1. Magsaysay-Labrador v. CA, GR 58168, December 19, 1989, Fernan, CJ., Third Division.

FACTS:
Adelaida Magsaysay, widow and administratrix of the estate of the late Senator Magsaysay, filed
an action against Artemio, Subic Land Corporation (Subic), Filipinas Manufacturer’s Bank
(Filmanbank), and the Zambales register of deeds. She alleges:
In 1958, her husband acquired thru conjugal funds a land known as “Pequeña Island”
covered by TCT 3258. After her husband died, she found an annotation at the back of
TCT 3258 that the land was acquired by her husband from his separate capital. Her
husband executed a deed of assignment in favor of Subic. Subic then mortgaged the land
to Filmanbank for P2.7M. These acts are void since the land is conjugal and her marital
consent to the annotation on TCT 3258 was not obtained. She prayed that the assignment
and mortgage be annulled and Subic’s new TCT 22431 on the land be cancelled.
Petitioners, sisters of Senator Magsaysay, filed a motion for intervention claiming that their
brother conveyed to them ½ of his shareholdings in Subic or 416,566.6 shares or 41% of the total
outstanding shares of Subic. Thus, they claim that have legal interest in the subject matter of
litigation.

Trial court denied the motion for intervention. CA affirmed. Hence this petition.

ISSUE:
Contention: Petitioners claim that their ownership of 41.66% of the outstanding capital stock of
Subic entitles them to a significant vote in the corporate affairs and that they are affected by the
action of Adelaida since it concerns the only tangible asset of Subic.
HELD: No legal interest as to be allowed to intervene.
1) Under RoC, to be allowed to intervene, the party must have a legal interest in the matter in
litigation, or in the success of either parties or against both parties etc. To allow intervention, a)
the movant must have legal interest in the matter in litigation, and b) consideration must be given
as to whether adjudication of the rights of the original parties may be delayed or prejudiced, or
whether intervenor’s rights may be protected in a separate proceeding or not. The interst of a
person must be direct and immediate.

Here, the interest, if it exists at all, of petitioners is indirect, remote, conjectural, contingent,
and collateral. Their interest is purely inchoate or in sheer expectancy of a right in the
management of the corporation and to share in the profits thereof and in the properties and assets
thereof on dissolution. While a share of stock represents a proportionate interest in the property
of the corporation, it does not vest the owner with any legal right or title to any of the
property, his interest in corporate property being equitable or beneficial in nature. Shareholders
are not owners of corporate property, which is owned by the corporation as a distinct legal
person.

SC also held that petitioners’ interest may be protected in a separate proceedings since there are
4 other pending cases.

2. Sulo ng Bayan, Inc. v. Gregorio Araneta, Inc., GR L-31061, August 17, 1976, Antonio, J.,
Second Division.
FACTS:
Petitioner Sulo ng Bayan, Inc. filed an accion de revindicacion with CFI against respondents to
recover ownership and possession of a land in Bulacan registered in the name of respondents’
predecessors-in-interest. The complaint alleged:
Petitioner is a corporation. Its membership is composed of natural persons residing at San
Jose del Monte, Bulacan. The members of petitioner had cultivated the land since the
Spanish regime and continuously possessed it openly and publicly. In 1958, respondent
Gregorio Araneta, Inc., thru force and intimidation, ejected the members of petitioner
from the land. Petitioners’ members found that the land had been “fraudulently or
erroneously” included by fraud in OCT 466, which OCT is fictitious since the CFI which
issued the decree of registration had no jurisdiction as petitioners’ members, who were
then in possession, were not notified of the proceedings. Thus, petitioners pray that its
members be declared absolute owners of the land.
CFI dismissed the complaint. Hence this petition.

ISSUE:
Whether Sulo ng Bayan Inc. can file a petition on behalf of its members.
HELD: NO.
1) A corporation is a distinct legal entity separate and apart from the individual
stockholders or members who compose it and is not affected by the personal rights,
obligations, and transactions of its stockholders/members. The property of the corporation is
its property and not that of the stockholders, as owners, although they have equities in it.
Properties registered in the name of the corporation are owned by it as an entity separate and
distinct from its members.  Conversely, a corporation ordinarily has no interest in the individual
property of its stockholders unless transferred to the corporation, "even in the case of a one-man
corporation. The mere fact that one is president of a corporation does not render the property
which he owns or possesses the property of the corporation, since the president, as individual,
and the corporation are separate similarities. Similarly, stockholders in a corporation engaged in
buying and dealing in real estate whose certificates of stock entitled the holder thereof to an
allotment in the distribution of the land of the corporation upon surrender of their stock
certificates were considered not to have such legal or equitable title or interest in the land, as
would support a suit for title, especially against parties other than the corporation.

