTS STATED IN THE DISPOSITIVE PORTION OF RESPONDENT COURT OF APPEALS'
DECISION:21
BPI filed its Comment22 raising the following arguments, to wit:
1. Respondent BPI is legally entitled to recover from ELISCON, MULTI and Babst the past due
obligations with CBTC prior to the merger of BPI with CBTC.
2. BPI did not give its consent to the DBP take-over of ELISCON. Hence, no valid novation has
been effected.
3. Express consent of creditor to substitution should be recorded in the books.
4. Petitioner Chester G. Babst and respondent MULTI are jointly and solidarily liable to BPI for
the unpaid letters of credit of ELISCON.
5. The question of the liability of ELISCON to BPI has been clearly established.
6. Since MULTI and Chester G. Babst are guarantors of the debts incurred by ELISCON, they
may recover from the latter what they may have paid for on account of that guaranty.
Chester Babst filed a Comment with Manifestation,23 wherein he contends that the suretyship agreement
he executed with Antonio Roxas Chua was in favor of MULTI; and that there is nothing therein which
authorizes MULTI, in turn, to guarantee the obligations of ELISCON.
24
In its Comment,  MULTI maintained that inasmuch as BPI had full knowledge of the purpose of the
meeting in June 1981, wherein the takeover by DBP of ELISCON was announced, it was incumbent upon the
said bank to formally communicate its objection to the assumption of ELISCON's liabilities by DBP in answer
to the call for the meeting. Moreover, there was no showing that the availment by ELISCON of MULTI's
credit facilities with CBTC, which was supposedly guaranteed by Antonio Roxas Chua, was indeed
authorized by the latter pursuant to the resolution of the Board of Directors of MULTI.
In compliance with this Court's Resolution dated March 17, 1993, 25 the parties submitted their respective
memoranda.
Meanwhile, in a petition for review filed with this Court, which was docketed as G.R. No. 99398, Chester
Babst alleged that the Court of Appeals acted without jurisdiction and/or with grave abuse of discretion
when:
1. IT AFFIRMED THE LOWER COURT'S HOLDING THAT THERE WAS NO NOVATION INASMUCH
AS RESPONDENT BANK OF THE PHILIPPINE ISLANDS (OR BPI) HAD PRIOR CONSENT TO AND
APPROVAL OF THE SUBSTITUTION AS DEBTOR BY THE DEVELOPMENT BANK OF THE
PHILIPPINES (OR DBP) IN THE PLACE OF ELIZALDE STEEL CONSOLIDATED, INC. (OR ELISCON) IN
THE LATTER 'S OBLIGATION TO BPI.
2. IT CONFIRMED THE LOWER COURT'S CONCLUSION THAT THERE WAS NO IMPLIED CONSENT
OF THE CREDITOR BANK OF THE PHILIPPINE ISLANDS TO THE SUBSTITUTION BY DEVELOPMENT
BANK OF THE PHILIPPINES OF THE ORIGINAL DEBTOR ELIZALDE STEEL CONSOLIDATED, INC.
3. IT AFFIRMED THE LOWER COURT'S FINDING OF LACK OF MERIT OF THE CONTENTION OF
ELISCON THAT THE FAILURE OF THE OFFICER OF BPI, WHO WAS PRESENT DURING THE
MEETING OF ELISCON'S CREDITORS IN JUNE 1981 TO VOICE HIS OBJECTION TO THE
ANNOUNCED TAKEOVER BY THE DBP OF THE ASSETS OF ELISCON AND ASSUMPTION OF ITS
LIABILITIES, CONSTITUTED AN IMPLIED CONSENT TO THE ASSUMPTION BY DBP OF THE
OBLIGATIONS OF ELISCON TO BPI.
4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER OF THE ENTIRE ELISCON WAS
AN ACT OF GOVERNMENT CONSTITUTING A FORTUITOUS EVENT EXCULPATING ELISCON
FROM ANY LIABILITY TO BPI.
5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP AND BPI RELIEVED ELISCON,
MULTI AND BABST OF ANY LIABILITY TO BPI.
6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES SOLIDARILY WITH ELISCON WITH
RESPECT TO THE OBLIGATION INVOLVED HERE.
7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST ELISCON ORDERING THE LATTER
TO PAY THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF THE DECISION; AND
ORDERING PETITIONER AND MULTI TO PAY SAID AMOUNTS JOINTLY AND SEVERALLY WITH
ELISCON.26
Petitioner Babst alleged that DBP sold all of ELISCON's assets to the National Development Company, for
the latter to take over and continue the operation of its business. On September 11, 1981, the Board of
Governors of the DBP adopted Resolution No. 2817 which states that DBP shall enter into a contractual
arrangement with NDC for the latter to pay ELISCON's creditors, including BPI in the amount of
P4,015,534.54. This was followed by a Memorandum of Agreement executed on May 4,1983 by and
between DBP and NDC, wherein they stipulated, inter alia,  that NDC shall pay to ELISCON's creditors,
through DBP, the amount of P299,524,700.00. Among the creditors mentioned in the agreement was BPI,
with a listed credit of P4,015,534.54.
Furthermore, petitioner Babst averred that the assets of ELISCON which were acquired by the DBP, and
later transferred to the NDC, were placed under the Asset Privatization Trust pursuant to Proclamation No.
50, issued by then President Corazon C. Aquino on December 8, 1986.
In its Comment,27 BPI countered that by virtue of its merger with CBTC, it acquired all the latter's rights and
interest including all receivables; that in order to effect a valid novation by substitution of debtors, the
consent of the creditor must be express; that in addition, the consent of BPI must appear in its books, it
being a private corporation; that BPI intentionally did not consent to the assumption by DBP of the
obligations of ELISCON because it wanted to preserve intact its causes of action and legal recourse against
Pacific Multi-Commercial Corporation and Babst as sureties of ELISCON and not of DBP; that MULTI
28
expressly bound itself solidarily for ELISCON's obligations to CBTC in its Resolution wherein it allowed the
latter to use its credit facilities; and that the suretyship agreement executed by Babst does not exclude
liabilities incurred by MULTI on behalf of third parties, such as ELISCON.
ELISCON likewise filed a Comment,28 wherein it manifested that of the seven errors raised by Babst in his
petition, six are arguments which ELISCON itself raised in its previous pleadings. It is only the sixth assigned
error --- that the Court of Appeals erred in finding that MULTI and Babst bound themselves solidarily with
ELISCON --- that ELISCON takes exception to. More particularly, ELISCON pointed out the contradictory
positions taken by Babst in admitting that he bound himself to pay the indebtedness of MULTI, while at the
same time completely disavowing and denying any such obligation. It stressed that should MULTI or Babst
be finally adjudged liable under the suretyship agreement, they cannot lawfully recover from ELISCON, but
from the DBP which had been substituted as the new debtor.
MULTI filed its Comrnent,29 admitting the correctness of the petition and adopting the Comment of
ELISCON insofar as it is not inconsistent with the positions of Babst and MULTI.
At the outset, the preliminary issue of BPI's right of action must first be addressed. ELISCON and MULTI
assail BPI's legal capacity to recover their obligation to CBTC. However, there is no question that there was
a valid merger between BPI and CBTC. It is settled that in the merger of two existing corporations, one of
the corporations survives and continues the business, while the other is dissolved and all its rights,
properties and liabilities are acquired by the surviving corporation.30 Hence, BPI has a right to institute the
case a quo.
We now come to the primordial issue in this case — whether or not BPI consented to the assumption by
DBP of the obligations of ELISCON.
Article 1293 of the Civil Code provides:
Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him the rights mentioned in articles
1236 and 1237.
BPI contends that in order to have a valid novation, there must be an express consent of the creditor. In the
case of Testate Estate of Mota, et al. v. Serra,31  this Court held:
It should be noted that in order to give novation its legal effect, the law requires that the
creditor should consent to the substitution of a new debtor. This consent must be given
expressly for the reason that, since novation extinguishes the personality of the first debtor
who is to be substituted by a new one, it implies on the part of the creditor a waiver of the
right that he had before the novation, which waiver must be express under the principle
of renuntiatio non proesumitur,  recognized by the law in declaring that a waiver of right may
not be performed [should read:  presumed] unless the will to waive is indisputably shown by
him who holds the right.32
The import of the foregoing ruling, however, was explained and clarified by this Court in the later case
of Asia Banking Corporation v. EIser33  in this wise:
The aforecited article 1205 [now 1293] of the Civil Code does not state that the creditor's
consent to the substitution of the new debtor for the old be express, or given at the time of
the substitution, and the Supreme Court of Spain, in its judgment of June 16, 1908, construing
said article, laid down the doctrine that "article 1205 of the Civil Code does not mean or
require that the creditor's consent to the change of debtors must be given simultaneously with
the debtor's consent to the substitution, its evident purpose being to preserve the creditor's
full right, it is sufficient that the latter's consent be given at any time and in any form
whatever, while the agreement of the debtors subsists." The same rule is stated in
the Enciclopedia Juridica Española,  volume 23, page 503, which reads: "'The rule that this kind
of novation, like all others, must be express, is not absolute; for the existence of the consent
may well be inferred from the act of the creditor, since volition may as well be expressed by
deeds as by words." The understanding between Henry W. Elser and the principal director of
Yangco, Rosenstock & Co., Inc., with respect to Luis R. Yangco's stock in said corporation, and
the acts of the board of directors after Henry W. Elser had acquired said shares, in substituting
the latter for Luis R. Yangco, are a clear and unmistakable expression of its consent. When this
court said in the case of Estate of Mota vs.  Serra (47 Phil. 464), that the creditor's express
consent is necessary in order that there may be a novation of a contract by the substitution of
debtors, it did not wish to convey the impression that the word "express" was to be given an
unqualified meaning. as indicated in the authorities or cases. both Spanish and American, cited
in said decision.34
Subsequently, in the case of Vda. e Hijos de Pio Barretto y Cia., Inc. v. Albo  & Sevilla, Inc., et al.,35  this Court
reiterated the rule that there can be implied consent of the creditor to the substitution of debtors.
In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to register its
objection to the take-over by DBP of ELISCON's assets, at the creditors' meeting held in June 1981 and
thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as debtor.
We find merit in the argument. Indeed, there exist clear indications that BPI was aware of the assumption
by DBP of the obligations of ELISCON. In fact, BPI admits that ---
"the Development Bank of the Philippines (DBP), for a time, had .proposed a formula for the
settlement of Eliscon's past obligations to its creditors, including the plaintiff [BPI], but the
formula was expressly rejected by the plaintiff as not acceptable (long before the filing of the
complaint at bar)."36
The Court of Appeals held that even if the account officer who attended the June 1981 creditors' meeting
had expressed consent to the assumption by DBP of ELISCON' s debts, such consent would not bind BPI for
lack of a specific authority therefor. In its petition, ELISCON counters that the mere presence of the account
officer at the meeting necessarily meant that he was authorized to represent BPI in that creditors' meeting.
Moreover, BPI did not object to the substitution of debtors, although it objected to the payment formula
submitted by DBP.
Indeed, the authority granted by BPI to its account officer to attend the creditors' meeting was an authority
to represent the bank, such that when he failed to object to the substitution of debtors, he did so on behalf
of and for the bank. Even granting arguendo  that the said account officer was not so empowered, BPI could
have subsequently registered its objection to the substitution, especially after it had already learned that
DBP had taken over the assets and assumed the liabilities of ELISCON. Its failure to do so can only mean an
acquiescence in the assumption by DBP of ELISCON's obligations. As repeatedly pointed out by ELISCON
and MULTI, BPI's objection was to the proposed payment formula, not to the substitution itself.
29
BPI gives no cogent reason in withholding its consent to the substitution, other than its desire to preserve
its causes of action and legal recourse against the sureties of ELISCON. It must be remembered, however,
that while a surety is solidarily liable with the principal debtor, his obligation to pay only arises upon the
principal debtor's failure or refusal to pay. A contract of surety is an accessory promise by which a person
binds himself for another already bound, and agrees with the creditor to satisfy the obligation if the debtor
does not.37 A surety is an insurer of the debt; he promises to pay the principal's debt if the principal will not
pay.38
In the case at bar, there was no indication that the principal debtor will default in payment. In fact, DBP,
which had stepped into the shoes of ELISCON, was capable of payment. Its authorized capital stock was
increased by the government.39 More importantly, the National Development Company took over the
business of ELISCON and undertook to pay ELISCON's creditors, and earmarked for that purpose the
amount of P4,015,534.54 for payment to BPI.40
Notwithstanding the fact that a reliable institution backed by government funds was offering to pay
ELISCON's debts, not as mere surety but as substitute principal debtor, BPI, for reasons known only to
itself, insisted in going after the sureties. The course of action chosen taxes the credulity of this Court. At
the very least, suffice it to state that BPI's actuation in this regard runs counter to the good faith covenant
in contractual relations, provided for by the Civil Code, to wit:
ART. 19. Every person must, in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty and good faith.1âwphi1.nêt
ART. 1159. Obligations arising from contract have the force of law between the contracting
parties and should be complied with in good faith.
BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as debtor.
Hence, there was a valid novation which resulted in the release of ELISCON from its obligation to BPI,
whose cause of action should be directed against DBP as the new debtor.
Novation, in its broad concept, may either be extinctive or modificatory .It is extinctive when
an old obligation is terminated by the creation of a new obligation that takes the place of the
former; it is merely modificatory when the old obligation subsists to the extent it remains
compatible with the amendatory agreement. An extinctive novation results either by changing
the object or principal conditions (objective or real), or by substituting the person of the
debtor or subrogating a third person in the rights of the creditor (subjective or personal).
Under this mode, novation would have dual functions — one to extinguish an existing
obligation, the other to substitute a new one in its place — requiring a conflux of four essential
requisites, (1) a previous valid obligation; (2) an agreement of all parties concerned to a new
contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new
obligation.41
The original obligation having been extinguished, the contracts of suretyship executed separately by Babst
and MULTI, being accessory obligations, are likewise extinguished. 42
Hence, BPI should enforce its cause of action against DBP. It should be stressed that notwithstanding the
lapse of time within which these cases have remained pending, the prescriptive period for BPI to file its
action was interrupted when it filed Civil Case No. 49226. 43
WHEREFORE, the consolidated petitions are GRANTED. The appealed Decision of the Court of Appeals,
which held ELISCON, MULTI and Babst solidarily liable for payment to BPI of the promissory note and
letters of credit, is REVERSED and SET ASIDE. BPI's complaint against ELISCON, MULTI and Babst
is DISMISSED.
SO ORDERED.
G.R. No. 157479               November 24, 2010
PHILIP TURNER and ELNORA TURNER, Petitioners,
vs.
LORENZO SHIPPING CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
This case concerns the right of dissenting stockholders to demand payment of the value of their
shareholdings.
In the stockholders’ suit to recover the value of their shareholdings from the corporation, the Regional Trial
Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered the corporation, herein
respondent, to pay. Execution was partially carried out against the respondent. On the respondent’s
petition for certiorari, however, the Court of Appeals (CA) corrected the RTC and dismissed the petitioners’
suit on the ground that their cause of action for collection had not yet accrued due to the lack of
unrestricted retained earnings in the books of the respondent.
Thus, the petitioners are now before the Court to challenge the CA’s decision promulgated on March 4,
2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his
capacity as Presiding Judge of Branch 46 of the Regional Trial Court of Manila, et al. 1
Antecedents
The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged
primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles of
incorporation to remove the stockholders’ pre-emptive rights to newly issued shares of stock. Feeling that
the corporate move would be prejudicial to their interest as stockholders, the petitioners voted against the
amendment and demanded payment of their shares at the rate of ₱2.276/share based on the book value
of the shares, or a total of ₱2,298,760.00.
The respondent found the fair value of the shares demanded by the petitioners unacceptable. It insisted
that the market value on the date before the action to remove the pre-emptive right was taken should be
the value, or ₱0.41/share (or a total of ₱414,100.00), considering that its shares were listed in the
Philippine Stock Exchange, and that the payment could be made only if the respondent had unrestricted
retained earnings in its books to cover the value of the shares, which was not the case.
30
The disagreement on the valuation of the shares led the parties to constitute an appraisal committee
pursuant to Section 82 of the Corporation Code, each of them nominating a representative, who together
then nominated the third member who would be chairman of the appraisal committee. Thus, the appraisal
committee came to be made up of Reynaldo Yatco, the petitioners’ nominee; Atty. Antonio Acyatan, the
respondent’s nominee; and Leo Anoche of the Asian Appraisal Company, Inc., the third member/chairman.
On October 27, 2000, the appraisal committee reported its valuation of ₱2.54/share, for an aggregate value
of ₱2,565,400.00 for the petitioners. 2
Subsequently, the petitioners demanded payment based on the valuation of the appraisal committee, plus
2%/month penalty from the date of their original demand for payment, as well as the reimbursement of
the amounts advanced as professional fees to the appraisers. 3
In its letter to the petitioners dated January 2, 2001, 4 the respondent refused the petitioners’ demand,
explaining that pursuant to the Corporation Code, the dissenting stockholders exercising their appraisal
rights could be paid only when the corporation had unrestricted retained earnings to cover the fair value of
the shares, but that it had no retained earnings at the time of the petitioners’ demand, as borne out by its
Financial Statements for Fiscal Year 1999 showing a deficit of ₱72,973,114.00 as of December 31, 1999.
Upon the respondent’s refusal to pay, the petitioners sued the respondent for collection and damages in
the RTC in Makati City on January 22, 2001. The case, docketed as Civil Case No. 01-086, was initially
assigned to Branch 132.5
On June 26, 2002, the petitioners filed their motion for partial summary judgment, claiming that:
7) xxx the defendant has an accumulated unrestricted retained earnings of ELEVEN MILLION
NINE HUNDRED SEVENTY FIVE THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS,
Philippine Currency, evidenced by its Financial Statement as of the Quarter Ending March 31,
2002; xxx
8) xxx the fair value of the shares of the petitioners as fixed by the Appraisal Committee is
final, that the same cannot be disputed xxx
9) xxx there is no genuine issue to material fact and therefore, the plaintiffs are entitled, as a
matter of right, to a summary judgment. xxx 6
The respondent opposed the motion for partial summary judgment, stating that the determination of the
unrestricted retained earnings should be made at the end of the fiscal year of the respondent, and that the
petitioners did not have a cause of action against the respondent.
During the pendency of the motion for partial summary judgment, however, the Presiding Judge of Branch
133 transmitted the records to the Clerk of Court for re-raffling to any of the RTC’s special commercial
courts in Makati City due to the case being an intra-corporate dispute. Hence, Civil Case No. 01-086 was re-
raffled to Branch 142.
Nevertheless, because the principal office of the respondent was in Manila, Civil Case No. 01-086 was
ultimately transferred to Branch 46 of the RTC in Manila, presided by Judge Artemio Tipon,7 pursuant to the
Interim Rules of Procedure on Intra-Corporate Controversies (Interim Rules) requiring intra-corporate cases
to be brought in the RTC exercising jurisdiction over the place where the principal office of the corporation
was found.
After the conference in Civil Case No. 01-086 set on October 23, 2002, which the petitioners’ counsel did
not attend, Judge Tipon issued an order,8 granting the petitioners’ motion for partial summary judgment,
stating:
As to the motion for partial summary judgment, there is no question that the 3-man committee mandated
to appraise the shareholdings of plaintiff submitted its recommendation on October 27, 2000 fixing the fair
value of the shares of stocks of the plaintiff at P2.54 per share. Under Section 82 of the Corporation Code:
"The findings of the majority of the appraisers shall be final, and the award shall be paid by the corporation
within thirty (30) days after the award is made."
"The only restriction imposed by the Corporation Code is–"
"That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted
retained earning in its books to cover such payment."
The evidence submitted by plaintiffs shows that in its quarterly financial statement it submitted to the
Securities and Exchange Commission, the defendant has retained earnings of P11,975,490 as of March 21,
2002. This is not disputed by the defendant. Its only argument against paying is that there must be
unrestricted retained earning at the time the demand for payment is made.
This certainly is a very narrow concept of the appraisal right of a stockholder. The law does not say that the
unrestricted retained earnings must exist at the time of the demand. Even if there are no retained earnings
at the time the demand is made if there are retained earnings later, the fair value of such stocks must be
paid. The only restriction is that there must be sufficient funds to cover the creditors after the dissenting
stockholder is paid. No such allegations have been made by the defendant. 9
On November 12, 2002, the respondent filed a motion for reconsideration.
On the scheduled hearing of the motion for reconsideration on November 22, 2002, the petitioners filed a
motion for immediate execution and a motion to strike out motion for reconsideration. In the latter
motion, they pointed out that the motion for reconsideration was prohibited by Section 8 of the Interim
Rules.  Thus, also on November 22, 2002, Judge Tipon denied the motion for reconsideration and granted
the petitioners’ motion for immediate execution.10
Subsequently, on November 28, 2002, the RTC issued a writ of execution. 11
Aggrieved, the respondent commenced a special civil action for certiorari in the CA to challenge the two
aforecited orders of Judge Tipon, claiming that:
A.
31
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING SUMMARY JUDGMENT TO THE
SPOUSES TURNER, BECAUSE AT THE TIME THE "COMPLAINT" WAS FILED, LSC HAD NO
RETAINED EARNINGS, AND THUS WAS COMPLYING WITH THE LAW, AND NOT VIOLATING ANY
RIGHTS OF THE SPOUSES TURNER, WHEN IT REFUSED TO PAY THEM THE VALUE OF THEIR LSC
SHARES. ANY RETAINED EARNINGS MADE A YEAR AFTER THE "COMPLAINT" WAS FILED ARE
IRRELEVANT TO THE SPOUSES TURNER’S RIGHT TO RECOVER UNDER THE "COMPLAINT",
BECAUSE THE WELL-SETTLED RULE, REPEATEDLY BROUGHT TO JUDGE TIPON’S ATTENTION, IS
"IF NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS COMMENCED THE SUIT CANNOT BE
MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY HAVE ACCRUED THEREAFTER.
B.
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS GRAVELY ABUSED HIS
DISCRETION, WHEN HE GRANTED AND ISSUED THE QUESTIONED "WRIT OF EXECUTION"
DIRECTING THE EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN FAVOR OF THE SPOUSES
TURNER, BECAUSE THAT JUDGMENT IS NOT A FINAL JUDGMENT UNDER SECTION 1 OF RULE
39 OF THE RULES OF COURT AND THEREFORE CANNOT BE SUBJECT OF EXECUTION UNDER THE
SUPREME COURT’S CATEGORICAL HOLDING IN PROVINCE OF PANGASINAN VS. COURT OF
APPEALS.
Upon the respondent’s application, the CA issued a temporary restraining order (TRO), enjoining the
petitioners, and their agents and representatives from enforcing the writ of execution. By then, however,
the writ of execution had been partially enforced.
The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent the execution.
Thereupon, the sheriff resumed the enforcement of the writ of execution.
The CA promulgated its assailed decision on March 4, 2003, 12 pertinently holding:
However, it is clear from the foregoing that the Turners’ appraisal right is subject to the legal condition that
no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained
earnings in its books to cover such payment. Thus, the Supreme Court held that:
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine
which means that the capital stock, property and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred
over the stockholders in the distribution of corporate assets. There can be no distribution of assets among
the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the
prejudice of creditors is null and void. Creditors of a corporation have the right to assume that so long as
there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation
to purchase its own stock.
In the instant case, it was established that there were no unrestricted retained earnings when the Turners
filed their Complaint. In a letter dated 20 August 2000, petitioner informed the Turners that payment of
their shares could only be made if it had unrestricted earnings in its books to cover the same. Petitioner
reiterated this in a letter dated 2 January 2001 which further informed the Turners that its Financial
Statement for fiscal year 1999 shows that its retained earnings ending December 31, 1999 was at a deficit
in the amount of ₱72,973,114.00, a matter which has not been disputed by private respondents. Hence, in
accordance with the second paragraph of sec. 82, BP 68 supra, the Turners’ right to payment had not yet
accrued when they filed their Complaint on January 22, 2001, albeit their appraisal right already existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the Supreme Court declared that:
Now, before an action can properly be commenced all the essential elements of the cause of action must
be in existence, that is, the cause of action must be complete. All valid conditions precedent to the
institution of the particular action, whether prescribed by statute, fixed by agreement of the parties or
implied by law must be performed or complied with before commencing the action, unless the conduct of
the adverse party has been such as to prevent or waive performance or excuse non-performance of the
condition.
It bears restating that a right of action is the right to presently enforce a cause of action, while a cause of
action consists of the operative facts which give rise to such right of action. The right of action does not
arise until the performance of all conditions precedent to the action and may be taken away by the running
of the statute of limitations, through estoppel, or by other circumstances which do not affect the cause of
action. Performance or fulfillment of all conditions precedent upon which a right of action depends must be
sufficiently alleged, considering that the burden of proof to show that a party has a right of action is upon
the person initiating the suit.
The Turners’ right of action arose only when petitioner had already retained earnings in the amount of
₱11,975,490.00 on March 21, 2002; such right of action was inexistent on January 22, 2001 when they filed
the Complaint.
In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the Supreme Court ruled:
Subject to certain qualifications, and except as otherwise provided by law, an action commenced before
the cause of action has accrued is prematurely brought and should be dismissed. The fact that the cause of
action accrues after the action is commenced and while it is pending is of no moment. It is a rule of law to
which there is, perhaps, no exception, either at law or in equity, that to recover at all there must be some
cause of action at the commencement of the suit. There are reasons of public policy why there should be
no needless haste in bringing up litigation, and why people who are in no default and against whom there
is as yet no cause of action should not be summoned before the public tribunals to answer complaints
which are groundless. An action prematurely brought is a groundless suit. Unless the plaintiff has a valid
and subsisting cause of action at the time his action is commenced, the defect cannot be cured or
remedied by the acquisition or accrual of one while the action is pending, and a supplemental complaint or
an amendment setting up such after-accrued cause of action is not permissible.
The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao vs. Court of Appeals.
The Turners’ apprehension that their claim for payment may prescribe if they wait for the petitioner to
have unrestricted retained earnings is misplaced. It is the legal possibility of bringing the action that
determines the starting point for the computation of the period of prescription. Stated otherwise, the
prescriptive period is to be reckoned from the accrual of their right of action.
Accordingly, We hold that public respondent exceeded its jurisdiction when it entertained the herein
Complaint and issued the assailed Orders. Excess of jurisdiction is the state of being beyond or outside the
limits of jurisdiction, and as distinguished from the entire absence of jurisdiction, means that the act
although within the general power of the judge, is not authorized and therefore void, with respect to the
32
particular case, because the conditions which authorize the exercise of his general power in that particular
case are wanting, and hence, the judicial power is not in fact lawfully invoked.
We find no necessity to discuss the second ground raised in this petition.
WHEREFORE, upon the premises, the petition is GRANTED. The assailed Orders and the corresponding
Writs of Garnishment are NULLIFIED. Civil Case No. 02-104692 is hereby ordered DISMISSED without
prejudice to refiling by the private respondents of the action for enforcement of their right to payment as
withdrawing stockholders.
SO ORDERED.
The petitioners now come to the Court for a review on certiorari of the CA’s decision, submitting that:
I.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT GRANTED THE PETITION FOR
CERTIORARI WHEN THE REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND ITS JURISDICTION
AMOUNTING TO LACK OF JURISDICTION IN GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT
AND IN GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF JUDGMENT;
II.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT ORDERED THE DISMISSAL OF THE
CASE, WHEN THE PETITION FOR CERTIORARI MERELY SOUGHT THE ANNULMENT OF THE ORDER GRANTING
THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND OF THE ORDER GRANTING THE MOTION FOR
IMMEDIATE EXECUTION OF THE JUDGMENT;
III.
THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF SUBSTANCE NOT THEREFORE
DETERMINED BY THIS HONORABLE COURT AND/OR DECIDED IT IN A WAY NOT IN ACCORD WITH LAW OR
WITH JURISPRUDENCE.
Ruling
The petition fails.
The CA correctly concluded that the RTC had exceeded its jurisdiction in entertaining the petitioners’
complaint in Civil Case No. 01-086, and in rendering the summary judgment and issuing writ of execution.
A.
Stockholder’s Right of Appraisal, In General
A stockholder who dissents from certain corporate actions has the right to demand payment of the fair
value of his or her shares. This right, known as the right of appraisal, is expressly recognized in Section 81 of
the Corporation Code, to wit:
Section 81. Instances of appraisal right.  - Any stockholder of a corporation shall have the right to dissent
and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences in any
respect superior to those of outstanding shares of any class, or of extending or shortening the
term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter or
articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest unless
objectionable corporate action is taken.13 It serves the purpose of enabling the dissenting stockholder to
have his interests purchased and to retire from the corporation.141avvphil
Under the common law, there were originally conflicting views on whether a corporation had the power to
acquire or purchase its own stocks. In England, it was held invalid for a corporation to purchase its issued
stocks because such purchase was an indirect method of reducing capital (which was statutorily restricted),
aside from being inconsistent with the privilege of limited liability to creditors. 15 Only a few American
jurisdictions adopted by decision or statute the strict English rule forbidding a corporation from purchasing
its own shares. In some American states where the English rule used to be adopted, statutes granting
authority to purchase out of surplus funds were enacted, while in others, shares might be purchased even
out of capital provided the rights of creditors were not prejudiced.16 The reason underlying the limitation of
share purchases sprang from the necessity of imposing safeguards against the depletion by a corporation
of its assets and against the impairment of its capital needed for the protection of creditors. 17
Now, however, a corporation can purchase its own shares, provided payment is made out of surplus profits
and the acquisition is for a legitimate corporate purpose.18 In the Philippines, this new rule is embodied in
Section 41 of the Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire
its own shares for a legitimate corporate purpose or purposes, including but not limited to the following
cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to
be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;
and
33
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under
the provisions of this Code. (n)
The Corporation Code defines how the right of appraisal is exercised, as well as the implications of the right
of appraisal, as follows:
1. The appraisal right is exercised by any stockholder who has voted against the proposed corporate action
by making a written demand on the corporation within 30 days after the date on which the vote was taken
for the payment of the fair value of his shares. The failure to make the demand within the period is
deemed a waiver of the appraisal right. 19
2. If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares within a
period of 60 days from the date the stockholders approved the corporate action, the fair value shall be
determined and appraised by three disinterested persons, one of whom shall be named by the stockholder,
another by the corporation, and the third by the two thus chosen. The findings and award of the majority
of the appraisers shall be final, and the corporation shall pay their award within 30 days after the award is
made. Upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith
transfer his or her shares to the corporation.20
3. All rights accruing to the withdrawing stockholder’s shares, including voting and dividend rights, shall be
suspended from the time of demand for the payment of the fair value of the shares until either the
abandonment of the corporate action involved or the purchase of the shares by the corporation, except
the right of such stockholder to receive payment of the fair value of the shares. 21
4. Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall submit to
the corporation the certificates of stock representing his shares for notation thereon that such shares are
dissenting shares. A failure to do so shall, at the option of the corporation, terminate his rights under this
Title X of the Corporation Code. If shares represented by the certificates bearing such notation are
transferred, and the certificates are consequently canceled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder;
and all dividend distributions that would have accrued on such shares shall be paid to the transferee. 22
5. If the proposed corporate action is implemented or effected, the corporation shall pay to such
stockholder, upon the surrender of the certificates of stock representing his shares, the fair value thereof
as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in
anticipation of such corporate action.23
Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover the payment. In case the corporation
has no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides
that if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his
voting and dividend rights shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment
of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property,
and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors,
who are preferred in the distribution of corporate assets. 24 The creditors of a corporation have the right to
assume that the board of directors will not use the assets of the corporation to purchase its own stock for
as long as the corporation has outstanding debts and liabilities. 25 There can be no distribution of assets
among the stockholders without first paying corporate debts. Thus, any disposition of corporate funds and
assets to the prejudice of creditors is null and void.26
B.
Petitioners’ cause of action was premature
That the respondent had indisputably no unrestricted retained earnings in its books at the time the
petitioners commenced Civil Case No. 01-086 on January 22, 2001 proved that the respondent’s legal
obligation to pay the value of the petitioners’ shares did not yet arise. Thus, the CA did not err in holding
that the petitioners had no cause of action, and in ruling that the RTC did not validly render the partial
summary judgment.
A cause of action is the act or omission by which a party violates a right of another. 27 The essential
elements of a cause of action are: (a) the existence of a legal right in favor of the plaintiff; (b) a correlative
legal duty of the defendant to respect such right; and (c) an act or omission by such defendant in violation
of the right of the plaintiff with a resulting injury or damage to the plaintiff for which the latter may
maintain an action for the recovery of relief from the defendant. 28 Although the first two elements may
exist, a cause of action arises only upon the occurrence of the last element, giving the plaintiff the right to
maintain an action in court for recovery of damages or other appropriate relief. 29
Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be based on a cause of
action. Accordingly, Civil Case No. 01-086 was dismissible from the beginning for being without any cause
of action.
The RTC concluded that the respondent’s obligation to pay had accrued by its having the unrestricted
retained earnings after the making of the demand by the petitioners. It based its conclusion on the fact that
the Corporation Code did not provide that the unrestricted retained earnings must already exist at the time
of the demand.
The RTC’s construal of the Corporation Code was unsustainable, because it did not take into account the
petitioners’ lack of a cause of action against the respondent. In order to give rise to any obligation to pay
on the part of the respondent, the petitioners should first make a valid demand that the respondent
refused to pay despite having unrestricted retained earnings. Otherwise, the respondent could not be said
to be guilty of any actionable omission that could sustain their action to collect.
Neither did the subsequent existence of unrestricted retained earnings after the filing of the complaint
cure the lack of cause of action in Civil Case No. 01-086. The petitioners’ right of action could only spring
from an existing cause of action. Thus, a complaint whose cause of action has not yet accrued cannot be
cured by an amended or supplemental pleading alleging the existence or accrual of a cause of action during
the pendency of the action.30 For, only when there is an invasion of primary rights, not before, does the
adjective or remedial law become operative.31 Verily, a premature invocation of the court’s intervention
renders the complaint without a cause of action and dismissible on such ground. 32 In short, Civil Case No.
01-086, being a groundless suit, should be dismissed.
Even the fact that the respondent already had unrestricted retained earnings more than sufficient to cover
the petitioners’ claims on June 26, 2002 (when they filed their motion for partial summary judgment) did
not rectify the absence of the cause of action at the time of the commencement of Civil Case No. 01-086.
The motion for partial summary judgment, being a mere application for relief other than by a
34
pleading,33 was not the same as the complaint in Civil Case No. 01-086. Thereby, the petitioners did not
meet the requirement of the Rules of Court that a cause of action must exist at the commencement of an
action, which is "commenced by the filing of the original complaint in court."34
The petitioners claim that the respondent’s petition for certiorari sought only the annulment of the assailed
orders of the RTC (i.e., granting the motion for partial summary judgment and the motion for immediate
execution); hence, the CA had no right to direct the dismissal of Civil Case No. 01-086.
The claim of the petitioners cannot stand.
Although the respondent’s petition for certiorari targeted only the RTC’s orders granting the motion for
partial summary judgment and the motion for immediate execution, the CA’s directive for the dismissal of
Civil Case No. 01-086 was not an abuse of discretion, least of all grave, because such dismissal was the only
proper thing to be done under the circumstances. According to Surigao Mine Exploration Co., Inc. v.
Harris:35
Subject to certain qualification, and except as otherwise provided by law, an action commenced before the
cause of action has accrued is prematurely brought and should be dismissed. The fact that the cause of
action accrues after the action is commenced and while the case is pending is of no moment. It is a rule of
law to which there is, perhaps no exception, either in law or in equity, that to recover at all there must be
some cause of action at the commencement of the suit. There are reasons of public policy why there
should be no needless haste in bringing up litigation, and why people who are in no default and against
whom there is as yet no cause of action should not be summoned before the public tribunals to answer
complaints which are groundless. An action prematurely brought is a groundless suit. Unless the plaintiff
has a valid and subsisting cause of action at the time his action is commenced, the defect cannot be cured
or remedied by the acquisition or accrual of one while the action is pending, and a supplemental complaint
or an amendment setting up such after-accrued cause of action is not permissible.
Lastly, the petitioners argue that the respondent’s recourse of a special action for certiorari was the wrong
remedy, in view of the fact that the granting of the motion for partial summary judgment constituted only
an error of law correctible by appeal, not of jurisdiction.
The argument of the petitioners is baseless. The RTC was guilty of an error of jurisdiction, for it exceeded its
jurisdiction by taking cognizance of the complaint that was not based on an existing cause of action.
WHEREFORE, the petition for review on certiorari is denied for lack of merit.
We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping
Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the Regional Trial
Court of Manila, et al.
Costs of suit to be paid by the petitioners.
SO ORDERED.
G.R. No. 181455-56               December 4, 2009
SANTIAGO CUA, JR., SOLOMON S. CUA and EXEQUIEL D. ROBLES, in their capacity as Directors of
PHILIPPINE RACING CLUB, INC., Petitioners,
vs.
MIGUEL OCAMPO TAN, JEMIE U. TAN and ATTY. BRIGIDO J. DULAY, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 182008
SANTIAGO CUA, SR., in his capacity as Director of PHILIPPINE RACING CLUB, INC., Petitioner,
vs.
COURT OF APPEALS, MIGUEL OCAMPO TAN, JEMIE U. TAN, ATTY. BRIGIDO J. DULAY, and HON. CESAR
UNTALAN, Presiding Judge, Makati Regional Trial Court, Br. 149, Respondents.
DECISION
CHICO-NAZARIO, J.:
Before this Court are two Petitions: (1) a Petition for Review on Certiorari 1 under Rule 45 of the Rules of
Court filed by petitioners Santiago Cua, Jr. (Santiago Jr.), Solomon S. Cua (Solomon), and Exequiel D. Robles
(Robles), in their capacity as directors of the Philippine Racing Club, Inc. (PRCI), with Miguel Ocampo Tan
(Miguel), Jemie U. Tan (Jemie) and Atty. Brigido J. Dulay (Dulay) as respondents, docketed as G.R. No.
181455-56; and (2) a Petition for Certiorari and Prohibition2 under Rule 65 of the Rules of Court filed by
petitioner Santiago Cua, Sr. (Santiago Sr.), also in his capacity as PRCI director, likewise naming Miguel,
Jemie, and Dulay as respondents, together with the Court of Appeals and Presiding Judge Cesar Untalan
(Judge Untalan) of the Regional Trial Court (RTC), Branch 149 of Makati City, docketed as G.R. No. 182008.
Both Petitions assail the Decision3 dated 6 September 2007 and Resolution4 dated 22 January 2008 of the
Court of Appeals in the consolidated cases CA-G.R. SP No. 99769 and No. 99780. In its 6 September 2007
Decision, the Court of Appeals dismissed for lack of merit, mootness, and prematurity, the Petition for
Certiorari of petitioners Santiago Jr., Solomon, and Robles (Santiago Jr., et al.); and the Petition for
Certiorari and Prohibition of petitioner Santiago Sr., which sought the nullification of the Resolution 5 dated
16 July 2007 of the RTC in Civil Case No. 07-610 granting the Temporary Restraining Order (TRO) prayed for
by respondents Miguel, Jemie, and Dulay (Miguel, et al.). In its 22 January 2008 Resolution, the appellate
court denied the Motions for Reconsideration of petitioners and the Motion to Admit Supplemental
Petition for Certiorari of petitioner Santiago Jr, et al. The same Resolution did not consider the
Supplemental Petition for Certiorari and Prohibition filed by petitioner Santiago Sr. for the latter’s failure to
seek leave of court for its filing and admittance. Petitioners would have wanted to challenge in their
Supplemental Petitions the Resolution6 dated 8 October 2007 of the RTC in Civil Case No. 07-610 granting
the issuance of a "permanent injunction" against petitioners and the other PRCI directors until the said case
was resolved.
I
FACTUAL AND PROCEDURAL ANTECEDENTS
PRCI is a corporation organized and established under Philippine laws to: (1) carry on the business of a race
course in all its branches and, in particular, to conduct horse races or races of any kind, to accept bets on
the results of the races, and to construct grand or other stands, booths, stablings, paddocks, clubhouses,
refreshment rooms and other erections, buildings, and conveniences, and to conduct, hold and promote
35
race meetings and other shows and exhibitions; and (2) promote the breeding of better horses in the
Philippines, lend all possible aid in the development of sports, and uphold the principles of good
sportsmanship and fair play.7 To pursue its avowed purposes, PRCI holds a franchise granted under
Republic Act No. 6632, as amended by Republic Act No. 7953, to operate a horse racetrack and manage
betting stations. Under its franchise, PRCI may operate only one racetrack.
In 1999, the Articles of Incorporation of PRCI was amended to include a secondary purpose, viz:
To acquire real properties and/or develop real properties into mix-use realty projects including but not
limited to leisure, recreational and memorial parks and to own, operate, manage and/or sell these real
estate projects.8
PRCI is publicly listed with the Philippine Stock Exchange (PSE). In 2006, PRCI had an authorized capital
stock of ₱1,000,000,000.00 divided into 1,000,000,000 shares, with a par value of ₱1.00 each; of which a
total of ₱569,857,749.00, representing 569,857,749 shares, had been subscribed and paid up. 9
PRCI owns only two real properties, each covered by several transfer certificates of title. One is known as
the Sta. Ana Racetrack, located along A. P. Reyes Avenue, Makati City (Makati property), measuring around
21.2 hectares; and the other is located in the towns of Naic and Tanza in the province of Cavite (Cavite
property).
Following the trend in the development of properties in the same area, 10 PRCI wished to convert its Makati
property from a racetrack to urban residential and commercial use. Given the location and size of its
Makati property, PRCI believed that said property was severely under-utilized. Hence, PRCI management
decided to transfer its racetrack from Makati to Cavite. PRCI began developing its Cavite property as a
racetrack, scheduled to be completed by April 2008.
Now as to its Makati property, PRCI management decided that it was best to spin off the management and
development of the same to a wholly owned subsidiary, so that PRCI could continue to focus its efforts on
pursuing its core business competence of horse racing. Instead of organizing and establishing a new
corporation for the said purpose, PRCI management opted to acquire another domestic corporation, JTH
Davies Holdings, Inc. (JTH).11
JTH was then owned by Jardine Matheson Europe B.V. (JME). 12 It had an authorized capital stock of
₱25,000,000.00, divided into 50,000,000 common shares with a par value of ₱0.50 each. JTH was publicly
listed with the PSE. Its tangible assets substantially consisted of cash. To determine the value of JTH, PRCI
engaged the services of the accounting firm Sycip Gorres Velayo & Co. (SGV) to conduct a due diligence
study.13
Using the results of the SGV study, PRCI management determined that PRCI could initially acquire
41,928,290 shares, or 95.55% of the outstanding capital stock of JTH, for the price of ₱10.71 per share, or
for a total of ₱449,250,000.00; in this case, PRCI would be paying a premium of ₱42,410,450.00 for the said
JTH shares, computed as follows:
Total price for all of the issued and subscribed JTH
  shares (at P10.71/share)
Less: Unaudited net worth of JTH (purely cash)
Total premium for 100% of JTH
Multiply: Interest in JTH to be initially acquired by
  PRCI (95.5%)
Premium for the 95.5% interest in JTH to be acquired
  by PRCI
The PRCI Board of Directors held a meeting on 26 September 2006. Among the directors present were
petitioners Santiago Sr., Santiago Jr., and Solomon, as well as respondent Dulay. After discussing and
deliberating on the matter of the acquisition of JTH by PRCI, all the directors present, except respondent
Dulay, voted affirmatively to pass and approve the following resolutions:
1. Declaration of Intention to Acquire and Purchase Shares of Stock of Another Company -
RESOLVED, as it is hereby resolved, that the Corporation intends to acquire up to
one hundred percent (100%) of the common shares of stock of JTH Davies
Holdings, Inc. by way of negotiated sale;
RESOLVED FURTHER, That Management and the Corporate Secretary shall
prepare and submit the Tender Offer, as well as, to file all the necessary
disclosures and notices in compliance with the Securities Regulation Code, its
implementing rules, and other prevailing regulations;
RESOLVED FURTHERMORE, That the Corporation authorizes its President, Mr.
Solomon S. Cua, to sign and execute any purchase agreements, memoranda, and
such other deeds, and to deliver any documents and papers, perform any acts,
necessary and incidental to implement the foregoing, as well as to source the
funds to implement the same.
2. Special Stockholders’ Meeting -
RESOLVED, That a Special Stockholders’ Meeting of PRCI shall be held on October
26, 2006 at 10:00 A.M., or at such later date as may be practicable under the
circumstances, in the principal place of business of PRCI at Santa Ana Park, A.P.
Reyes Avenue, Makati City;
RESOLVED FURTHER, That only those stockholders of record as of end of business
day of October 11, 2006 shall be entitled to notice, to vote and/or to be voted
upon, in accordance with the laws, regulations and by-laws of PRCI;
RESOLVED FURTHERMORE, That the Corporate Secretary shall be authorized to
issue the required notices, set the time for the submission of, and to receive and
validate proxies, as well as, to order publication of notices and undertake such
appropriate and necessary steps, including the filing of the required disclosures to
the regulating agencies, to effect the foregoing.
3. Authorized Attorney-In-Fact and Proxy -
In the event of a successful acquisition of the shares of JTH Davies Holdings, Inc., the Board
passed and approved the following resolutions:
36
RESOLVED, that the Corporation shall hereby authorize SANTIAGO CUA, or in his
absence, EXEQUIEL ROBLES, or in his absence, SOLOMON S. CUA, or in his
absence, SANTIAGO CUA, JR., or in his absence, DATUK SURIN UPATKOON, or in
his absence, Laurence Lim Swee Lim, or in his absence, LIM TEONG LEONG, to act
as its attorney-in-fact/proxy and to vote all shares as may be registered in the
name of the Corporation/lodged with the PCD System, and to exercise all rights
appurtenant thereto during the Annual Stockholders’ Meeting/s and all
regular/special meeting/s of JTH DAVIES HOLDINGS, INC. (formerly JARDINE
DAVIES, INC.);
RESOLVED FURTHER, That these Directors, in the said order of priority, shall have
full power and authority and discretion to nominate, appoint, and/or vote into
office such directors and/or officers during the said Annual Stockholders’
Meeting/s and regular/special meeting/s of JTH HOLDINGS, INC. (formerly
JARDINE DAVIES, INC.);
RESOLVED FINALLY, That these Directors be, as they are hereby granted full
power and authority whatsoever requisite or necessary or proper to be done in
these matters.14
The next day, 27 September 2006, PRCI entered into a Sale and Purchase Agreement for the acquisition
from JME of 41,928,290 common shares or 95.55% of the outstanding capital stock of JTH. Among the
principal terms of the Sale and Purchase Agreement were:
(a) The consideration for the acquisition was ₱10.71 per share or ₱449,250,000.00;
(b) Upon the signing of the [A]greement, the [PRCI] shall pay P20 Million to an Escrow Agent as
deposit; and
(c) The sale and purchase transaction contemplated in the Agreement shall be consummated
at a closing not later than November 30, 2006 or the 50th day from the start of the JTH Offer
or such date which shall in no case be later than December 11, 2006. 15
PRCI also made a tender offer for the remaining 4.45% or 1,954,883 issued and outstanding common
shares of JTH at ₱10.71 each.
In the Special Stockholders’ Meeting held on 7 November 2006, attended by stockholders with 481,045,887
shares or 84.42% of the outstanding capital stock of PRCI, the acquisition by PRCI of JTH was presented for
approval. The events during said meeting were duly recorded in the Minutes, to wit:
V. APPROVAL OF THE ACQUISITION OF THE SHARES OF STOCK OF JTH DAVIES HOLDINGS, INC.
Thereafter, the Corporate Secretary informed that the President will present to the stockholders the
rationale for the acquisition of the shares of JTH Davies Holdings, Inc.
According to the President PRCI is intending to acquire up to 100% of the shares of JTH Davies Holdings,
Inc. another listed company in the PSE. For reference, the President informed that the latest Annual Report
of JTH has been appended to the Information Statement for guidance. Also copies of the Board’s resolution
presented for approval and ratification by the stockholders has been posted in the room for convenient
reading of the stockholders.
The President explained that JTH is one of the oldest holdings company and the name JTH Davies is an
internationally acclaimed name with a reputation for solid and sound financial standing. With PRCI’s
acquisition of JTH, it gives PRCI the necessary vehicle within which to enlarge and broaden the business and
operational alternatives or options of our company. PRCI believes that this JTH will complement the
direction of PRCI in fast tracking the development of PRCI’s plans and provide it investment opportunities.
It is for this reason that we call this special meeting so you may know soonest the present opportunity
faced by PRCI without need for you to wait until next year’s annual meeting.
The Vice-Chairman then informed that the resolution approving the purchase of JTH Davies Holdings, Inc.
as presented in the Information Statement which were furnished to the stockholders is presented for
approval to the body. A stockholder thereafter moved that the the (sic) resolution be approved which was
duly seconded by another stockholder. The Vice-Chairman declared the resolution approved. Thereafter,
Atty. Pagunsan took the floor and informed that he is the proxy of various stockholders (10%) and would
like to manifest his vote as "NO" which the Vice-Chairman duly noted. Notwithstanding the objection of
Atty. Pagunsan, considering the more than 2/3 of the outstanding capital stock of PRCI has approved and
ratified the resolution, (74%) the Corporate Secretary declared the resolution as duly approved and ratified.
Thereafter, another stockholder, Mr. Ngo, asked the President what are the plans of PRCI on the assets of
JTH. The President informed that as of now, JTH has no material hard assets other than its retained
earnings. Mr. Ngo asked again what will be the direction of PRCI on the substantial retained earnings of JTH
to which the President replied that there are several options being considered once the purchase is
complete one of which is the declaration of cash dividend.
Another stockholder took the floor and informed the Management that he is happy with the transaction of
PRCI and the purchase by PRCI of the JTH shares is a good deal since the value of the goodwill of JTH is
substantial by his estimate. He proceeded to thank the President and shook hands with him. 16
By 22 November 2006, PRCI was able to additionally acquire 1,160,137 common shares of JTH from the
minority stockholders of the latter, giving PRCI ownership of 98.19% of the outstanding capital stock of JTH.
PRCI prepared consolidated financial statements for itself and for JTH for the fiscal year ending 31
December 2006. The financial statements were audited by the accounting firm Punongbayan & Araullo
which gave the following unqualified opinion of the same: "In our opinion, based on our audit and the
report of other auditors, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Philippine Racing Club, Inc. and Subsidiary as of December 31, 2006,
and their consolidated financial performance and their cash flows for the year then ended in accordance
with Philippine Financial Reporting Standards." The audited financial statements of PRCI and JTH for 2006
were presented to the stockholders of PRCI and submitted to the Securities and Exchange Commission
(SEC), the Bureau of Internal Revenue (BIR), and the Philippine Stock Exchange (PSE).
Thereafter, PRCI again engaged the assistance of SGV in executing its intended spin-off to JTH of the
management and development of PRCI’s Makati property. It was then determined that the Makati
property, with a total zonal value of ₱3,817,242,000.00, could be transferred to JTH in exchange for the
unissued portion of the latter’s recently increase authorized capital stock,17 amounting to ₱397,908,894.50,
divided into 795,817,789 shares with a par value of ₱0.50 per share. The difference of ₱3,419,333,105.50
37