The judirical personality of a corporation is but a legal fiction for the purpose of convenience.
The veil of corporate fiction may be pierced in cases where it is used as a cloak or cover for
fraud or illegality etc. (SC discussed piercing doctrine)

Here, it is not claimed that petitioners’ members have assigned or transferred their rights on the
land to petitioner corporation. Absent any showing of interest, a corporation like petitioner has
no personality to bring an action for and in behalf of its stockholders/members for the
purpose of recovering property which belongs to said stockholders/members in their
personal capacities. The elements of a cause of action are legal right of plaintiff, correlative
obligation of defendant, an act or omission of defendant in violation of said right. Here, no right
of action exists in favor of petitioner since it does not have any interest in the subject matter
of the case as to entitle it to file suit as a real party in interest. Thus, petitioner corporation has no
cause of action.
2) Contention: The complaint may be treated as a class suit.
Held:
For a class suit to prosper, the requisites are: 1) subject matter of the controversy is one of
common or general interest to many persons, 2) the parties are so numerous that it is
impracticable to bring them all before the court. Here, there is only one party plaintiff, and the
plaintiff corporation does not even have an interest in the subject matter of the controversy and
thus cannot represent its members or stockholders who claim in their individual capacities
ownership of said property. Also, a class suit does not lie in actions to recover property where
several persons claim partnership of their respective portions, as each one could allege and prove
his respective right in a different way for each portion of the land, thus they cannot all have
identical title thru acquisitive prescription.

3. Bataan Shipyard & Engineering Co., Inc. (BASECO) v. PCGG, GR 75885, May 27,
1987, Narvasa, J., En Banc.
FACTS:
Commissioner Bautista issued a sequestration order to 3 agents of PCGG, ordering sequestration
of various companies, including petitioner BASECO. Later, Commissioner Diaz decreed the
provisional takeover by PCGG of BASECO, invoking EO 1, S3(c). Petitioner filed this special
civil action for certiorari and prohibition, challenging the sequestration, takeover, and other
orders and acts done pursuant to said orders by PCGG.

BASECO acquisitions with Marcos intervention- BASECO is a shiprepair and shipbuilding

company incorporated as a domestic private corporation by Filipino shipping executives. Its
articles of incorporation disclose that its authorized capital stock is P60M divided into 60k
shares, of which 12k shares with a value of P12M has been subscribed and on said subscription
P3M has been paid by the incorporators. It had 15 incorporators. By 1986, of these 15, 6 had
ceased to be stockholders. As of 1986, there were 20 stockholders listed in BASECO’s stock and
transfer book. Its total stocks were 218,819 shares.

Barely 6 months after its incorporation on Aug. 30, 1972, BASECO acquired from National
Shipyard & Steel Corporation (NASSCO), GOCC, NASSCO’s shipyard in Bataan (Bataan
National Shipyard) and all its structures and equipment by virtue of a contract of purchase and
sale with chattel mortgage executed on Feb. 13, 1973 for P52M. The P52M price was reduced by
more than one-half to P24M 8 months later thru a MOA signed at the top right corner of the first
page “APPROVED” in president Marcos’ handwriting followed by his usual full signature.

BASECO also acquired 300ha of land in Mariveles from Export Processing Zone Authority for
P10M in the document of sale.