between the total zonal value of the Makati property and the aggregate par value of the JTH shares to be VI. Approval of the Audited Financial Statement for the year ended December 31, 2006;
issued in exchange for the same, would be reflected as additional paid-in capital of PRCI in JTH.

The matter of the proposed exchange was taken up and approved by the PRCI Board of Directors in its
meeting held on 11 May 2007, again with the lone dissent of respondent Dulay. According to the Minutes
of the said meeting, the following occurred:
VII. Approval and Ratification of the acts of the Board of Directors, the Executive Committee
and the Management of the Corporation for the Fiscal Year 2006;
VIII. Approval of the Planned Exchange of PRCI’s Makati property for shares of stock;

A. Exchange of the Corporation’s Makati Property with Shares of JTH Davies Holdings, Inc.
IX. Approval of the Amendments of the By-Laws to conform with the Manual of Corporate
Governance;
President Cua reported on certain essential matters regarding the Corporation’s Makati Property. After
doing so, President Cua proposed the exchange of this Property with shares of JTH Davies Holdings, Inc. He
then presented to the Board financial facts and figures heavily favoring the transaction. X. Election of the members of the Board of Directors;

After due discussion and deliberation, all the Directors present approved and passed the following XI. Appointment of Independent External Auditors;
resolution, except Director Brigido Dulay who registered a negative vote:
XII. Other Matters;
RESOLVED, That the Corporation hereby approves and authorizes the exchange of its Makati property with
shares of JTH Davies Holdings, Inc.; XIII. Adjournment.19

RESOLVED FURTHER, That, for this purpose, the Corporation hereby authorizes its Executive Committee to The 11 May 2007 Resolution of the PRCI Board of Directors on the property-for-shares exchange between
determine and approve the terms and conditions governing the exchange as it shall consider for the best PRCI and JTH was supposed to be presented for approval by the stockholders under the afore-quoted Items
interest of the Corporation subject to approval by the stockholders in compliance with the Corporation No. VII and No. VIII of the Agenda.
Code;

However, on 10 July 2007, respondents Miguel, et al., as minority stockholders of PRCI, with the following
RESOLVED FURTHER, That the Executive Committee, be, as it is hereby granted full power and authority shareholdings:
whatsoever requisite or necessary or proper to accomplish these;