On July 15, 1975, BASECO, again with the intervention of president Marcos, acquired
ownership of the rest of NASSCO’s assets which were not included in the first two purchase
documents thru a “Contract of purchase and sale” which also bore “APPROVED” in Marcos’
handwriting with his usual full signature. What was transferred were NASSCO’s ownership of
all titles over all equipment and facilities in the Engineer Island Shops.
Reports to Marcos- BASECO president, in a letter on September 05, 1977, reported to Marcos
that there are no orders for ship construction and if this continued, he feared that BASECO
would not be able to pay its debts to the government of P165M. He suggested a spin-off
company for BASECO’s shipbuilding activities. Capt. Romualdez also reported to the president
11 days later, stating that BASECO faced great difficulties in meeting its loan obligations. He
also advised that 5 stockholders had assigned their shareholdings in blank and recommended that
their replacements be effected so that “we can register their names in the stock book prior to the
implementation of your instructions to pass a board resolution to legalize the transfers under SEC
regulations.” He transmitted to Marcos the stock certificates indorsed and assigned in blank.

Marcos responded, authorizing the spin-off.

HELD:
1) Thus, the actuality of the control by president Marcos of BASECO has been sufficiently
shown. Not only does he exercise control over BASECO, but he actually owns well nigh 100%
of its outstanding stock.

Of the 20 stockholders of BASECO, 4 were juridical persons: 1) Metro Bay Drydock-

136,370shares, 2) Fidelity Management, Inc.- 65,882 shares, 3) Trident Management- 7,412
shares, 4) United Phil Lines- 1,240 shares. The first three own 209,664, or 95.82% of the
outstanding stock. When president Marcos suddenly fled from Malacanang, found therein were
certificates corresponding to more than 95% of BASECO outstanding shares endorse in blank
together with deeds of assignment of all the shares of these 3 corporations.

In the light of the affirmative showing by the Government that, prima facie at least, the
stockholders and directors of BASECO as of April, 1986 were mere "dummies," nominees
or alter egos of President Marcos; at any rate, that they are no longer owners of any shares of
stock in the corporation, the conclusion cannot be avoided that said stockholders and directors
have no basis and no standing whatever to cause the filing and prosecution of the instant
proceeding; and to grant relief to BASECO, as prayed for in the petition, would in effect be to
restore the assets, properties and business sequestered and taken over by the PCGG to persons
who are "dummies," nominees or alter egos of the former president.

2) Contention: BASECO also contends that its right against self incrimination and unreasonable
searches and seizures had been transgressed by the Order of April 18, 1986 which required it "to
produce corporate records from 1973 to 1986 under pain of contempt of the Commission if it
fails to do so."
Held:
The right against self-incrimination has no application to juridical persons.

The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the
public. It received certain special privileges and franchises, and holds them subject to the laws of
the state and the limitations of its charter. Its powers are limited by law. It can make no contract
not authorized by its charter. Its rights to act as a corporation are only preserved to it so long as it
obeys the laws of its creation. There is a reserve right in the legislature to investigate its contracts
and find out whether it has exceeded its powers. It would be a strange anomaly to hold that a
state, having chartered a corporation to make use of certain franchises, could not, in the
exercise of sovereignty, inquire how these franchises had been employed, and whether they
had been abused, and demand the production of the corporate books and papers for that
purpose. The defense amounts to this, that an officer of the corporation which is charged with a
criminal violation of the statute may plead the criminality of such corporation as a refusal to
produce its books. To state this proposition is to answer it. While an individual may lawfully
refuse to answer incriminating questions unless protected by an immunity statute, it does not
follow that a corporation, vested with special privileges and franchises may refuse to show its
hand when charged with an abuse of such privileges.

The constitutional safeguard against unreasonable searches and seizures finds no application to
the case at bar either. There has been no search undertaken by any agent or representative of the
PCGG, and of course no seizure on the occasion thereof.

SC thus sustained PCGG’s act of sequestration and takeover.

4. Luxuria Homes, Inc. v. CA, GR 125986, January 28, 1999, Martinez, J., First Division.
(No intent to defraud as to allow piercing corporate personality where corporation
established before relationship turned sour; Pierce only where personality is used for
fraud)
FACTS:
Petitioner Aida Posadas owned a 1.6ha property in Sucat, Muntinlupa which was occupied by
squatters. Posadas negotiated with respondent Jaime Bravo regarding the development of said
property into a residential subdivision. Posadas authorized Bravo to negotiate with the squatters
to leave the property. On Dec. 11, 1989, Posadas assigned the property to petitioner Luxuria
Homes, Inc. for tax avoidance purposes. Bravo signed as a witness to the execution of the deed
of assignment and the articles of incorporation of Luxuria.

In 1992, the relationship between Posadas and Bravo turned sour when Posadas could not accept
the management contracts to develop the property into a residential subdivision that Bravo was
proposing. In retaliation, Bravo demanded payment for services rendered of P1.7M- for
relocation of squatters, preparation of architectural design and site development plan, survey, and
fencing. Posadas refused to pay. Thus, Bravo filed a complaint for specific performance in RTC
against petitioners Posadas and Luxuria.

Posadas was declared in default. RTC ruled that Posadas was solidarily liable with Luxuria to
pay Bravo the balance of payment for services performed and damages. CA affirmed. Hence this
petition.

ISSUE:
Whether Luxuria can be held solidarily liable with Posadas.
HELD: NO.
SC held Posadas liable for the contract price of survey of the land of P140k (less P130k partial
payments) and P450k (less P25k partial payments) for preparation of architectural design and
site development plan. But SC found no proof that the contract for ejectment of squatters and
fencing were actually fulfilled.
1) Respondents sent demand letters on 21 August 1991 and 14 September 1991, or more than a
year and a half after the execution of the Deed of Assignment on 11 December 1989, and the
issuance of the Articles of Incorporation of petitioner Luxuria Homes on 26 January 1990. And,
the transfer was made at the time the relationship between petitioner Posadas and private
respondents was supposedly very pleasant. In fact the Deed of Assignment dated 11 December
1989 and the Articles of Incorporation of Luxuria Homes, Inc., issued 26 January 1990 were
both signed by respondent Bravo himself as witness. It cannot be said then that the incorporation
of petitioner Luxuria Homes and the eventual transfer of the subject property to it were in fraud
of private respondents as such were done with the full knowledge of respondent Bravo himself.

Also, Posadas is not a majority stockholder of Luxuria as she owns only 33% of the capital
stock. Thus, Posadas cannot be considered an alter ego of Luxuria.

1.1) To disregard the separate juridical personality of a corporation, the wrongdoing must be
clearly and convincingly established. The separate personality may be disregarded ONLY when
the corporation is used as a cloak or cover for fraud or illegality or to work injustice or
where necessary for the protection of creditors. Thus in Del Roscrrio v. NLRC, where Philsa
International was organized in 1981 several years before the complainant filed a case in 1985, we
held that this cannot imply fraud.

Here, respondents failed to failed to show proof that Posadas acted in BF. Thus, since Luxiria is
not a party to the transactions, it cannot be held liable jointly or solidarily to respondents. Only
Posadas is liable.

2) As to respondents prayer for the court to compel Posadas to execute a management contract
(specific performance), SC held that the authorization letter to negotiate to squatters is not an
agreement.

While there is an agreement to develop the area, this was also not perfected and are mere drafts
of a proposed agreement. Thus, the drafts are mere unaccepted offers. There is no contract
without the element of agreement or mutual assent of the parties. To compel Posadas to execute
a management contract would violate the principle of consensuality of contracts.

5. Concept Builders Inc. v. NLRC, GR 108734, May 29, 1996, Hermosisima, Jr., J., First
Division.
FACTS:
Petitioner Concept with principal office at 355 Maysan Road, Valenzuela, is engaged in the
construction business. Respondents were employed thereby as laborers, carpenters, and riggers.
Respondents were served with written notices of termination of employment by Concept, stating
that the project in which they were hired had been completed. Respondent found out that the
project had not in fact yet been completed as Concept had to engage sub-contractors whose
workers performed the functions of respondents. Thus, respondents filed a complaint for illegal
dismissal against Concept.
LC ordered Concept to reinstate respondents and pay them 1y backwages. NLRC dismissed
Concept’s MR on the ground that the decision had become final and executory.

LA issued a writ of execution. The sheriff submitted a report that he tried to serve the writ on
Concept but the employees at 355 Maysan Road claimed that they were employees of Hydro
Pipes Philippines, Inc. (HPPI) and not of Concept. Respondents moved for issuance of a break-
open order, alleging that HPPI and Concept were owned by the same incorporators/stockholders.
Respondents submitted the general information sheet of Concept and HPPI, which showed that
the stockholders, board of directors, officers, and address of both corporations were the same.

LA denied the motion for break open order. NLRC reversed, issuing a break-open order for the
properties already levied upon and dismissed the third-party claim previously filed by the VP of
HPPI, a certain Cuyegkeng. Hence this petition.