Stockholder No. of Shares Percentage

RESOLVED FINALLY, That SOLOMON CUA, President & CEO, be, as he is hereby authorized to negotiate with
JTH Davies Holdings, Inc. and to execute, sign, and/or deliver any and all documents covering the exchange
in accordance with the terms and conditions of the Executive Committee. 18
Subsequently, the Annual Stockholders’ Meeting of PRCI was scheduled on 17 July 2007, the Agenda for
which is reproduced below:
I. Call to Order;
II. Proof of Notice;
III. Certification of Quorum;
IV. Approval of the Minutes of the Annual Stockholders’ Meeting held last June 19, 2006 and
of the Special Stockholders’ Meeting held last November 7, 2006;
V. Report of the President;
Miguel Ocampo-Tan 16,380,000 2.87
Jemie U. Tan 15,972,720 2.80
Atty. Brigido J. Dulay20 1 0.00
Total 32,352,721 5.67
filed before the RTC a Complaint, denominated as a Derivative Suit with prayer for Issuance of
TRO/Preliminary Injunction, against the rest of the directors of PRCI and/or JTH. The Complaint was
docketed as Civil Case No. 07-610.
The Complaint was based on three causes of action: (1) the approval by the majority directors of PRCI of
the Board Resolutions dated 26 September 2006 and 11 May 2007 -- with undue haste and deliberate
speed, despite the absence of any disclosure and information -- was not only anomalous and fraudulent,
but also extremely prejudicial and inimical to interest of PRCI, committed in violation of their fiduciary duty
as directors of the said corporation; (2) respondent Solomon, as PRCI President, with the acquiescence of
the majority directors of PRCI, maliciously refused and resisted the request of respondents Miguel, et al.,
for complete and adequate information relative to the disputed Board Resolutions, brazenly and unlawfully
violating the rights of the minority stockholders to information and to inspect corporate books and records;
and (3) without being officially and formally nominated, the majority directors of PRCI illegally and
unlawfully constituted themselves as members of the Board of Directors and/or Executive Officers of JTH,
rendering all the actions they have taken as such null and void ab initio. In the end, respondents Miguel, et
al., prayed to the RTC, after notice and hearing, that:
38
1. A temporary restraining order and/or writ of preliminary injunction be issued restraining
and enjoining the holding of the Annual Stockholders’ Meeting scheduled on 17 July 2007 and
restraining and enjoining the defendants [PRCI directors] from enforcing, implementing,
"railroading", or taking any further action in reliance upon or in substitution or in furtherance
of the Disputed Resolutions, which would inflict grave and irreparable injury in fraud of the
Corporation.
2. A receiver and/or management committee be constituted and appointed to undertake the
management and operations of the Corporation and to take over its assets to prevent its
further loss, wastage and dissipation.
3. To compel the defendant Majority Directors to render a complete and adequate disclosure
of all documents and information relating to the subject matter of the Disputed Resolutions as
well as the business and affairs of the Corporation and its wholly-owned subsidiary from the
time of the latter’s acquisition until final judgment.
4. After trial on the merits, that judgment be rendered in favor of the plaintiffs and against the
defendants, as follows:
(a) Permanently enjoining and prohibiting defendants from enforcing,
implementing, or taking any action in reliance upon the Disputed Resolutions.
(b) Declaring the Disputed Resolutions dated 26 September 2006 and 11 May
2007 and the approval by the Executive Committee of the exchange of the
Corporation’s Makati Property for JTH shares, as well as any and all actions taken
in reliance upon or pursuant to or in furtherance of the Disputed Resolutions
and/or approval of the Executive Committee, as null and void ab initio.
(c) Declaring the assumption by defendant Majority Directors as Directors and/or
officers of JTH, including all acts done by defendant Majority Directors as such
Directors and/or officers of JTH, as null and void ab initio.
(d) Ordering defendants to pay plaintiffs the sum of ₱500,000.00, and by way of
attorney’s fees, plus ₱10,000.00 per court appearance, plus costs of suit.
Other reliefs just and equitable under the premises are likewise prayed for. 21
After conducting hearings on the prayer for the issuance of a TRO, RTC Judge Untalan issued a Resolution
on 16 July 2007, the dispositive portion of which reads:
WHEREFORE, premises considered, this court hereby partially grants the prayer of PRCI for the issuance of
Temporary Restraining Order upon the herein defendants subject to the posting of Php100,000.00 bond on
condition that such bond shall answer to any damage that the Defendants may sustain by reason of this
TRO if the court should finally decide that the applicants are not entitled thereto. This TRO shall be
effective for TWENTY (20) DAYS only from service of the same upon the Defendants after posting of the
bond.
Therefore, the Defendants, their agents, proxies and representatives are hereby enjoined, prohibited and
forbidden to present to, discuss, much more to approve the same, at the 2007 Annual Stockholders’
Meeting of PRCI to be held on July 17, 2007 at 8:00 A.M. at the VIP Room, Santa Ana Park, A.P. Reyes Ave.,
Makati City, the following Agenda included in the Notice of said stockholders’ meeting:
1. Agenda Roman No. IV – Approval of the Minutes of the Annual Stockholders’ Meeting held
last June 19, 2006 and the Special Stockholders’ meeting held last November 7, 2006.
2. Agenda Roman No. VII – Approval and Ratification of the acts of the Board of Directors, the
Executive Committee and the Management of the Corporation for the Fiscal Year 2006.
3. Agenda Roman No. VIII – Approval of the Planned Exchange of PRCI’s Makati property for
shares of stock.
Thus, in order that these subject matters and items of the Agenda of the aforesaid Stockholders’ Meeting
shall not be taken up, the herein Defendants, their agents, proxies and representatives, jointly and
severally, are hereby ordered to delete and remove from the Agenda said three (3) above stated items of
the Agenda before the start and conduct of the said stockholders’ meeting. Therefore, in case herein
Defendants, their agents, proxies and representatives defy and disobey this mandate, they have committed
already four (4) distinct contemptuous acts: delete, present, discuss and approve.
This Court appealed to the Corporate Secretary as Officer of the Court, to please make sure that this
mandate is obeyed and observed by the Defendants, their agents, proxies and representatives, before and
during the conduct of said stockholders’ meeting.
Let the hearing of the main injunction be set on July 23 and 24, 2007 and August 2, 2007, all at two o’clock
in the afternoon.22
The Annual Stockholders’ Meeting of PRCI scheduled the next day, 17 July 2007, failed to push through for
lack of quorum.
On 19 July 2007, petitioners Santiago Jr., et al., as PRCI directors filed a Petition for Certiorari with the Court
of Appeals, docketed as CA-G.R. SP No. 99769. On 20 July 2007, Santiago Sr., also as PRCI director, filed his
own Petition for Certiorari and Prohibition, docketed as CA-G.R. SP No. 99780. Both Petitions assailed the
RTC Resolution dated 16 July 2007, granting the issuance of a TRO, for being rendered with grave abuse of
discretion amounting to lack or excess of jurisdiction. CA-G.R. SP No. 99769 and No. 99780 were
subsequently consolidated.
The Court of Appeals promulgated its Decision on 6 September 2007 dismissing the Petitions in CA-G.R. SP
No. 99769 and No. 99780 for lack of merit, mootness, and prematurity.
According to the Court of Appeals, the TRO issued by the RTC enjoined the presentation, discussion, and
approval of only three of the 13 items on the Agenda of the 2007 Annual Stockholders’ Meeting. There is
no evidence that the TRO issued by the RTC legally impaired the holding of the scheduled stockholders’
meeting. Indeed, the lack of quorum during the said meeting was due to the absence of petitioners
themselves who comprised the majority interest in PRCI. Consequently, the appellate court found no grave
abuse of discretion in the issuance by the RTC of the TRO.
39
The Court of Appeals also noted that the Petitions in CA-G.R. SP No. 99769 and No. 99780 as regards the
issuance of the TRO already became moot when the 20-day period of effectivity of said restraining order
expired on 5 August 2007, even before the Petitions were submitted for resolution.
Lastly, the Court of Appeals held that the issues raised by petitioners were factual and evidentiary in nature
which must be threshed out before the RTC as the designated commercial court in Makati. The appellate
court would not interfere with the proceedings a quo considering that Civil Case No. 07-610 had not yet
gone to trial and had not yet been resolved or terminated by the RTC. Therefore, for being premature, the
Court of Appeals could not prohibit the continuance of the RTC proceedings in Civil Case No. 07-610.
The Court of Appeals ruled that there was no reason to dismiss the Complaint in Civil Case No. 07-610.
Although the Complaint contained mere allegations, which had yet to be supported by evidence, it was
sufficient in form and substance, and the RTC properly took cognizance of the same. The Court of Appeals
reasoned that:
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies (Interim Rules)
provides:
"SECTION 1. Derivative action. – A stockholder or member may bring an action in the name of a corporation
or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss the case."
A reading of the Complaint reveals that the same sufficiently alleges the foregoing requirements.
Complainants essentially allege that they are PRCI stockholders, that they have opposed the issuance and
approval of the questioned resolutions during the board stockholders’ (sic) meetings, that prior resort to
intra-corporate remedies are futile, that nevertheless, they have asked for copies of the pertinent
documents pertaining to the questioned transactions which the board has declined to furnish, that they
have instituted the derivative suit in the name of the corporation, that they are questioning the acts of the
majority of the board of directors believing that the herein petitioners have committed a wrong against the
corporation and seeking a nullification of the questioned board resolutions on the ground of wastage of the
corporate assets.
Thus, contrary to petitioners’ averment, the Complaint does state a cause of action. 23
Petitioners in CA-G.R. SP No. 99769 and No. 99780 filed their respective Motions for Reconsideration of the
foregoing Decision of the Court of Appeals.
In the meantime, upon the expiration of the TRO issued by RTC Judge Untalan in Civil Case No. 07-610, the
Annual Stockholders’ Meeting of PRCI was again scheduled on 10 October 2007. However, Judge Untalan
issued on 8 October 2007 a Resolution with the following decree:
WHEREFORE, premises considered, this court hereby GRANTS the issuance of PERMANENT INJUNCTION
against the defendants until the instant case is finally resolved, subject to the posting by plaintiffs of a Php
100,000.00 bond, on condition that such bond shall answer to any damage that the Defendants may
sustain by reason of this injunction if the court should finally decide that the applicants are not entitled
thereto. This injunction shall be effective from service of the same upon the Defendants after posting of the
bond.
Therefore, the Defendants, their agents, proxies and representatives are hereby enjoined, prohibited and
forbidden to present to, discuss, much more to approve the same, at any stockholders’ meeting,
whatsoever kind and nature, of PRCI of the following Agenda:
1. Approval of the Minutes of the Annual Stockholders’ Meeting held last June 19, 2006 and
the Special Stockholders’ meeting held last November 7, 2006 of PRCI.
2. Approval and Ratification of the acts of the Board of Directors, the Executive Committee and
the Management of PRCI for the Fiscal Year 2006, as far as the acquisition of JTH and the
planned exchange of PRCI’s Makati property for shares of stock of JTH are concerned.
3. Approval of the Planned Exchange of PRCI’s Makati property for shares of stock of JTH. 24
As a result, the Annual Stockholders’ Meeting of PRCI proceeded as scheduled on 10 October 2007 without
taking up the matters covered by the permanent injunction issued by the RTC.
Petitioners Santiago Jr., et al. filed in CA-G.R. SP No. 99769 their Motion to Admit Supplemental Petition for
Certiorari with the attached Supplemental Petition for Certiorari;25 and petitioner Santiago Sr. filed in CA-
G.R. SP No. 99780 a Supplemental Petition for Certiorari and Prohibition, 26 to be followed shortly thereafter
by a Motion to Admit (Supplemental Petition).27 Petitioners intended to additionally assail in their
Supplemental Petitions the 8 October 2007 Resolution of the RTC granting the issuance of the permanent
injunction.
In its Resolution dated 22 January 2008, the Court of Appeals denied the Motions for Reconsideration of
petitioners and the Motion to Admit Supplemental Petition for Certiorari of petitioners Santiago Jr., et al.
The Court of Appeals found that petitioners’ Motions for Reconsideration merely reiterated the issues and
arguments which were raised in the Petitions and/or which the appellate court already discussed and
passed upon. The Court of Appeals reiterated its ruling that it was premature to prohibit the continuance of
the proceedings in Civil Case No. 07-610 before the RTC; and that the Complaint therein sufficiently stated
a cause of action.
40
The Court of Appeals likewise refused to admit petitioners’ Supplemental Petitions for Certiorari. It noted
that Santiago Sr. filed his Supplemental Petition without asking for leave to file the same. Apparently, the
appellate court disregarded the Motion to Admit (Supplemental Petition) which petitioner Santiago filed
separately from and at a later date than his Supplemental Petition. In addition, the Court of Appeals
adjudged that the Supplemental Petitions which petitioners hoped to be admitted involved a subject
matter not covered in their original Petitions. Although the TRO and the permanent injunction were both
issued by the RTC in Civil Case No. 07-610, the two issuances were independent of each other, and only the
TRO was the subject of the original Petitions. Hence, the Supplemental Petitions assailing the permanent
injunction granted by the RTC could not be considered as merely augmenting the matters, issues, and
causes of action of the original Petitions; and should be challenged in a separate petition for certiorari.
Failing to obtain any relief from the Court of Appeals, petitioners turned to this Court.
Petitioners Santiago Jr., et al., filed a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
docketed as G.R. No. 181455-56; while petitioner Santiago Sr. filed a Petition for Certiorari under Rule 65 of
the Rules of Court, docketed as G.R. No. 182008. According to petitioners, the appellate court committed
reversible errors of law and grave abuse of discretion in its Decision dated 6 September 2007 and
Resolution dated 22 January 2008 in CA-G.R. SP No. 99769 and No. 99780.
Petitioners insisted that Civil Case No. 07-610 pending before the RTC did not constitute a valid derivative
suit. Respondents Miguel, et al., failed to allege in their Complaint that they had no appraisal rights for the
acts they were complaining of. In fact, the very allegations made by respondents Miguel, et al. in their
Complaint supported the availability of appraisal rights to them. The Complaint in Civil Case No. 07-610 was
nothing more than a nuisance or harassment suit against petitioners and the other PRCI directors.
Petitioners averred that, by finding no grave abuse of discretion on the part of the RTC in issuing the TRO
against petitioners and the other PRCI directors, the Court of Appeals substituted its own judgment for that
of the PRCI Board of Directors, arbitrarily and capriciously disregarding the business judgment made by the
said Board and approved by PRCI stockholders. The TRO issued by the RTC was not for the benefit of the
PRCI stockholders. Furthermore, the expiration of the 20-day TRO did not make their Petitions for
Certiorari in CA-GR SP No. 99769 and No. 99780 moot. Said Petitions included the prayer that the RTC be
restrained from proceeding with Civil Case No. 07-610 in view of the fatally defective Complaint, the grant
or denial of which the appellate court should have still determined despite the expiration of the TRO.
Petitioners also challenged the refusal by the Court of Appeals to admit their Supplemental Petitions in CA-
GR SP No. 99769 and No. 99780. They asserted that the issues in their Supplemental Petitions were closely
intertwined with those in their original Petitions.
The prayer of petitioners Santiago Jr., et al., in their Petition in G.R. No. 181455-56 reads:
PRAYER
WHEREFORE, in view of the foregoing and in the interest of justice, it is most respectfully prayed of the
Honorable Supreme Court that:
A. The Decision of the Court of Appeals dated 06 September 2007 (Annex "I") and the
Resolution of the Court of Appeals dated 22 January 2008 (Annex "M") be NULLIFIED,
REVERSED and SET ASIDE for having been issued on the basis of reversible error of law and
with grave abuse of discretion amounting to lack of jurisdiction.
B. The Resolutions of Judge Cesar Untalan of Makati Regional Trial Court, Branch 149 dated 16
July 2007 (Annex "F") and 08 October 2007 (Annex "G") be accordingly NULLIFIED, REVERSED
and SET ASIDE for having been issued with grave abuse of discretion amounting to lack of
jurisdiction.
C. The complaint of Respondents be DISMISSED outright for lack of jurisdiction and cause of
action.
D. Such further reliefs just and equitable under the circumstances be GRANTED. 28
Petitioners Santiago Jr., et al., subsequently filed in G.R. No. 181455-56 an Urgent Motion for Issuance of a
Temporary Restraining Order (Status Quo Ante) and/or Writ of Preliminary Injunction, in which they
additionally asked the Court that "a Temporary Restraining Order (Status Quo Ante) and/or Writ of
Preliminary Injunction be immediately issued restraining the implementation (sic) Judge Cesar Untalan’s
Resolutions dated 16 July 2007 and 08 October 2007 so as not to render inutile this Most Honorable
Court’s exercise of jurisdiction over this action and to prevent the decision on this case from being
rendered ineffectual and academic." 29
Meanwhile, petitioner Santiago Sr. sought the following reliefs from this Court in his Petition in G.R. No.
182008:
PRAYER
WHEREFORE, premises considered, it is respectfully prayed that the petition be given due course, and that:
1. Upon the filing of this petition, a temporary restraining order and/or writ of preliminary
injunction be immediately issued restraining and enjoining the enforcement or execution of
the assailed Court of Appeals’ Decision and Resolution, and the assailed trial court’s
resolutions, particularly that which mandates the continued enforcement of the Writ of
PERMANENT Injunction issued by the trial, which prevents the stockholders of the corporation
from acting on matters that have to be submitted to them for approval and/ratification at the
regular annual stockholders’ meetings.
2. Thereafter, a writ of prohibition be issued and/or the preliminary injunction be made
permanent and continuing, during the pendency of the instant case before the Honorable
court.
3. After due hearing, that the Honorable Court:
(a) Declare null and void the Honorable Court of Appeals’ 06 September 2007
Decision and 22 January 2008 Resolution, in CA-G.R. SP No. 99780, as well as the
Trial Court’s 16 July 2007 and 8 October 2007 Resolutions in Civil Case No. 07-610
of the Makati Regional Trial Court, and
(b) Order the dismissal of the Complaint filed by the private respondents against
petitioner, et al., docketed as Civil Case No. 07-610 of the RTC of Makati City.
41

Other reliefs just and equitable in the premises are likewise prayed for. 30
In a Resolution dated 9 April 2008 in G.R. No. 182008, the Court granted petitioner Santiago Sr.’s prayer for
the issuance of a TRO, to wit:
action could not be set by supplemental complaint. The issues raised in the original Petitions pertain to the
grave abuse of discretion committed by the RTC in issuing the TRO and in taking cognizance of Civil Case
No. 07-610, by setting the same for hearing on the main injunction; in contrast, the issues in the
Supplemental Petitions referred to the issuance of the Writ of Preliminary Injunction.

Acting on the prayer for the issuance of a temporary restraining order and/or a writ of preliminary
injunction dated 24 March 2008, the Court likewise resolves to ISSUE a TEMPORARY RESTRAINING ORDER
enjoining respondents from enforcing or executing the assailed Court of Appeals’ decision and resolution
and the assailed trial court’s resolutions particularly that which mandates the continued enforcement of
the writ of permanent injunction issued by the trial court, until further orders from this Court, and to
require petitioner to POST a CASH BOND or a SURETY BOND from a reputable bonding company of
indubitable solvency with terms and conditions acceptable to the Court, in the amount of TWO HUNDRED
THOUSAND PESOS (P200,000.00), within five (5) days from notice, otherwise, the temporary restraining
order herein issued shall automatically be lifted. Unless and until the Court directs otherwise, the bond
shall be effective from its approval by the Court until this case is finally decided, resolved or terminated. 31
In support of their prayer for the immediate lifting or dissolution of the TRO issued by this Court,
respondents Miguel, et al., contended that:
I
The Temporary Restraining Order issued by this Honorable Court has impelled herein
petitioner and his co-majority directors to schedule a stockholders’ meeting with the view TO
RENDER MOOT AND ACADEMIC the action and proceedings before the Regional Trial Court of
Makati, Branch 149.

Accordingly, the Court issued the TRO32 on even date, directed against the respondents of G.R. No. 182008, II
namely, respondents Miguel, et al., and Judge Untalan.
The Petitioner herein, having been impleaded as director and fiduciary of PRCI, does NOT
On 21 April 2008, respondents Miguel, et al. filed with the Court their Comment with Prayer for the stand to suffer any irreparable injury.
Immediate Lifting or Dissolution of the Temporary Restraining Order in G.R. No. 182008.
III
Respondents Miguel, et al., argued that the Petition for Certiorari in G.R. No. 182008 was dismissible due to
several procedural errors. Petitioner Solomon, who signed the Petition in G.R. No. 182008 on behalf of To the contrary, it is PRCI who stand to suffer grave and irreparable injury if the TRO is not
Santiago Sr., was guilty of forum shopping for failing to inform the Court of the Petition for Review in G.R. lifted and/or dissolved.
No. 181455-56, of which he was one of the petitioners. Both Petitions involved the same transactions,
essential facts, and circumstances, as well as identical causes of action, subject matter, and issues. The
Petition for Certiorari in G.R. No. 182008 was also not personally verified by petitioner Santiago Sr. as IV
required by rules and jurisprudence. Moreover, the Petition for Certiorari was not a proper remedy, since it
was only proper when there was no other plain, speedy, and adequate remedy in the ordinary course of
The petitioner herein has failed to establish any clear legal right that entitles him to the
law. Petitioner Cua himself admitted the availability of other remedies, except that he was "avoiding the
issuance of a TRO and/or Writ of preliminary injunction.
tortuous manner offered by other remedies." In fact, petitioners Santiago Jr., et al., filed a Petition for
Review in G.R. No. 181455-56. Lastly, errors of judgment could not be remedied by a Petition for Certiorari.
Petitioner Santiago Sr.’s Petition in G.R. No. 182008 raised issues that were factual and evidentiary in V
nature, on which the RTC has yet to make finding.

The TRO was improperly issued as petitioner has failed to show any extreme urgency to
On substantial grounds, respondents Miguel, et al., explained that their Complaint in Civil Case No. 07-610 necessitate the issuance thereof.33
was comprised of several causes of action. It was not merely a derivative suit, but was also an intra-
corporate action arising from devices or schemes employed by the PRCI Board of Directors amounting to
fraud or misrepresentation and were detrimental to the interest of the PRCI stockholders. Additionally, the In the end, respondents Miguel, et al., prayed:
fraudulent acts and breach of fiduciary duties by the PRCI directors had already been established by prima
facie factual evidence, which warranted the continuation of the proceedings in Civil Case No. 07-610 before
PRAYER
the RTC for adjudication on the merits. It was also established that there were no appraisal rights available
for the acts complained of, since (1) the PRCI directors were being charged with mismanagement,
misrepresentation, fraud, and breach of fiduciary duties, which were not subject to appraisal rights; (2) WHEREFORE, premises considered, it is respectfully prayed of this Honorable Supreme Court that the
appraisal rights would only obtain for acts of the Board of Directors in good faith; and (3) appraisal rights Temporary Restraining Order be LIFTED or DISSOLVED IMMEDIATELY, and that the instant Petition be
may be exercised by a stockholder who had voted against the proposed corporate action, and no corporate DISMISSED.
action had yet been taken herein by PRCI stockholders, who still had not voted on the intended property-
for-shares exchange between PRCI and JTH. Furthermore, the Court of Appeals correctly denied admission
of the Supplemental Petitions in CA-GR SP No. 99769 and No. 99780. A new and independent cause of Other just and equitable reliefs are likewise prayed for.34
42

Only two days later, on 23 April 2008, respondents Miguel, et al., again urgently moved 35 for the lifting
and/or dissolution of the TRO issued by this Court. They informed the Court that the PRCI Board of
Directors passed and approved on 22 April 2008 a Resolution setting the Annual Stockholders’ Meeting of
PRCI on 18 June 2008, including in the proposed Agenda therefor the following items:
Petitioners Santiago Jr., et al., brought to the attention of the Court the fact that on 5 June 2008, another
set of minority stockholders of PRCI, namely, Jalane Christie U. Tan, Marilou U. Pua, Aristeo G. Puyat, and
Ricardo S. Parreno (Jalane, et al.) filed with the RTC of Makati a Complaint against petitioners and the other
directors of PRCI and/or JTH, docketed as Civil Case No. 08-458. Jalane, et al., have the following
shareholdings in PRCI:

(d) Approval of the Minutes of the Special Stockholders’ Meeting held on 7 November 2006, and the
Minutes of the Annual Stockholders’ Meeting held on 10 October 2007;
Stockholder No. of Shares Percentage

xxxx Jalane Christie U. Tan 16,927,560 2.97

Marilou U. Pua 3,884,400 0.68

(g) Approval and ratification of the acts of the Board of Directors, the Executive Committee, and
Management of the Corporation for Fiscal Years 2006 and 2007;
Artisteo G. Puyat 1,633,666 0.29

(h) Approval of the Planned Exchange of PRCI’s Makati Property for shares of stock of JTH Davies Holdings, Ricardo S. Pareño 5,850 0.00
Inc.36
Total 22,451,476 3.94

On the same day, 23 April 2008, the Court issued a Resolution37 consolidating G.R. No. 181455-56 and No.
182008.
Thereafter, on 16 June 2008, Aris Prime Resources, Inc. (APRI), a minority stockholder of PRCI – with
5,000,000.00 shares or 0.88% of the outstanding capital stock of PRCI – filed a Very Respectful Motion for
Leave to Intervene as Co-Respondent in the Petition with the attached Very Respectful Urgent Motion to
Lift Restraining Order.38 It relayed to the Court that it received Notice of the Annual Stockholders’ Meeting
of PRCI set on 18 June 2008, where the items on the property-for-shares exchange between PRCI and JTH
were included in the Agenda.
Jalane, et al., claimed in their Complaint in Civil Case No. 08-458 that "[a]part from being a derivative suit,
this suit is also filed based on devices or schemes employed by the Board of Directors amounting to fraud
or misrepresentation which is detrimental to the interest of the corporation, the public and/or
stockholders as provided for under Section 1(a)(1) of the Interim Rules of Procedure for Intra-Corporate
Controversies (A.M. No. 01-2-04-SC)."40 The Complaint was based on four causes of action: (1) the
acquisition of JTH by PRCI; (2) sale of 29.92% of JTH shares by PRCI; 41 (3) exchange of the Makati property
of PRCI for JTH shares; and (4) interlocking of Directors of PRCI and JTH. The Complaint of Jalane, et al.,
contained the following prayer:
PRAYER

Considering that the validity of the acts of the PRCI Board of Directors concerning the property-for-shares
exchange are the very issues raised in the Petitions presently before the Court, while the factual issues WHEREFORE, it is respectfully prayed of this Honorable Court, after due notice and hearing, that:
relating to the same are still being litigated before the RTC in Civil Case No. 07-610, the submission of the
exchange to the PRCI stockholders for their approval will render the aforementioned proceedings before
this Court and the RTC moot and academic. It will amount to a denial of the right of APRI and of 1. A Temporary Restraining Order and/or Writ of Preliminary Mandatory
respondents Miguel, et al., to be heard before the RTC where they are still to present their evidence on the Injunction be issued enjoining the presentation, discussion and ratification of
factual issues. It will likewise unduly pave the way for the validation of the abuse committed by the portions of the Agenda of the Annual Stockholders Meeting of PRCI scheduled on
majority directors of PRCI in denying the right of the minority directors and stockholders of the corporation June 18, 2008, particularly items IV, VII and VIII;
to information, and for the sanction of the blatant disregard by the majority directors of their duties of
fidelity and transparency. Unless the TRO is lifted forthwith, APRI, respondents Miguel, et al., and all other 2. An order be issued nullifying the Sale and Purchase Agreement dated
minority stockholders stand to suffer prejudice. Expectedly, petitioners seek the dismissal, while September 27, 2006 for the acquisition of JTH Davies Holdings, Inc.
respondents Miguel, et al., pray for the grant of the motion to intervene of APRI.

3. An order be issued nullifying the sale of PRCI shares in JTH in April 2007 and
Pending action on the foregoing incidents, petitioners Santiago Jr., et al., filed before the Court a May 7, 2007;
Manifestation and Motion to Set Case for Oral Arguments.39

[Paragraph crossed-out.]
In their Manifestation, petitioners Santiago Jr., et al., admitted that the PRCI Board of Directors had already
called and set the Annual Stockholders’ Meeting on 18 June 2008, and among the items on the Agenda for
confirmation and approval by the stockholders was the property-for-shares exchange between PRCI and 5. An order be issued directing defendants to pay plaintiffs the sum of
JTH. ₱500,000.00 as and by way of attorney’s fees, plus cost of suit.

Other reliefs, just and equitable under the premises are likewise prayed for. 42
43
Acting on the Complaint of Jalane, et al. in Civil Case No. 08-458, Executive Judge Winlove Dumayas
(Executive Judge Dumayas) of the Makati City RTC issued a 72-hour TRO, enjoining PRCI directors from
presenting, discussing, and ratifying the items in the Agenda for the Annual Stockholders’ Meeting set on
18 June 2008 related to the property-for-shares exchange between PRCI and JTH. However, upon being
apprised of the TRO issued by this Court on 9 April 2008 in G.R. No. 182008, in relation to Civil Case No. 07-
610 pending before the Makati City RTC, Branch 149, Executive Judge Dumayas gave verbal advice that the
Annual Stockholders’ Meeting of PRCI should proceed on 18 June 2008 as if the 72-hour TRO had not been
issued. Consequently, the Annual Stockholders’ Meeting of PRCI proceeded on 18 June 2008.1avvphi1
The Annual Stockholders’ Meeting of PRCI, held on 18 June 2008, was attended by stockholders with a total
of 493,017,509 shares or 86.52% of the outstanding capital stock of PRCI, more than the necessary 2/3 to
constitute a quorum. Discussed in the meeting were the same items, whose presentation to the
stockholders was sought to be enjoined by respondents Miguel, et al., in Civil Case No. 07-610 and by
Jalane, et al., in Civil Case No. 08-458. The actions taken by the stockholders on the controversial items
were duly recorded in the Minutes of the meeting, as follows:
IV. APPROVAL OF THE MINUTES OF THE PREVIOUS STOCKHOLDERS’ MEETINGS
Before the next agenda was tackled in the meeting, a stockholder, Atty. Benjamin Santos asked to be
recognized on the floor. The Chairman gave Atty. Santos permission to speak. Atty. Santos inquired from
the Corporate Secretary if there has already been official notice of service on him regarding a 72-hour
temporary restraining order which was issued by the Executive Judge of the Makati Regional Trial Court
(RTC). The Corporation (sic) Secretary answered in the negative.
For the information of the stockholders present, Atty. Santos mentioned that a case has been filed by
certain minority shareholders, namely, Jalane Christie U. Tan, Marilou U. Pua, Aristeo G. Puyat and Ricardo
S. Parreno, against the Board of Directors of PRCI (Civil Case No. 08-458, Makati RTC), and a 72-hour TRO
was issued on 17 June 2008 "enjoining defendants (directors of PRCI), their representatives, employees
and/or all those acting for and in their behalf to refrain from the presentation, discussion and ratification of
portions of the Agenda of the Annual Stockholders’ Meeting of PRCI scheduled on June 18, 2008
particularly items IV, VII and VIII." x x x.
xxxx
According to Atty. Santos, the TRO enjoins them in their capacity as Directors of PRCI. He further stated
that the attendance of all the directors present in the stockholders’ meeting, is in their capacity as
stockholders of PRCI and not as directors of PRCI. The Chairman is present merely to preside over the
meeting, and the Corporate Secretary is not a member of the Board of Directors. Atty. Santos likewise
informed the stockholders present of the existence of a temporary restraining order issued by the Supreme
Court dated 09 April 2008 (in SC G.R. No. 182008) which "enjoin(ed) respondents from enforcing or
executing the assailed Court of Appeals’ decision and resolution, and the assailed trial court’s resolutions
particularly that which mandates the continued enforcement of the writ of permanent injunction issued by
the trial court, until further orders from this Court." Thereafter, Atty. Santos moved that Agenda Item IV as
well as the rest of the items to be taken up since the TRO of the Makati RTC is defective and should not
prevail over the TRO of the Supreme Court.
Atty. Santos added that the case recently filed by the abovementioned minority shareholders is a duplicate
of another pending case filed by other minority shareholders also in the Makati RTC. It was pointed out
that the shareholders in the recent case are guilty of forum shopping since they primarily have the same
interests as those who had earlier filed a suit against PRCI. Atty. Santos clarified that the pending case is
currently the subject of a Petition to the Supreme Court wherein the aforementioned TRO was issued. With
this Comment, the Corporate Secretary took note of the Petition filed with the Supreme Court and the TRO
issued by the Supreme Court.
xxxx
x x x With all the foregoing comments, Atty. Santos moved that the stockholders proceed with the meeting
and that the item under Agenda IV be approved, which are the following: the Minutes of the Annual
Stockholders’ Meeting held on June 19, 2006, the Minutes of the Special Stockholders’ Meeting held on
November 7, 2006 and the Minutes of the Annual Stockholders’ Meeting held on October 10, 2007.
Thereafter, Atty. Alexander Carandang asked to be given permission to speak. The Chairman asked Atty.
Carandang his name and authority to speak, to which, he answered his name and said he was stockholder
of record and a proxy of Aristeo Puyat and Jose L. Santos. After Atty. Carandang was recognized, he stated
that, contrary to Atty. Santos’ earlier actuations, the recent complaint filed is different from the complaint
earlier filed by the Dulay group. He also mentioned that the case which Puyat earlier filed is different
because it is a case for inspection and photocopying of PRCI documents. He thereafter warned against the
tackling of Agenda Item No. 4.
Atty. Brigido Dulay, as a stockholder and proxy to the Tan group (Miguel Ocampo Tan, Jemie U. Tan, JUT
Holdings, Inc., Jalane Christie U. Tan, etc.) likewise took the floor to manifest his continuing objection to the
proceedings.
Atty. Amado Paolo Dimayuga also took the floor as a proxy to Marilou Pua and manifested that the
complainants in the recent case filed are not guilty of forum shopping and also manifested his objection to
the taking up of Item IV in the agenda and the continuance of the proceedings in the stockholders’
meeting. Atty. Pelagio Ricalde also took the floor as proxy for Aries Prime Resources, Inc. and also
manifested objection to the proceedings. Both Atty. Dimayuga and Atty. Ricalde manifested continuing
objections.
Atty. Dimayuga also mentioned that he received word that a Motion to Lift was just filed by the PRCI
Directors regarding the recent TRO issued by the Makati RTC. As a reply, the Corporate Secretary asked
that the counsel for the PRCI directors be allowed to explain such allegations. Atty. Garbriel Q. Enriquez,
the counsel for PRCI Directors Cua, Cua, Jr., De Villa and Robles informed the stockholders of the wrong
information being given by Atty. Dimayuga. They had filed a manifestation before the Executive Judge of
the RTC which issued the TRO and informed him of the facts mentioned by Atty. Santos. The Executive
Judge said that today’s meeting should proceed because the plaintiffs therein suppressed the existing TRO
in the Supreme Court, and the TRO of the RTC cannot rise above the Supreme Court TRO. There is
therefore no legal obstacle to holding the Annual Stockholders’ Meeting, which should proceed so as not to
prejudice the stockholders.
The Corporate Secretary stated that all the objections are duly noted. There being an earlier motion for the
approval of the Minutes, a stockholder seconded said motion. The motion having been duly seconded, the
Chairman declared all the minutes for approval as duly approved.
xxxx
VI. RATIFICATION OF THE ACTS OF THE BOARD OF DIRECTORS, THE EXECUTIVE COMMITTEE AND THE
MANAGEMENT OF THE CORPORATION FOR FISCAL YEARS 2006 AND 2007
44
The Chairman then proceeded by stating that the next item on the agenda is the ratification by the
Stockholders of the acts of the Board of Directors, the Executive Committee, and the Management during
the last fiscal years 2006 and 2007. The Chairman then explained that as to all other matters and action
affecting the operations, financial performance and strategic posture of the Corporation, all have been
subsumed and discussed in the Annual Report of the President and likewise reflected in the Information
Statement sent to all stockholders of record and to the SEC.
Once more, Atty. Dulay, Atty. Carandang, Atty. Dimayuga and Atty. Ricalde all took the floor successively
and objected to this item in the agenda and the Corporate Secretary duly noted these objections.
A stockholder later moved that all the acts of the Board of Directors, the Executive Committee, and the
corporate management be confirmed, ratified and approved by the stockholders. The said motion was duly
seconded, thus, the stockholders thereafter approved and ratified all the said acts.
At this juncture, Atty. Dulay requested that the stockholders who moved and seconded the
aforementioned acts be named and their authority to speak be made known. Atty. Carandang likewise
inquired about the same information about a lady stockholder who earlier seconded the motion. With this,
Atty. Jose Miguel Manalo stated his name and said he was a stockholder of record. The other stockholders
stated that they were proxies of Mr. Santiago Cualoping III.
VII. APPROVAL OF THE EXCHANGE OF PRCI’S MAKATI PROPERTY FOR SHARES OF STOCK OF JTH DAVIES
HOLDINGS, INC.
When asked by the Chairman as to the next item in the agenda, the Corporate Secretary informed all
present that the next item is the approval of the exchange of PRCI’s Makati property for shares of stock of
JTH Davies Holdings which was duly approved by the Board of Directors during its 11 May 2007 meeting.
The exchange was duly reported and disclosed to the SEC and the information thereof was included in the
Information Statements mailed to all stockholders of PRCI.
Yet again, Atty. Dulay, Atty. Carandang, Atty. Dimayuga and Atty. Ricalde all took the floor successively and
objected to this item in the agenda which were duly noted by the Corporate Secretary.
The Chairman then called the President of PRCI, Mr. Solomon Cua to officiate on this matter. At this point,
one stockholder moved that the exchange of PRCI’s Makati property for JTH shares be approved by the
stockholders, which was duly seconded by another stockholder. President Cua then asked that the total
percentage of those who are in favor of the exchange be taken. Mr. Santiago Cua, Jr., a stockholder and a
proxy of approximately 31.39% of the shareholdings voted in favor of the exchange. Then, Mr. Lawrence
Lim Swee Lin, representing Magnum Investment Ltd. and Leisure Management Ltd. who own 39.15% of the
shareholdings, also voted in favor of the exchange. Mr. Exequiel D. Robles also voted in favor of the
exchange, as proxy of Sta. Lucia Realty & Development, Inc. owning 4.19% of the shares. Lastly, Atty. Santos
also wanted his vote of approval be counted whi his shares of stock of 117 shares.
With 75.23% of the outstanding capital stock of PRCI voting in favor of the exchange of its Makati property
for shares of stock of JTH Davies, the Chairman then declared said motion as carried and approved. 43
Hence, at their annual meeting on 18 June 2008, the PRCI stockholders had already confirmed and
approved the actions and resolutions of the PRCI Board of Directors, which were to subject matters of Civil
Cases No. 07-610 and No. 08-458. Resultantly, on 7 July 2008, PRCI and JTH duly signed and executed a
Deed of Transfer with Subscription Agreement, covering the exchange of the Makati property of PRCI for
shares of stock of JTH. Paragraph 4 of said Deed expressly provides:
4. The parties understand, acknowledge and agree that this Deed is executed with the intention of availing
of the benefits of Sections 40(C)(2) of the National Internal Revenue Code of 1997 (NIRC), as amended,
where, upon subscription of shares hereunder, the Subscriber shall gain further control of the Company.
The parties obtained a ruling from the Bureau of Internal Revenue to the effect that no gain or loss will be
recognized on the part of each of the parties, pursuant to this Deed, in accordance with Sections 40(C)(2) of
the NIRC, as amended. The ruling confirmed that the transfer of the Subscriber’s parcels of land to the
Company in exchange for the shares of stock of the latter is not subject to income tax, capital gains tax,
donor’s tax, value-added tax and documentary stamp tax, except for documentary stamp tax on the
original issuance of the Company’s shares of stock to the Subscriber. 44 (Emphases ours.)
However, in a letter dated 15 July 2008, the BIR reversed/revoked its earlier ruling that the property-for-
shares exchange between PRCI and JTH was a tax-free transaction under Section 40(C)(2) of the National
Internal Revenue Code of 1997; and subjected the exchange to value-added tax. As a result, PRCI and JTH
executed on 22 August 2008 a Disengagement Agreement, 45 by virtue of which, effective immediately, PRCI
and JTH would disengaged and would no longer implement the Deed of Transfer with Subscription
Agreement dated 7 July 2008. For all intents and purposes, the said Deed of Transfer with Subscription
Agreement was rescinded. PRCI disclosed the Disengagement Agreement to the SEC on 26 August 2008.
Civil Case No. 08-458 was eventually also assigned to the only commercial court of Makati City, i.e., RTC,
Branch 149, presided over by Judge Untalan. Petitioners Santiago Jr., et al. averred that Judge Untalan
refused to dismiss Civil Case No. 08-458 on the ground of forum shopping, even when it was no different
from Civil Case No. 07-610. They further asserted that Judge Untalan showed evident partiality in favor of
Jalane, et al., during the hearings in Civil Case No. 08-458, openly making hasty conclusions as to certain
marked exhibits and demonstrating his pre-judgment of the case. On 25 September 2008 and 30
September 2008, the PRCI directors filed before the RTC a Motion to Inhibit 46 and a Supplemental Motion
to Inhibit,47 respectively, urging Judge Untalan to inhibit himself from Civil Case No. 08-458, since he had
revealed in several instances his utter bias and prejudice against the PRCI directors and admitted his being
a relative by affinity of Atty. Amado Paulo Dimayuga,48 the initial counsel of Jalane, et al. Judge Untalan has
yet to act on such motions.
At the end of their Manifestation, petitioners Santiago Jr., et al., asked that this Court grant them the
following reliefs:
PRAYER
WHEREFORE, it is respectfully prayed that the foregoing Manifestation be noted, and that the First Suit
[Civil Case No. 07-610] as well as the Second Suit [Civil Case No. 08-458] should now be dismissed for being
moot and academic, without need of remand to the trial (sic) Court for further proceedings.
It is further respectfully prayed that should the Honorable Court find it proper and necessary, the instant
cases be set for oral arguments on such date and time as it may deem convenient to its calendar.
Herein petitioners furthermore pray for such other reliefs as may be just and equitable in the premises. 49
Petitioner Santiago Sr. also filed his own Manifestation (To Update the Honorable Court on Relevant
Supervening Proceedings and Incidents) with Motion to Resolve Merits of Petition and of the Case in the
45
Lower Court (In View of Supervening Proceedings and Incidents), 50 essentially recounting the same events
in the Manifestation of petitioners Santiago Jr., et al. The prayer of Santiago Sr. in his Manifestation and
Motion reads:
PRAYER
WHEREFORE, it is respectfully prayed that the Honorable Court:
1. TAKE COGNIZANCE of the instant Manifestation on relevant supervening proceedings and
incidents in this case, especially and specifically, after the issuance by the Honorable Court on
09 April 2008 of a temporary restraining order, addressed to the Court of Appeals, the
presiding judge of the Regional Trial Court, Branch 149, Makati City, and the private
respondents, and their agents, representatives and/or any person or persons acting upon their
orders or in their place of stead, who are:
"ENJOINED from enforcing or executing the assailed Court of Appeals’ decision and resolution,
and the assailed trial court’s resolutions particularly that which mandates the continued
enforcement of the writ of permanent injunction issued by the trial court, until further orders
from this Court."
2. ORDER the dismissal of the complaint below on the ground that the same is not a legitimate
and valid derivative suit.
3. ORDER the dismissal of the complaint below, in any case, on the ground that the issues
raised in the complaint, specifically with respect to the so-called "disputed" resolutions, have
been mooted and/or no longer subsist.
4. ORDER the private respondents to explain why they should not be cited for contempt of
court for violation of the temporary restraining order issued by the Court on 09 April 2008.
5. ORDER the private respondents to explain why they should not be cited for contempt of
court for engaging in forum-shopping.
6. ORDER that the temporary restraining order issued by the Court on 09 April 2008 be made
PERMANENT.
Other reliefs just and equitable in the premises are likewise prayed for. 51
II
ISSUES
The Court identifies the following fundamental issues for its resolution in the Petitions at bar:
(1) Whether the Petition of Santiago Sr. in G.R. No. 180028 should be dismissed for its
procedural infirmities?
(2) Whether Civil Case No. 07-610 instituted by respondents Miguel, et al. before the RTC
should be ordered dismissed?
(3) Whether Civil Case No. 08-458 instituted by Jalane, et al., before the RTC should be ordered
dismissed?
(4) Whether APRI should be allowed to intervene in the instant Petitions?
III
RULING OF THE COURT
Procedural infirmities of Petition in G.R. No. 180028
Respondents Miguel, et al., call attention to two procedural infirmities of the Petition for Certiorari of
petitioner Santiago Sr. in G.R. No. 180028: (1) the failure to inform the Court of the pendency of the
Petition in G.R. No. 181455-56, thus, violating the rule against forum-shopping; and (2) its being the wrong
mode of appeal.
The Verification and Certification of Non-Forum Shopping attached to the Petition for Certiorari of
petitioner Santiago Sr. in G.R. No. 180028 was actually signed by his attorney-in-fact, Solomon, 52 who is also
a petitioner in G.R. No. 181455-56. It contains the following paragraph:
4. In compliance with the 1997 Rules of Civil Procedure, I hereby certify that the petitioner, by himself
personally and/or acting through his attorneys-in fact, has not heretofore commenced any other action or
proceeding involving the same issues in the Supreme Court, the Court of Appeals, or different Divisions
thereof, or any other tribunal or agency, and that to the best of my knowledge, no such action or
proceeding is pending in the Supreme Court, the Court of Appeals, or different Divisions thereof, or any
other tribunal or agency. If I should learn that a similar action or proceeding has been filed or is pending
before the Supreme Court, Court of Appeals, or different Divisions thereof, or any other tribunal or agency,
I undertake to promptly inform this Honorable Court, the aforesaid courts and other tribunal or agency
within five (5) days therefrom.53
Respondents Miguel, et al., maintain that the failure of Solomon, as petitioner Santiago Sr.’s attorney-in-
fact, to inform the Court as regards the pendency of the Petition for Review in G.R. No. 181455-56, of
which Solomon is one of the petitioners, is in violation of the rule against forum-shopping and warrants the
summary dismissal of the Petition in G.R. No. 182008.
Forum shopping is the institution of two or more actions or proceedings grounded on the same cause on
the supposition that one or the other court would make a favorable disposition. It is an act of malpractice
and is prohibited and condemned as trifling with courts and abusing their processes. In determining
whether or not there is forum shopping, what is important is the vexation caused the courts and parties-
litigants by a party who asks different courts and/or administrative bodies to rule on the same or related
causes and/or grant the same or substantially the same reliefs and in the process creates the possibility of
conflicting decisions being rendered by the different bodies upon the same issues. 54
Forum shopping is present when, in two or more cases pending, there is identity of (1) parties (2) rights or
causes of action and reliefs prayed for, and (3) the two preceding particulars, such that any judgment
46
rendered in the other action will, regardless of which party is successful, amount to res judicata in the
action under consideration.55
It is evident that Santiago Sr., the petitioner in G.R. No. 182008, is not a party to G.R. No. 181455-56. Even
though Solomon is admittedly a petitioner in G.R. No. 181455-56, he is only acting in G.R. No. 182008 as
the attorney-in-fact of Santiago Sr., the actual petitioner in the latter case. Thus, the very first element for
forum shopping, identity of parties, is lacking.
Respondents Miguel, et al., cannot insist on identity of interests between petitioner Santiago Sr. in G.R. No.
182008 and petitioners Santiago Jr., et al., in G.R. No. 181455-56, when the Complaint itself of respondents
Miguel, et al., before the RTC, docketed as Civil Case No. 07-610, impleads the petitioners Santiago Sr. and
Santiago Jr., et al., as defendants a quo in their individual capacities as PRCI directors, and not collectively
as the PRCI Board of Directors. Each individual PRCI director, therefore, is not precluded from hiring his
own counsel, presenting his own arguments and defenses, and resorting to his own procedural remedies,
apart and independent from the other PRCI directors. In addition, the consolidation of G.R. No. 181455-56
and G.R. No. 182008 has already eliminated the danger of conflicting decisions being issued in said cases.
Assuming arguendo that Solomon did have the legal obligation to inform the Court in G.R. No. 182008 of
the pendency of G.R. No. 181455-56, his failure to do so does not necessarily result in the dismissal of the
former. Although the submission of a certificate against forum shopping is deemed obligatory, it is not
jurisdictional.56 Hence, in this case in which such a certification was in fact submitted – only, it was
defective -- the Court may still refuse to dismiss and may, instead, give due course to the Petition in light of
attendant exceptional circumstances.57
Santiago Sr. committed another procedural faux pas by filing before this Court a Petition for Certiorari
under Rule 65 of the Rules of Court to assail the Decision dated 6 September 2007 and Resolution dated 22
January 2008 of the Court of Appeals in CA-G.R. SP No. 99769 and No. 99780.
The proper remedy of a party aggrieved by a decision of the Court of Appeals is a petition for review under
Rule 45, which is not similar to a petition for certiorari under Rule 65 of the Rules of Court. As provided in
Rule 45 of the Rules of Court, decisions, final orders or resolutions of the Court of Appeals in any case, i.e.,
regardless of the nature of the action or proceedings involved, may be appealed to this Court by filing a
petition for review, which would be but a continuation of the appellate process over the original case. On
the other hand, a special civil action under Rule 65 is an independent action based on the specific grounds
therein provided and, as a general rule, cannot be availed of as a substitute for the lost remedy of an
ordinary appeal, including that under Rule 45.58
Accordingly, when a party adopts an improper remedy, as in this case, his Petition may be dismissed
outright. However, in the interest of substantial justice, the strict application of procedural technicalities
should not hinder the speedy disposition of this case on the merits. Thus, while the instant Petition is one
for certiorari under Rule 65 of the Rules of Court, the assigned errors are more properly addressed in a
petition for review under Rule 45. 59
The merits of the Petitions in both G.R. No. 181455-56 and No. 182008 compel this Court to give more
weight to substantive justice, instead of technical rules. Indeed, where, as here, there is a strong showing
that a grave miscarriage of justice would result from the strict application of the Rules, the Court will not
hesitate to relax the same in the interest of substantial justice. It bears stressing that the rules of procedure
are merely tools designed to facilitate the attainment of justice. They were conceived and promulgated to
effectively aid the court in the dispensation of justice. Courts are not slaves to or robots of technical rules,
shorn of judicial discretion. In rendering justice, courts have always been, as they ought to be,
conscientiously guided by the norm that, on the balance, technicalities take a backseat against substantive
rights, and not the other way around. Thus, if the application of the Rules would tend to frustrate rather
than promote justice, it is always within the power of the Court to suspend the Rules, or except a particular
case from its operation.60
Derivative suits, in general
A corporation, such as PRCI, is but an association of individuals, allowed to transact under an assumed
corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to such body. As to its corporate and management
decisions, therefore, the State will generally not interfere with the same. Questions of policy and of
management are left to the honest decision of the officers and directors of a corporation, and the courts
are without authority to substitute their judgment for the judgment of the board of directors. The board is
the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable
by the courts.61
The governing body of a corporation is its board of directors. Section 23 of the Corporation Code provides
that "[u]nless otherwise provided in this Code, the corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all property of such corporations controlled and held
by the board of directors or trustees x x x." The concentration in the board of the powers of control of
corporate business and of appointment of corporate officers and managers is necessary for efficiency in
any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a
corporation to conduct its business directly. And so the plan of corporate organization is for the
stockholders to choose the directors who shall control and supervise the conduct of corporate business. 62
The following discourse on the corporate powers of the board of directors under Section 23 of the
Corporation Code establishes the extent thereof:
Under the above provision, it is quite clear that, except in the instances where the Code expressly grants a
specific power to the stockholders or member, the board has the sole power and responsibility to decide
whether a corporation should sue, purchase and sell property, enter into any contract, or perform any act.
Stockholders’ or members’ resolutions dealing with matters other than the exceptions are not legally
effective nor binding on the board, and may be treated by it as merely advisory, or may even be completely
disregarded. Since the law has vested the responsibility of managing the corporate affairs on the board, the
stockholders must abide by its decisions. If they do not agree with the policies of the board, their remedy is
to wait for the next election of the directors and choose new ones to take their place. The theory of the law
is that although stockholders are to have all the profit, the complete management of the enterprise shall
be with the board.63
The board of directors of a corporation is a creation of the stockholders. The board of directors, or the
majority thereof, controls and directs the affairs of the corporation; but in drawing to itself the power of
the corporation, it occupies a position of trusteeship in relation to the minority of the stock. The board shall
exercise good faith, care, and diligence in the administration of the affairs of the corporation, and protect
not only the interest of the majority but also that of the minority of the stock. Where the majority of the
board of directors wastes or dissipates the funds of the corporation or fraudulently disposes of its
properties, or performs ultra vires  acts, the court, in the exercise of its equity jurisdiction, and upon
showing that intracorporate remedy is unavailing, will entertain a suit filed by the minority members of the
board of directors, for and in behalf of the corporation, to prevent waste and dissipation and the
commission of illegal acts and otherwise redress the injuries of the minority stockholders against the
47
wrongdoing of the majority. The action in such a case is said to be brought derivatively in behalf of the
corporation to protect the rights of the minority stockholders thereof. 64
It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust — not of
mere error of judgment or abuse of discretion — and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly
upon the stockholders.65
A derivative suit must be differentiated from individual and representative or class suits, thus:
Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or
other persons may be classified into individual suits, class suits, and derivative suits. Where a stockholder
or member is denied the right of inspection, his suit would be individual because the wrong is done to him
personally and not to the other stockholders or the corporation. Where the wrong is done to a group of
stockholders, as where preferred stockholders’ rights are violated, a class or representative suit will be
proper for the protection of all stockholders belonging to the same group. But where the acts complained
of constitute a wrong to the corporation itself, the cause of action belongs to the corporation and not to
the individual stockholder or member. Although in most every case of wrong to the corporation, each
stockholder is necessarily affected because the value of his interest therein would be impaired, this fact of
itself is not sufficient to give him an individual cause of action since the corporation is a person distinct and
separate from him, and can and should itself sue the wrongdoer. Otherwise, not only would the theory of
separate entity be violated, but there would be multiplicity of suits as well as a violation of the priority
rights of creditors. Furthermore, there is the difficulty of determining the amount of damages that should
be paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees
themselves, a stockholder or member may find that he has no redress because the former are vested by
law with the right to decide whether or not the corporation should sue, and they will never be willing to
sue themselves. The corporation would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue on
behalf of a corporation in what eventually became known as a "derivative suit." It has been proven to be an
effective remedy of the minority against the abuses of management. Thus, an individual stockholder is
permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the ones to
be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party in interest. 66
The afore-quoted exposition is relevant considering the claim of respondents Miguel, et al., that its
Complaint in Civil Case No. 07-610 is not just a derivative suit, but also an intracorporate action arising from
devices or schemes employed by the PRCI Board of Directors amounting to fraud or misrepresentation. 67 A
thorough study of the said Complaint, however, reveals that the distinction is deceptive. The supposed
devices and schemes employed by the PRCI Board of Directors amounting to fraud or misrepresentation
are the very same bases for the derivative suit. They are the very same acts of the PRCI Board of Directors
that have supposedly caused injury to the corporation. From the very beginning of their Complaint,
respondents have alleged that they are filing the same "as shareholders, for and in behalf of the
Corporation, in order to redress the wrongs committed against the Corporation and to protect or vindicate
corporate rights, and to prevent wastage and dissipation of corporate funds and assets and the further
commission of illegal acts by the Board of Directors." Although respondents Miguel, et al., also aver that
they are seeking "redress for the injuries of the minority stockholders against the wrongdoings of the
majority," the rest of the Complaint does not bear this out, and is utterly lacking any allegation of injury
personal to them or a certain class of stockholders to which they belong. 68
Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and
individual and class suits, on the other, are mutually exclusive, viz:
As the Supreme Court has explained: "A shareholder's derivative suit seeks to recover for the benefit of the
corporation and its whole body of shareholders when injury is caused to the corporation that may not
otherwise be redressed because of failure of the corporation to act. Thus, ‘the action is derivative, i.e., in
the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of
its stock and property without any severance or distribution among individual holders, or it seeks to
recover assets for the corporation or to prevent the dissipation of its assets.’ [Citations.]" (Jones, supra, 1
Cal.3d 93, 106, 81 Cal.Rptr. 592, 460 P.2d 464.) In contrast, "a direct action [is one] filed by the shareholder
individually (or on behalf of a class of shareholders to which he or she belongs) for injury to his or her
interest as a shareholder. ... [¶] ... [T]he two actions are mutually exclusive: i.e., the right of action and
recovery belongs to either the shareholders (direct action) *651 or the corporation (derivative action)."
(Friedman, Cal. Practice Guide: Corporations, supra, ¶ 6:598, p. 6-127.)
Thus, in Nelson v. Anderson (1999) 72 Cal.App.4th 111, 84 Cal.Rptr.2d 753, the **289 minority shareholder
alleged that the other shareholder of the corporation negligently managed the business, resulting in its
total failure. (Id. at p. 125, 84 Cal.Rptr.2d 753) The appellate court concluded that the plaintiff could not
maintain the suit as a direct action: "Because the gravamen of the complaint is injury to the whole body of
its stockholders, it was for the corporation to institute and maintain a remedial action. [Citation.] A
derivative action would have been appropriate if its responsible officials had refused or failed to act." (Id. at
pp. 125-126, 84 Cal.Rptr.2d 753) The court went on to note that the damages shown at trial were the loss
of corporate profits. (Id. at p. 126, 84 Cal.Rptr.2d 753) Since "[s]hareholders own neither the property nor
the earnings of the corporation," any damages that the plaintiff alleged that resulted from such loss of
corporate profits "were incidental to the injury to the corporation." 69
Based on allegations in the Complaint of Miguel, et al., in Civil Case No. 07-610, the Court determines that
there is only a derivative suit, based on the devices and schemes employed by the PRCI Board of Directors
that amounts to mismanagement, misrepresentation, fraud, and bad faith.
At the crux of the Complaint of respondents Miguel, et al., in Civil Case No. 07-610 is their dissent from the
passage by the majority of the PRCI Board of Directors of the "disputed resolutions," particularly: (1) the
Resolution dated 26 September 2006, authorizing the acquisition by PRCI of up to 100% of the common
shares of JTH; and (2) the Resolution dated 11 May 2007, approving the property-for-shares exchange
between PRCI and JTH.
Derivative suit (re: acquisition of JTH)
It is important for the Court to mention that the 26 September 2006 Resolution of the PRCI Board of
Directors not only authorized the acquisition by PRCI of up to 100% of the common stock of JTH, but it also
specifically appointed petitioner Santiago Sr. 70 to act as attorney-in-fact and proxy who could vote all the
shares of PRCI in JTH, as well as nominate, appoint, and vote into office directors and/or officers during
regular and special stockholders’ meetings of JTH. It was by this authority that PRCI directors were able to
constitute the JTH Board of Directors. Thus, the protest of respondents Miguel, et al., against the
interlocking directors of PRCI and JTH is also rooted in the 26 September 2006 Resolution of the PRCI Board
of Directors.
48
After a careful study of the allegations concerning this derivative suit, the Court rules that it is dismissible
for being moot and academic.
That a court will not sit for the purpose of trying moot cases and spend its time in deciding questions, the
resolution of which cannot in any way affect the rights of the person or persons presenting them, is well
settled. Where the issues have become moot and academic, there is no justiciable controversy, thereby
rendering the resolution of the same of no practical use or value. 71
The Resolution dated 26 September 2006 of the PRCI Board of Directors was approved and ratified by the
stockholders, holding 74% of the outstanding capital stock in PRCI, during the Special Stockholders’
Meeting held on 7 November 2006. 72
Respondents Miguel, et al., instituted Civil Case No. 07-610 only on 10 July 2007, against herein petitioners
Santiago Sr., Santiago Jr., Solomon, and Robles, together with Renato de Villa, Lim Teong Leong, Lawrence
Lim Swee Lin, Tham Ka Hon, and Dato Surin Upatkoon, in their capacity as directors of PRCI and/or JTH.
Clearly, the acquisition by PRCI of JTH and the constitution of the JTH Board of Directors are no longer just
the acts of the majority of the PRCI Board of Directors, but also of the majority of the PRCI stockholders. By
ratification, even an unauthorized act of an agent becomes the authorized act of the principal. 73 To declare
the Resolution dated 26 September 2006 of the PRCI Board of Directors null and void will serve no practical
use or value, or affect any of the rights of the parties, because the Resolution dated 7 November 2006 of
the PRCI stockholders -- approving and ratifying said acquisition and the manner in which PRCI shall
constitute the JTH Board of Directors -- will still remain valid and binding.
In fact, if the derivative suit, insofar as it concerns the Resolution dated 26 September 2006 of the PRCI
Board of Directors, is not dismissible for mootness, it is still vulnerable to dismissal for failure to implead
indispensable parties, namely, the majority of the PRCI stockholders.
Under Rule 3, Section 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. The interests of such indispensable party in the subject
matter of the suit and the relief are so bound with those of the other parties that his legal presence as a
party to the proceeding is an absolute necessity. As a rule, an indispensable party’s interest in the subject
matter is such that a complete and efficient determination of the equities and rights of the parties is not
possible if he is not joined.74
The majority of the stockholders of PRCI are indispensable parties to Civil Case No. 07-610, for they have
approved and ratified, during the Special Stockholders’ Meeting on 7 November 2006, the Resolution dated
26 September 2006 of the PRCI Board of Directors. Obviously, no final determination of the validity of the
acquisition by PRCI of JTH or of the constitution of the JTH Board of Directors can be had without
consideration of the effect of the approval and ratification thereof by the majority stockholders.
Respondents Miguel, et al., cannot simply assert that the majority of the PRCI Board of Directors named as
defendants in Civil Case No. 07-610 are also the PRCI majority stockholders, because respondents Miguel,
et al., explicitly impleaded said defendants in their capacity as directors of PRCI and/or JTH, not as
stockholders.
Derivative suit (re: property-for-shares exchange)
The derivative suit, with respect to the Resolution dated 11 May 2007 of the PRCI Board of Directors, is
similarly dismissible for lack of cause of action.
The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any express
provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized
when the said laws make corporate directors or officers liable for damages suffered by the corporation and
its stockholders for violation of their fiduciary duties. In effect, the suit is an action for specific performance
of an obligation, owed by the corporation to the stockholders, to assist its rights of action when the
corporation has been put in default by the wrongful refusal of the directors or management to adopt
suitable measures for its protection. The basis of a stockholder’s suit is always one of equity. However, it
cannot prosper without first complying with the legal requisites for its institution. 75
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies (IRPICC) lays down the
following requirements which a stockholder must comply with in filing a derivative suit:
Sec. 1. Derivative action. – A stockholder or member may bring an action in the name of a corporation or
association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit. (Emphasis ours.)
In their Complaint before the RTC in Civil Case No. 07-610, respondents Miguel, et al., made no mention at
all of appraisal rights, which could or could not have been available to them. In their Comment on the
Petitions at bar, respondents Miguel, et al., contend that there are no appraisal rights available for the acts
complained of, since (1) the PRCI directors are being charged with mismanagement, misrepresentation,
fraud, and breach of fiduciary duties, which are not subject to appraisal rights; (2) appraisal rights will only
obtain for acts of the Board of Directors in good faith; and (3) appraisal rights may be exercised by a
stockholder who shall have voted against the proposed corporate action, and no corporate action has yet
been taken herein by PRCI stockholders, who still have not voted on the intended property-for-shares
exchange between PRCI and JTH.
The Court disagrees.
It bears to point out that every derivative suit is necessarily grounded on an alleged violation by the board
of directors of its fiduciary duties, committed by mismanagement, misrepresentation, or fraud, with the
latter two situations already implying bad faith. If the Court upholds the position of respondents Miguel, et
al. – that the existence of mismanagement, misrepresentation, fraud, and/or bad faith renders the right of
appraisal unavailable – it would give rise to an absurd situation. Inevitably, appraisal rights would be
unavailable in any derivative suit. This renders the requirement in Rule 8, Section 1(3) of the IPRICC
superfluous and effectively inoperative; and in contravention of an elementary rule of legal hermeneutics
that effect must be given to every word, clause, and sentence of the statute, and that a statute should be
so interpreted that no part thereof becomes inoperative or superfluous. 76
49
The import of establishing the availability or unavailability of appraisal rights to the minority stockholder is
further highlighted by the fact that it is one of the factors in determining whether or not a complaint
involving an intra-corporate controversy is a nuisance and harassment suit. Section 1(b), Rule 1 of IRPICC
provides:
(b) Prohibition against nuisance and harassment suits. - Nuisance and harassment suits are prohibited. In
determining whether a suit is a nuisance or harassment suit, the court shall consider, among others, the
following:
(1) The extent of the shareholding or interest of the initiating stockholder or member;
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts complained of; and
(5) Prejudice or damage to the corporation, partnership, or association in relation to the relief
sought. [Emphasis ours.]
In case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith dismiss the
case.
The availability or unavailability of appraisal rights should be objectively based on the subject matter of the
complaint, i.e., the specific act or acts performed by the board of directors, without regard to the
subjective conclusion of the minority stockholder instituting the derivative suit that such act constituted
mismanagement, misrepresentation, fraud, or bad faith.
The raison d’etre for the grant of appraisal rights to minority stockholders has been explained thus:
x x x [Appraisal right] means that a stockholder who dissented and voted against the proposed corporate
action, may choose to get out of the corporation by demanding payment of the fair market value of his
shares. When a person invests in the stocks of a corporation, he subjects his investment to all the risks of
the business and cannot just pull out such investment should the business not come out as he expected. He
will have to wait until the corporation is finally dissolved before he can get back his investment, and even
then, only if sufficient assets are left after paying all corporate creditors. His only way out before
dissolution is to sell his shares should he find a willing buyer. If there is no buyer, then he has no recourse
but to stay with the corporation. However, in certain specified instances, the Code grants the stockholder
the right to get out of the corporation even before its dissolution because there has been a major change in
his contract of investment with which he does not agree and which the law presumes he did not foresee
when he bought his shares. Since the will of two-thirds of the stocks will have to prevail over his objections,
the law considers it only fair to allow him to get back his investment and withdraw from the corporation. x
x x,77 (Emphasis ours.)
The Corporation Code expressly made appraisal rights available to the dissenting stockholder in the
following instances:
Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose. –
Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation
or business or for any purpose other than the primary purpose for which it was organized when approved
by a majority of the board of directors or trustees and ratified by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, or by at least two-thirds (2/3) of the members in case of
non-stock corporations, at a stockholders’ or members’ meeting duly called for the purpose. Written notice
of the proposed investment and the time and place of the meeting shall be addressed to each stockholder
or member at his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally; Provided, That any dissenting
stockholder shall have appraisal right as provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the
articles of incorporation, the approval of the stockholders or members shall not be necessary.
Sec. 81. Instances of appraisal right. – Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholders or class of shares, or of authorizing preferences in any
respect superior to those of outstanding shares of any class, or of extending or shortening the
term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in this Code; and
3. In case of merger or consolidation. (Emphasis ours.)
Respondents Miguel, et al., themselves admitted that the property-for-shares exchange between PRCI and
JTH, approved by majority of the PRCI Board of Directors in the Resolution dated 11 May 2007, involved all
or substantially all of the properties and assets of PRCI. They alleged in their Complaint in Civil Case No. 07-
610 that:
49. The Corporation’s Makati Property, consisting of prime property in the heart of Makati City worth
billions of pesos in its current value constitutes substantially all of the assets of the Corporation and is the
sole and exclusive location on which it conducts its business of a race course.
50. The exchange of the Corporation’s property for JTH shares would therefore constitute a sale of
substantially all of the assets of the corporation. (Emphasis ours.)
Irrefragably, the property-for-shares exchange between PRCI and JTH, involving as it did substantially all of
the properties and assets of PRCI, qualified as one of the instances when dissenting stockholders, such as
respondents Miguel, et al., could have exercised their appraisal rights.
The Court finds specious the averment of respondents Miguel, et al., that appraisal rights were not
available to them, because appraisal rights may only be exercised by stockholders who had voted against
the proposed corporate action; and that at the time respondents Miguel, et al., instituted Civil Case No. 07-
610, PRCI stockholders had yet to vote on the intended property-for-shares exchange between PRCI and
JTH. Respondents Miguel, et al., themselves caused the unavailability of appraisal rights by filing the
Complaint in Civil Case No. 07-610, in which they prayed that the 11 May 2007 Resolution of the Board of
Directors approving the property-for-shares exchange between PRCI and JTH be declared null and void,
50
even before the said Resolution could be presented to the PRCI stockholders for approval or rejection.
More than anything, the argument of respondents Miguel, et al., raises questions of whether their
derivative suit was prematurely filed for they had failed to exert all reasonable efforts to exhaust all other
remedies available under the articles of incorporation, by-laws, laws, or rules governing the corporation or
partnership, as required by Rule 8, Section 1(2) of the IRPICC. The obvious intent behind the rule is to make
the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought
have failed.78
Personal action for inspection of corporate books and records
Respondents Miguel, et al., allege another cause of action, other than the derivative suit -- the violation of
their right to information relative to the disputed Resolutions, i.e., the Resolutions dated 16 September
2006 and 11 May 2007 of the PRCI Board of Directors.
Rule 7 of the IRPICC shall apply to disputes exclusively involving the rights of stockholders or members to
inspect the books and records and/or to be furnished with the financial statements of a corporation, under
Sections 7479 and 7580 of the Corporation Code.81
Rule 7, Section 2 of IRPICC enumerates the requirements particular to a complaint for inspection of
corporate books and records:
Sec. 2. Complaint. - In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must
state the following:
(1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or
records and/or to be furnished with financial statements under Sections 74 and 75 of the
Corporation Code of the Philippines;
(2) A demand for inspection and copying of books and records and/or to be furnished with
financial statements made by the plaintiff upon defendant;
(3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for
such refusals, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is
unjustified and illegal, stating the law and jurisprudence in support thereof. (Emphasis ours.)
As has already been previously established herein, the right to information, which includes the right to
inspect corporate books and records, is a right personal to each stockholder. After a closer reading of the
Complaint in Civil Case No. 07-610, the Court observes that only respondent Dulay actually made a demand
for a copy of "all the records, documents, contracts, and agreements, emails, letters, correspondences,
relative to the acquisition of JTH x x x." There is no allegation that his co-respondents (who are his co-
plaintiffs in Civil Case No. 07-610) made similar demands for the inspection or copying of corporate books
and records. Only respondent Dulay complied then with the requirement under Rule 7, Section 2(2) of
IRPICC.
Even so, respondent Dulay’s Complaint should be dismissed for lack of cause of action, for his demand for
copies of pertinent documents relative to the acquisition of JTH shares was not denied by any of the
defendants named in the Complaint in Civil Case No. 07-610, but by Atty. Jesulito A. Manalo (Manalo), the
Corporate Secretary of PRCI, in a letter dated 17 January 2006. Section 74 of the Corporation Code, the
substantive law on which respondent Dulay’s Complaint for inspection and copying of corporate books and
records is based, states that:
Sec. 74. Books to be kept; stock transfer agent. –
xxxx
Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from its records or minutes, in accordance with
the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages,
and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is pursuant to a resolution or order of the Board of Directors or Trustees, the
liability under this section for such action shall be imposed upon the directors or trustees who voted for
such refusal: x x x (Emphasis ours.)
Based on the foregoing, it is Corporate Secretary Manalo who should be held liable for the supposedly
wrongful and unreasonable denial of respondent Dulay’s demand for inspection and copying of corporate
books and records; but, as previously mentioned, Corporate Secretary Manalo is not among the defendants
named in the Complaint in Civil Case No. 07-610. There is also utter lack of any allegation in the Complaint
that Corporate Secretary Manalo denied respondent Dulay’s demand pursuant to a resolution or order of
the PRCI Directors, so that the latter (who are actually named defendants in the Complaint) could also be
held liable for the denial.
Supervening events
During the pendency of the cases at bar, supervening events took place that further justified the dismissal
of Civil Case No. 07-610 for already being moot and academic.
First, during the 2008 Annual Stockholders’ Meeting of PRCI, held on 18 June 2008, the following agenda
items were finally presented to the stockholders, who approved and ratified the same by a majority vote:
(1) the Minutes of the Special Stockholders’ Meeting dated 7 November 2006, during which the majority of
the stockholders approved and ratified the acquisition of JTH by PRCI; (2) the acts of the Board of Directors,
the Executive Committee, and the Management of PRCI for 2006, which included the acquisition of JTH by
PRCI; and (3) the planned property-for-shares exchange between PRCI and JTH. Even respondents
Miguel, et al., themselves admitted in their Comment with Prayer for the Immediate Lifting or Dissolution
of the Temporary Restraining Order in G.R. No. 182008 that:
12. Indeed, the approval and/or ratification of the transfer of PRCI’s Sta. Ana racetrack property to JTH
during the upcoming stockholders’ meeting would render nugatory, moot and academic the action and
proceedings before the Regional Trial Court of Makati, Branch 149, inasmuch as the acts assailed by private
respondents would have already been consummated by such approval and/or ratification.
13. In the same vein, such approval and/or ratification during the forthcoming PRCI stockholder’s (sic)
meeting would likewise render moot and academic the proceedings before this Honorable Court in that it
51
would have effectively granted the reliefs sought by herein petitioner even before this Honorable Court
could finally rule on the propriety of the Court of Appeals’ Decision/Resolution by herein petitioners. 82
Second, although already approved and ratified by majority vote of the PRCI stockholders, and PRCI and
JTH executed a Deed of Transfer with Subscription Agreement on 7 July 2008 to effect the property-for-
shares exchange between the two corporations, the controversial transaction will no longer push through.
A major consideration for the exchange is that it will be tax-free; but the BIR ruled that such transaction
shall be subject to VAT. Resultantly, PRCI and JTH executed on 22 August 2008 a Disengagement
Agreement, by virtue of which, both corporations rescinded the Deed of Transfer with Subscription
Agreement dated 7 July 2008 and immediately disengaged from implementing the said Deed.
Civil Case No. 08-458
The very nature of Civil Case No. 07-610 as a derivative suit bars Civil Case No. 08-458 and warrants the
latter’s dismissal.
In Chua v. Court of Appeals,83 the Court stresses that the corporation is the real party in interest in a
derivative suit, and the suing stockholder is only a nominal party:
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he
holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation as the real party in interest.
xxxx
x x x For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of
the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated who may wish to join him in the suit. It is a
condition sine qua non that the corporation be impleaded as a party because not only is the corporation an
indispensable party, but it is also the present rule that it must be served with process. The judgment must
be made binding upon the corporation in order that the corporation may get the benefit of the suit and
may not bring subsequent suit against the same defendants for the same cause of action. In other words,
the corporation must be joined as party because it is its cause of action that is being litigated and because
judgment must be a res adjudicata against it. (Emphases ours.)
The more extensive discussion by the Court of the nature of a derivative suit in Asset Privatization Trust v.
Court of Appeals84 is presented below:
Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the
stockholder filing suit for the corporation’s behalf is only a nominal party. The corporation should be
included as a party in the suit.
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he
holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation as the real party in interest. x x x.
It is a condition sine qua non that the corporation be impleaded as a party because-
x x x. Not only is the corporation an indispensable party, but it is also the present rule that it must be
served with process. The reason given is that the judgment must be made binding upon the corporation
and in order that the corporation may get the benefit of the suit and may not bring a subsequent suit
against the same defendants for the same cause of action. In other words the corporations must be joined
as party because it is its cause of action that is being litigated and because judgment must be a res
ajudicata against it.
The reasons given for not allowing direct individual suit are:
(1) x x x "the universally recognized doctrine that a stockholder in a corporation has no title
legal or equitable to the corporate property; that both of these are in the corporation itself for
the benefit of the stockholders." In other words, to allow shareholders to sue separately
would conflict with the separate corporate entity principle;
(2) x x x that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held
in the case of Evangelista v. Santos, that "the stockholders may not directly claim those
damages for themselves for that would result in the appropriation by, and the distribution
among them of part of the corporate assets before the dissolution of the corporation and the
liquidation of its debts and liabilities, something which cannot be legally done in view of
Section 16 of the Corporation Law xxx;"
(3) the filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on
the damages recoverable by the corporation for the same act.
As established in the foregoing jurisprudence, in a derivative suit, it is the corporation that is the
indispensable party, while the suing stockholder is just a nominal party. Under Rule 7, Section 3 of the
Rules of Court, an indispensable party is a party-in-interest, without whom no final determination can be
had of an action without that party being impleaded. Indispensable parties are those with such an interest
in the controversy that a final decree would necessarily affect their rights, so that the court cannot proceed
without their presence. "Interest," within the meaning of this rule, should be material, directly in issue, and
to be affected by the decree, as distinguished from a mere incidental interest in the question involved. On
the other hand, a nominal or pro forma party is one who is joined as a plaintiff or defendant, not because
such party has any real interest in the subject matter or because any relief is demanded, but merely
because the technical rules of pleadings require the presence of such party on the record. 85
With the corporation as the real party-in-interest and the indispensable party, any ruling in one of the
derivative suits should already bind the corporation as res judicata in the other. Allowing two different
minority stockholders to institute separate derivative suits arising from the same factual background,
alleging the same causes of action, and praying for the same reliefs, is tantamount to allowing the
corporation, the real party-in-interest, to file the same suit twice, resulting in the violation of the rules
against a multiplicity of suits and even forum-shopping. It is also in disregard of the separate-corporate-
52
entity principle, because it is to look beyond the corporation and to give recognition to the different
identities of the stockholders instituting the derivative suits.
It is for these reasons that the derivative suit, Civil Case No. 08-458, although filed by a different set of
minority stockholders from those in Civil Case No. 07-610, should still not be allowed to proceed.
Furthermore, the highly suspicious circumstances surrounding the institution of Civil Case No. 08-458 are
not lost upon the Court. To recall, on 9 April 2008, the Court already issued in G.R. No. 182008 a TRO
enjoining the execution and enforcement of the writ of permanent injunction issued by the RTC in Civil
Case No. 07-610, which prevented the PRCI Board of Directors from presenting to the PRCI stockholders at
the Annual Stockholders’ Meeting, for approval and ratification, the agenda items on the acquisition by
PRCI of JTH shares and the property-for-shares exchange between PRCI and JTH. The Complaint in Civil
Case No. 08-458 was filed with the RTC on 16 June 2008, just two days before the scheduled Annual
Stockholders’ Meeting on 18 June 2008, where the items subject of the permanent injunction were again
included in the agenda. The 72-hour TRO issued by the RTC in Civil Case No. 08-458 enjoined the very same
acts covered by the writ of permanent injunction issued by the RTC in Civil Case No. 07-610, the execution
and enforcement of which, in turn, was already enjoined by the TRO dated 9 April 2008 of this Court.
Considering that it is PRCI which is the real party-in-interest in both Civil Cases No. 07-610 and No. 08-458,
then its acquisition in the latter of a TRO exactly similar to the writ of permanent injunction in the former is
but an obvious attempt to circumvent the TRO of this Court enjoining the execution and enforcement of
the permanent injunction.
Intervention of APRI
It is also the nature of a derivative suit that prompts the Court to deny the intervention by APRI in Civil Case
No. 07-610. Once more, the Court emphasizes that PRCI is the real party-in-interest in Civil Case No. 07-
610, not respondents Miguel, et al., whose participation therein is deemed nominal. APRI, moreover,
merely echoes the position of respondents Miguel, et al., and, hence, renders the participation of APRI in
Civil Case No. 07-610 redundant.
Also, the main concern of APRI was the lifting of the TRO issued by this Court on 9 April 2008 and the
execution and enforcement of the permanent injunction issued by the RTC, enjoining the presentation by
the PRCI Board of Directors -- at the Annual Stockholders’ Meeting scheduled on 18 June 2008, for approval
and ratification by the stockholders – of the agenda items on the acquisition by PRCI of JTH shares and the
property-for-shares exchange between PRCI and JTH. Given that the Annual Stockholders’ Meeting already
took place on 18 June 2008, during which the subject agenda items were presented to and approved and
ratified by the stockholders, the intervention of APRI is already moot.
As a final note, respondent Miguel, et al. made repeated allegations that foreigners were taking over PRCI,
and that this must be stopped to protect the Filipino stockholders. They even invoked the ruling of this
Court in Manila Prince Hotel v. Government Service Insurance System (GSIS). 86
Respondents Miguel, et al., however, cannot rely on Manila Prince Hotel as judicial precedent, for the facts
therein are far different from those in the cases at bar. The Government, through GSIS, owned Manila
Hotel Corporation (MHC), which, in turn, owned the historic Manila Hotel. The case arose from the efforts
of GSIS at privatizing MHC by holding a public bidding for 30-51% of the issued and outstanding shares of
MHC. The Court ruled that since the Filipino corporation was able to match the higher bid made by a
foreign corporation, then preference should be given to the former, considering that Manila Hotel had
become a landmark, a living testimonial to Philippine heritage, and part of Philippine economy and
patrimony. This was in accord with the Filipino-first policy in the 1987 Constitution.
In contrast, PRCI is a publicly listed corporation. Its shares can be freely sold and traded to the public,
subject to regulation by the PSE and the SEC. Without any legal basis therefor, the Court cannot be
expected to allocate or impose limitations on ownership of PRCI shares by foreigners. What is more, PRCI,
which operates and maintains a horse racetrack and conducts horse racing and betting, can hardly claim to
be "a living testimonial of Philippine heritage," like Manila Hotel, that would justify judicial intervention to
protect the interests of Filipino stockholders as against foreign stockholders.
WHEREFORE, the Court renders the following judgment:
(1) The Court GRANTS the Petitions of petitioners Santiago, et al., and petitioner Santiago Sr. in
G.R. No. 181455-56 and G.R. No. 182008, respectively. It REVERSES and SETS ASIDE the
Decision dated 6 September 2007 and Resolution dated 22 January 2008 of the Court of
Appeals in CA-G.R. SP No. 99769 and No. 99780;
(2) The Court LIFTS the TRO issued on 9 April 2008 in G.R. No. 180028 and CANCELS and
RETURNS the cash bond posted by petitioner Santiago Sr. The permanent injunction issued by
the RTC on 8 October 2007, the execution and enforcement of which the TRO dated 9 April
2008 of this Court enjoins, has been rendered moot, since the agenda items subject of said
permanent injunction were already presented to, and approved and ratified by a majority of
the PRCI stockholders at the Annual Stockholders’ Meeting held on 18 June 2008;
(3) The Court ORDERS the DISMISSAL of the Complaint of respondents Miguel, et al., in Civil
Case No. 07-610 before the RTC for lack of cause of action, failure to implead indispensable
parties, and mootness;
(4) The Court ORDERS the DISMISSAL of the Complaint of Jalane, et al., in Civil Case No. 08-
458, for being in violation of the rules on the multiplicity of suits and forum shopping; and
(5) The Court DENIES the Very Respectful Motion for Leave to Intervene as Co-Respondent in
the Petition with the attached Very Respectful Urgent Motion to Lift Restraining Order of APRI,
for redundancy and mootness.
No costs.
G.R. No. 172843               September 24, 2014
ALFREDO L. VILLAMOR, JR., Petitioner,
vs.
JOHN S. UMALE, in substitution of HERNANDO F. BALMORES, Respondent.
x-----------------------x
G.R. No. 172881
ODIVAL E. REYES, HANS M. PALMA and DOROTEO M. PANGILINAN, Petitioners,
vs.
HERNANDO F. BALMORES, Respondent.
53
DECISION
LEONEN, J.:
Before us is a petition for review on certiorari 1 under Rule 45 of the Rules of Court, assailing the decision2 of
the Court of Appeals dated March 2, 2006 and its resolution3 dated May 29, 2006, denying petitioners’
motions for reconsideration. The Court of Appeals placed Pasig Printing Corporation (PPC) under
receivership and appointed an interim management committee for the corporation. 4
MC Home Depot occupied a prime property (Rockland area) in Pasig. The property was part of the area
owned by Mid-Pasig Development Corporation (Mid-Pasig). 5
On March 1, 2004, PPC obtained an option to lease portions of MidPasig’s property, including the Rockland
area.6
On November 11, 2004, PPC’s board of directors issued a resolution7 waiving all its rights, interests, and
participation in the option to lease contract in favor of the law firm of Atty. Alfredo Villamor, Jr. (Villamor),
petitioner in G.R. No. 172843. PPC received no consideration for this waiver in favor of Villamor’s law firm. 8
On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of agreement (MOA)
with MC Home Depot.9 Under the MOA, MC Home Depot would continue to occupy the area as PPC’s
sublessee for four (4) years, renewable for another four (4) years, at a monthly rental of ₱4,500,000.00 plus
goodwill of ₱18,000,000.00. 10
In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks representing
rentalpayments for one year and the goodwill money. The checks were given to Villamor who did not turn
these or the equivalent amount over to PPC, upon encashment. 11
Hernando Balmores, respondent inG.R. No. 172843 and G.R. No. 172881 and a stockholder and director of
PPC,12 wrote a letter addressed to PPC’s directors, petitioners inG.R. No. 172881, on April 4, 2005. 13 He
informed them that Villamor should bemade to deliver to PPC and account for MC Home Depot’s checks or
their equivalent value.14
Due to the alleged inaction of the directors, respondent Balmores filed with the Regional Trial Court an
intra-corporate controversy complaint under Rule 1, Section 1(a)(1) of the Interim Rules for Intra-Corporate
Controversies15 (Interim Rules) against petitioners for their alleged devices or schemes amounting to fraud
or misrepresentation "detrimental to the interest of the corporation and its stockholders." 16
Respondent Balmores alleged in his complaint that because of petitioners’ actions, PPC’s assets were ". . .
not only in imminent danger, but have actually been dissipated,lost, wasted and destroyed." 17
Respondent Balmores prayed that a receiver be appointed from his list of nominees. 18 He also prayed for
petitioners’ prohibition from "selling, encumbering, transferring or disposing in any manner any of [PPC’s]
properties, including the MC Home [Depot] checks and/or their proceeds." 19 He prayed for the accounting
and remittance to PPC of the MC Home Depot checks or their proceeds and for the annulment of the
board’s resolution waiving PPC’s rights in favor of Villamor’s law firm. 20
Ruling of the Regional Trial Court
In its resolution21 dated June 15, 2005, the Regional Trial Court denied respondent Balmores’ prayer for the
appointment of a receiver or the creation of a management committee.The dispositive portion reads:
WHEREFORE, premises considered the appointment of a Receiver and the creation of a Management
Committee applied for by plaintiff Hernando F. Balmores are, as they are hereby, DENIED. 22 (Emphasis in
the original)
According to the trial court, PPC’s entitlement to the checks was doubtful. The resolution issued by PPC’s
board of directors, waiving its rights to the option to lease contract infavor of Villamor’s law firm, must be
accorded prima facie validity.23
The trial court also noted that there was a pending case filed by one Leonardo Umale against Villamor,
involving the same checks. Umale was also claiming ownership of the checks. 24 This, according to the trial
court, weakened respondent Balmores’ claim that the checks were properties of PPC. 25
The trial court also found that there was "no clear and positive showing of dissipation, loss, wastage, or
destruction of [PPC’s] assets . . . [that was] prejudicial to the interestof the minority stockholders,
partieslitigants or the general public."26 The board’s failure to recover the disputed amounts was not an
indication of mismanagement resulting in the dissipation of assets. 27
The trial court noted that PPC was earning substantial rental income from its other sub-lessees. 28
The trial court added that the failure to implead PPCwas fatal. PPC should have been impleaded as an
indispensable party, without which, there would be no final determination of the action. 29
Ruling of the Court of Appeals
Respondent Balmores filed with the Court of Appeals a petition for certiorari under Rule 65 of the Rules of
Court.30 He assailed the decision of the trial court, which denied his "application for the appointment of a
[r]eceiver and the creation ofa [m]anagement [c]ommittee."31
In the decision promulgated on March 2, 2006, the Court of Appeals gave due course to respondent
Balmores’ petition. It reversed the trial court’s decision, and issued a new order placing PPC under
receivership and creating an interim management committee.32 The dispositive portion reads:
WHEREFORE, premises considered, the instant petition is hereby GRANTED and GIVEN DUE COURSE and
the June 15, 2005 Order/Resolution of the commercial court, the Regional Trial Court of Pasig City, Branch
167, in S.E.C. Case No. 05-62, is hereby REVERSED and SET ASIDE and a NEW ORDER is ISSUED that, during
the pendency of the derivative suit, untiljudgment on the merits is rendered by the commercial court, in
order toprevent dissipation, loss, wastage or destruction of the assets, in order to prevent paralization of
business operations which may be prejudicial to the interest of stockholders, parties-litigants or the general
public, and in order to prevent violations of the corporation laws: (1) Pasig Printing Corporation (PPC) is
hereby placed under receivership pursuant to the Rules Governing Intra-Corporate Controversies under
R.A. No. 8799;(2) an Interim Management Committee is hereby created for Pasig Printing Corporation (PPC)
composed of Andres Narvasa, Jr., Atty. Francis Gustilo and Ms Rosemarie Salvio-Leonida; (3) the interim
54
management committee is hereby directed to forthwith, during the pendency of the derivative suit until
judgment on the merits is rendered by the commercial court, to: (a) take over the business of Pasig Printing
Corporation (PPC), (b) take custody and control of all assets and properties owned and possessed by Pasig
Printing Corporation (PPC), (c) take the place of the management and the board of directors of Pasig
Printing Corporation (PPC), (d) preserve Pasig Printing Corporation’s assets and properties, (e) stop and
prevent any disposal, in any manner, of any of the properties of Pasig Printing Corporation (PPC) including
the MC Home Depot checks and/or their proceeds; and (3) [sic] restore the status quo ante prevailing by
directing respondents their associates and agents to account and return to the Interim Management
Committee for Pasig Printing Corporation (PPC) all the money proceeds of the 20 MC Home Depot checks
taken by them and to account and surrender to the Interim Management Committee all subsequent MC
Home Depot checks or proceeds.33 (Citation omitted)
The Court of Appeals characterizedthe assailed order/resolution of the trial court as an interlocutory order
that is not appealable.34 In reversing the trial court order/resolution, the Court of Appeals considered the
danger of dissipation, wastage, and loss of PPC’s assets if the review of the trial court’s judgment would be
delayed.35
The Court of Appeals ruled that the case filed by respondent Balmores with the trial court "[was] a
derivative suit because there were allegations of fraud or ultra vires acts . . . by [PPC’s directors]." 36
According to the Court of Appeals,the trial court abandoned its duty to the stockholders in a derivative suit
when it refused to appoint a receiver or create a management committee, all during the pendency of the
proceedings. The assailed order ofthe trial court removed from the stockholders their right, in an intra-
corporate controversy, to be allowed the remedy of appointment of a receiverduring the pendency of a
derivative suit, leaving the corporation under the control of an outsider and its assets prone to
dissipation.37 The Court of Appeals also ruled that this amounts to "despotic, capricious, or
whimsicalexercise of judicial power"38 on the part of the trial court.
In justifying its decision to place PPCunder receivership and to create a management committee, the Court
of Appeals stated that the board’s waiver of PPC’s rights in favor ofVillamor’s law firm without any
consideration and its inaction on Villamor’s failure to turn over the proceeds of rental payments to PPC
warrant the creation of a management committee.39 The circumstances resulted in the imminent danger of
loss, waste, or dissipation of PPC’s assets. 40
Petitioners filed separatemotions for reconsideration. Both motions were denied by the Court of Appeals
on May 29, 2006. The dispositive portion of the Court of Appeals’ resolution reads:
WHEREFORE, for lack of merit, respondents’ March 10, 2006 and March 20, 2006 Motions for
Reconsideration are hereby DENIED.41
Petitioners filed separatepetitions for review under Rule 45, raising the following threshold issues:
I. Whether the Court of Appeals correctly characterized respondent Balmores’ action as a
derivative suit
II. Whether the Court of Appeals properly placed PPC under receivership and created a
receiver or management committee
PPC’s directors argued that the Court of Appeals erred in characterizing respondent Balmores’ suit as a
derivative suit because of his failure to implead PPC as party in the case. Hence, the appellate court did not
acquire jurisdiction over the corporation, and the appointment of a receiver or management committee is
not valid.42
The directors further argued that the requirements for the appointment of a receiver or management
committee under Rule 943 of the Interim Rules were not satisfied. The directors pointed out that
respondent Balmores failed to prove that the assets of the corporation were in imminent danger of being
dissipated.44
According to the directors, assuming that a receiver or management committee may be appointed in the
case, it is the Regional Trial Court only and not the Court of Appeals that must appoint them. 45
Meanwhile, Villamor argued that PPC’s entitlement to the checks or their proceeds was still in dispute. In a
separate civil case against Villamor, a certain Leonardo Umale was claiming ownership of the checks. 46
Villamor also argued that the Court of Appeals’ order to place PPC under receivership and to appoint a
management committee does not endanger PPC’s assets because the MC Home Depot checks were not the
only assets of PPC.47 Therefore, it would not affect the operation of PPC or result in its paralysation. 48
In his comment, respondent Balmores argued that Villamor’s and the directors’ petitions raise questions of
facts, which cannot be allowed in a petition for review under Rule 45. 49
On the appointment of a receiver or management committee, respondent Balmores stated that the ". . .
very practice of waiving assets and income for no consideration can in factlead, not only to the paralyzation
of business, but to the complete loss or cessation of business of PPC[.] It is
precisely because of this fraudulent practice that a receiver/management committee must be appointed to
protect the assets of PPC from further fraudulent acts, devices and schemes." 50
The petitions have merit.
I
Petition for review on
certiorari under Rule 45 was proper
First, we rule on the issue of whether petitioners properly filed a petition for review on certiorari under
Rule 45.
Respondent Balmores argued that the petition raises questions of fact.
Under Rule 45, only questionsof law may be raised.51 There is a question of law "when there is doubt or
controversy as to what the law is on a certain [set] of facts." 52 The test is "whether the appellate court can
determine the issue raised without reviewing or evaluating the evidence." 53 Meanwhile, there is a question
55
of fact when there is "doubt . . . as to the truth or falsehood of facts." 54 The question must involve the
examination of probative value of the evidence presented.
In this case, petitioners raise issues on the correctness of the Court of Appeals’ conclusions. Specifically,
petitioners ask (1) whether respondent Balmores’ failure to implead PPC in his action with the trial court
was fatal; (2) whether the Court of Appeals correctly characterized respondent Balmores’ action as a
derivative suit; (3) whether the Court of Appeals’ appointment of a management committee was proper;
and (4) whether the Court of Appeals may exercise the power to appoint a management committee.
These are questions of law that may be determined without looking into the evidence presented. The
question of whether the conclusion drawn by the Court of Appeals from a set of facts is correct is a
question of law, cognizable by this court. 55
Petitioners, therefore, properly filed a petition for review under Rule 45.
II
Respondent Balmores’ action
in the trial court is not a derivative suit
A derivative suit is an action filed by stockholders to enforce a corporate action. 56 It is an exception to the
general rule that the corporation’s power to sue57 is exercised only by the board of directors or trustees. 58
Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or
officers of the corporation refuse to sue to vindicate the rights of the corporation or are the ones to be
sued and are in control of the corporation.59 It is allowed when the "directors [or officers] are guilty of
breach of . . . trust, [and] not of mere error of judgment."60
In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere nominal
party.61
Thus, this court noted:
The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any express
provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized
when the said laws make corporate directors or officers liable for damages suffered by the corporation and
its stockholders for violation of their fiduciary duties. In effect, the suit isan action for specific performance
of an obligation, owed by the corporation to the stockholders, to assist its rights of action when the
corporation has been put in default by the wrongful refusal of the directors or management to adopt
suitable measures for its protection.62
Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies (Interim Rules)
provides the five (5) requisites63 for filing derivative suits:
SECTION 1. Derivative action. – A stockholder or member may bring an action in the name of a corporation
or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
toexhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first
paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or member must
be "in the name of [the] corporation or association. . . ." This requirement has already been settled in
jurisprudence.
Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al.,64 this court said that "[a]mong the basic
requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf
of the corporation must allege in his complaint before the proper forum that he is suing on a derivative
cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join
[him]."65 This principle on derivative suits has been repeated in, among other cases, Tam Wing Tak v. Hon.
Makasiar and De Guia66 and in Chua v. Court of Appeals,67 which was cited in Hi-Yield Realty, Incorporated
v. Court of
Appeals.68
Moreover, it is important that the corporation be made a party to the case. 69
This court explained in Asset Privatization Trust v. Court of Appeals70 why it is a condition sine qua nonthat
the corporation be impleaded as party in derivative suits. Thus:
Not only is the corporation an indispensible party, but it is also the present rule that it must be served with
process. The reason given is that the judgment must be made binding upon the corporation inorder that
the corporation may get the benefit of the suit and may not bring a subsequent suit against the same
defendants for the same cause of action. In other words the corporation must be joined as party because it
is its cause of action that is being litigated and because judgment must be a res judicata against it. 71
In the same case, this court enumerated the reasons for disallowing a direct individual suit.
The reasons given for not allowing direct individual suit are:
(1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title
legal or equitable to the corporate property; that both of these are in the corporation itself for
56
the benefit of the stockholders." Inother words, to allow shareholders to sue separately would
conflict with the separate corporate entity principle;
(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held
in the case of Evangelista v. Santos, that ‘the stockholders may not directly claim those
damages for themselves for that would result in the appropriation by, and the distribution
among them of part of the corporate assets before the dissolution of the corporation and the
liquidation of its debts and liabilities, something which cannot be legally donein view of
Section 16 of the Corporation Law. . .";
(3) the filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on
the damages recoverable by the corporation for the same act. 72
While it is true that the basis for allowing stockholders to file derivative suits on behalf of corporations is
based on equity, the above legal requisites for its filing must necessarily be complied with for its
institution.73
Respondent Balmores’ action in the trial court failed to satisfy all the requisites of a derivative suit.
Respondent Balmores failed to exhaust all available remedies to obtain the reliefs he prayed for. Though he
tried to communicate with PPC’s directors about the checks in Villamor’s possession before he filed an
action with the trial court, respondent Balmores was not able to show that this comprised all the remedies
available under the articles of incorporation, bylaws, laws, or rules governing PPC.
An allegation that appraisal rights were not available for the acts complained of is another requisite for
filing derivative suits under Rule 8, Section 1(3) of the Interim Rules.
Section 81 of the Corporation Code provides the instances of appraisal right:
SEC. 81. Instances of appraisal right.— Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholders or class of shares, or of authorizing preferences in any
respect superior to those of outstanding shares of any class, or of extending or shortening the
term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in this Code; and
3. In case of merger or consolidation.
Section 82 of the Corporation Codeprovides that the stockholder may exercise the right if he or she voted
against the proposed corporate action and if he made a written demand for payment on the corporation
within thirty (30) days after the date of voting.
Respondent Balmores complained aboutthe alleged inaction of PPC’s directors in his letter informing
themthat Villamor should be made to deliver to PPC and accountfor MC Home Depot’s checks or their
equivalent value. He alleged that these are devices or schemes amounting to fraud or misrepresentation
detrimental to the corporation’s and the stockholders’ interests. He also alleged that the directors’ inaction
placed PPC’s assets in imminent and/or actual dissipation, loss, wastage, and destruction.
Granting that (a) respondent Balmores’ attempt to communicate with the other PPC directors already
comprised all the available remedies that he could have exhausted and (b) the corporation was under full
control of petitioners that exhaustion of remedies became impossible or futile,74 respondent Balmores
failed toallege that appraisal rights were not available for the acts complained of here.
Neither did respondent Balmores implead PPC as party in the case nor did he allege that he was filing on
behalf of the corporation.
The non-derivative character of respondent Balmores’ action may also be gleaned from his allegations in
the trial court complaint. In the complaint, he described the nature ofhis action as an action under Rule 1,
Section 1(a)(1) of the Interim Rules, and not an action under Rule 1, Section 1(a)(4) of the Interim Rules,
which refers to derivative suits. Thus, respondent Balmores said:
1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-corporate
Controversies, involving devices or schemes employed by, or acts of, the defendants as board of directors,
business associates and officers of Pasig Printing Corporation (PPC), amounting to fraud or
misrepresentation, which are detrimental to the interest of the plaintiff as stockholder of PPC. 75 (Emphasis
supplied)
Rule 1, Section 1(a)(1) of the Interim Rules refers to acts of the board, associates, and officers, amounting
to fraud or misrepresentation, which may be detrimental to the interest of the stockholders. This is
different from a derivative suit.
While devices and schemes of the board of directors, business associates, or officers amounting to fraud
under Rule 1, Section 1(a)(1) of the Interim Rules are causes of a derivative suit, it is not always the case
that derivative suits are limited to such causes or that they are necessarily derivative suits. Hence, they are
separately enumerated in Rule 1, Section 1(a) of the Interim Rules:
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
57
corporation, partnership, or association of which they are stockholders, members, or
associates, respectively;
(3) Controversies in the election orappointment of directors, trustees, officers, or managers
ofcorporations, partnerships, or associations;
(4) Derivative suits;and
(5) Inspection of corporate books. (Emphasis supplied)
Stockholder/s’ suits based on fraudulent or wrongful acts of directors, associates, or officers may also
beindividual suits or class suits.
Individual suits are filed when the cause of action belongs to the individual stockholder personally, and
notto the stockholders as a group or to the corporation, e.g., denial of right to inspection and denial of
dividends to a stockholder.76 If the cause of action belongs to a group of stockholders, such as when the
rights violated belong to preferred stockholders, a class or representative suit may be filed to protect the
stockholders in the group.77
In this case, respondent Balmores filed an individual suit. His intent was very clear from his manner of
describing the nature of his action:
1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-corporate
Controversies, involving devices or schemes employed by, or acts of, the defendants as board of directors,
business associates and officers of Pasig Printing Corporation (PPC),amounting to fraud or
misrepresentation, which are detrimental to the interest of the plaintiff as stockholder of PPC. 78
(Emphasis supplied)
His intent was also explicit from his prayer:
WHEREFORE, plaintiff respectfully prays that the Honorable Court –
....
2. After notice and due proceedings –
Declare that the acts of defendant Directorsin allowing defendant VILLAMOR to retain custody of the MC
Home checks and encash them upon maturity, as well as their refusal or failure to take any action against
defendant VILLAMOR to make him account and deliver the MC Home checks and/or their proceeds to Pasig
Printing Corporation are devices, schemes or acts amounting to fraud that are detrimental to plaintiff’s
interest as a stockholder of PPC;79 (Emphasis supplied)
Respondent Balmores did not bring the action for the benefit of the corporation. Instead, hewas alleging
that the acts of PPC’s directors, specifically the waiver of rights in favor of Villamor’s law firm and their
failure to take back the MC Home Depot checks from Villamor, were detrimental to his individual interest
as a stockholder. In filing an action, therefore, his intention was to vindicate his individual interest and not
PPC’s or a group of stockholders’.
The essence of a derivative suit is thatit must be filed on behalf of the corporation. This is because the
cause of action belongs, primarily, to the corporation. The stockholder who sues on behalf of a corporation
is merely a nominal party.
Respondent Balmores’ intent to file an individual suit removes it from the coverage of derivative suits.
III
Respondent Balmores has no cause of action that would
entitle him to the reliefs sought
Corporations have a personality that is separate and distinct from their stockholders and directors. A wrong
tothe corporation does not necessarily create an individual cause of action. "A cause of action is the act or
omission by which a party violates the right of another."80 A cause of action must pertain to complainant if
he or she is to be entitled to the reliefs sought. Thus, in Cua v. Tan, 81 this court emphasized:
. . . where the acts complainedof constitute a wrong to the corporation itself, the cause of action belongs to
the corporation and not to the individual stockholder or member. Although in most every case of wrong to
the corporation, each stockholder is necessarily affected because the value of his interest therein would
beimpaired, this fact of itself is not sufficient to give him an individual cause of action since the corporation
is a person distinct and separate from him, and can and should itself sue the wrongdoer. Otherwise, not
only would the theory of separate entity be violated, but there would be multiplicity of suits as well as a
violation of the priority rights of creditors. Furthermore, there is the difficulty of determining the amount of
damages that should be paid to each individual stockholder.82
In this case, respondent Balmores did not allege any cause of action that is personal to him. His allegations
are limited to the facts that PPC’s directors waived their rights to rental income in favor of Villamor’s law
firm without consideration and that they failed to take action when Villamor refused to turn over the
amounts to PPC. These are wrongsthat pertain to PPC. Therefore, the cause of action belongs to PPC — not
to respondent Balmores or any stockholders as individuals.
For this reason, respondent Balmoresis not entitled to the reliefs sought in the complaint. Only the
corporation, or arguably the stockholders as a group, is entitled to these reliefs, which should have been
sought in a proper derivative suit filed on behalf of the corporation.
PPC will not be bound by a decision granting the application for the appointment of a receiver or
management committee. Since it was not impleaded in the complaint, the courtsdid not acquire
jurisdiction over it. On this matter, it is an indispensable party, without which, no final determination can
be had.
Hence, it is not only respondent Balmores’ failure to implead PPC that is fatal to his action, as petitioners
point out. It is the fact that he alleged no cause of action that pertains personally to him that disqualifies
him from the reliefs he sought in his complaint.
58

On this basis alone, the Court of Appeals erred in giving due course to respondent Balmores’ petition for The Court of Appeals had no
certiorari, reversing the trial court’s decision, and issuing a new order placing PPC under receivership and jurisdiction to appoint the receiver or management
creating an interim management committee.

committee
IV

Appointment of a management committee was not proper
Assuming that respondent Balmores has an individual cause of action, the Court of Appeals still erred in
placing PPC under receivership and in creating and appointing a management committee.
A corporation may be placed under receivership, or management committees may be created to
preserveproperties involved in a suit and to protect the rights of the parties under the control and
supervision of the court.83 Management committees and receivers are appointed when the corporation is
in imminent danger of "(1) [d]issipation, loss, wastage or destruction of assets or other properties; and (2)
[p]aralysation of its business operations that may be prejudicial to the interest of the minority
stockholders, parties-litigants, or the general public."84
The Court of Appeals has no power to appoint a receiver or management committee. The Regional Trial
Court has original and exclusive jurisdiction89 to hear and decide intra-corporate controversies,90 including
incidents of such controversies.91 These incidents include applications for the appointment of receivers or
management committees.
"The receiver and members of the management committee . . . are considered officers of the court and
shall be under its control and supervision."92 They are required to report tothe court on the status of the
corporation within sixty (60) days from their appointment and every three (3) months after. 93
When respondent Balmores filed his petition for certiorari with the Court of Appeals, there was still a
pending action in the trial court. No less than the Court of Appeals stated that it allowed respondent
Balmores’ petition under Rule 65 because the order or resolution in question was an interlocutory one. This
means that jurisdiction over the main case was still lodged with the trial court.

Applicants for the appointment of a receiver or management committee need to establish the confluence
of these two requisites.1âwphi1 This is because appointed receivers and management committees will
immediately take over the management of the corporation and will have the management powers
specified in law.85 This may have a negative effect on the operations and affairs of the corporation with
third parties,86 as persons who are more familiar with its operations are necessarily dislodged from their
positions in favor of appointees who are strangers to the corporation’s operations and affairs.
The court making the appointment controls and supervises the appointed receiver or management
committee.1âwphi1 Thus, the Court of Appeals’ appointment of a management committee would result in
an absurd scenario wherein while the main case is still pending before the trial court, the receiver or
management committee reports to the Court of Appeals.

WHEREFORE, the petitions are GRANTED. The decision of the Court of Appeals dated March 2, 2006 and its
Thus, in Sy Chim v. Sy Siy Ho & Sons, Inc.,87 this court said: resolution dated May 29, 2006 are SET ASIDE.

. . . the creation and appointment of a management committee and a receiver is an extra ordinary and SO ORDERED.
drastic remedy to be exercised with care and caution; and only when the requirements under the Interim
Rules are shown. It is a drastic course for the benefit of the minority stockholders, the parties-litigants or
the general public are allowed only under pressing circumstances and, when there is inadequacy,
ineffectual or exhaustion of legal or other remedies . . . The powerof the court to continue a business of a
corporation . . . must be exercised with the greatest care and caution. There should be a full consideration
ofall the attendant facts, including the interest of all the parties concerned. 88

PPC waived its rights, without any consideration in favor of Villamor. The checks were already in Villamor’s
possession. Some of the checks may have already been encashed. This court takes judicial notice that the
goodwill money of ₱18,000,000.00 and the rental payments of ₱4,500,000.00 every month are not meager
amounts only to be waived without any consideration. It is, therefore, enough to constitute loss or
dissipation of assets under the Interim Rules.

Respondent Balmores, however, failed to show that there was an imminent danger of paralysis of PPC’s
business operations. Apparently, PPC was earning substantial amounts from its other sub-lessees.
Respondent Balmores did not prove otherwise. He, therefore, failed to show at least one of the requisites
for appointment of a receiver or management committee.