ISSUE:
Contention: Concept alleges that HPPI is engaged in the manufacture and sale of steel, concrete,
and iron pipes, a business distinct and separate from Concept’s construction business.
HELD: Corporate veil pierced.
A corporation is an entity separate and distinct from its stockholders and other corporations to
which it may be connected. But this separate personality is merely a fiction created by law for
convenience and to promote justice. When the separate personality is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, or is used as a device to defeat
labor laws, the separate personality may be disregarded. This is also true when the corporation is
merely an adjunct, a business conduit or alter ego of another corporation.

No hard and fast rule can be accurately laid down, but there are some PROBATIVE FACTORS
OF IDENTITY that justifies application of the doctrine of piercing:
"1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business."
SEC en banc explained the “instrumentality rule” (Instrumentality or alter ego doctrine):
"Where one corporation is so organized and controlled and its affairs are conducted so
that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the ‘instrumentality’ may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but such domination of
finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal . The
control must be shown to have been exercised at the time the acts complained of took
place. Moreover, the control and breach of duty must proximately cause the injury or
unjust loss for which the complaint is made."
The test in determining the applicability of the doctrine of piercing the veil is:
"1. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;
 2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiff’s legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of
The absence of any one of these elements prevents the piercing of corporate veil.

Here, the information sheets of Concept and HPPI were filed by the same Virgilio Casiño to SEC
as corporate secretary of both corporations. Both corporations also had the same president, board
of directors, corporate officers, and substantially the same subscribers. They also have the same
address/premises. Thus, Concept ceased its business operations to evade payment to
respondents of backwages and to bar their reinstatement. HPPI is obviously a business
conduit of Concept and its emergence was orchestrated to avoid the financial liability that
already attached to Concept.

SC affirmed the break open order.

6. Francisco Motors Corporation v. CA, GR 100812, June 25, 1999, Quisumbing, J., Second
Division. (Cannot pierce corporate veil to hold corporation liable for claim against its
directors/officers/incorporators; Doctrine would be turned upside-down)
FACTS:
Petitioner filed a complaint against respondents Sps Manuel to recover P3,412, price of jeep
body purchased, P20k, unpaid balance of cost of repair of the vehicle, P6k cost of suit. In their
answer, respondents interposed a counterclaim for unpaid legal services by respondent Gregorio
Manuel of P50k which was not paid by the incorporators, directors, and officers of
petitioner.

Gregorio alleged that while he was petitioner’s legal officer, he represented members of the
Francisco family in the intestate estate proceedings of the late Benita Trinidad for which services
he is not yet paid.

RTC ruled for petitioner as to its money claim, but also allowed the counterclaim of respondents.
CA affirmed, stating that the petitioner is composed of the heirs of the late Benita as
directors/incorporators for whom Gregorio rendered legal services. Thus, justice requires that
petitioner’s veil of corporate identity be pierced and Gregorio be compensated for legal services
rendered to the heirs. Hence this petition.

ISSUE:
Whether petitioner’s separate personality may be pierced so that it may be held liable for the
debts of its directors and incorporators.
HELD: NO.
Given the facts, the doctrine of piercing the corporate veil is not applicable. The rationale
behind piercing a corporation’s identity in a given case is to remove the barrier between the
corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those
who use the corporate personality as a shield for undertaking certain proscribed activities.
However, here, instead of holding certain individuals or persons responsible for an alleged
corporate act, the situation has been reversed. It is the petitioner as a corporation which is
being ordered to answer for the personal liability of certain individual directors, officers and
incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down
because of its erroneous invocation. Note that according to private respondent Gregorio Manuel
his services were solicited as counsel for members of the Francisco family to represent them in
the intestate proceedings over Benita Trinidad’s estate. These estate proceedings did not involve
any business of petitioner.

Considering the nature of legal services, the obligation was incurred by the incorporators etc. in
their personal capacity. The personality of the corporation and those of its incorporators etc. in
their personal capacities ought to be kept separate in this case. Every action, including a
counterclaim, must be prosecuted or defended in the name of the real party in interest. It is plain
error to lay the claim for legal fees of Gregorio against petitioner rather than the individual
members of the Francisco family.

7. Times Transportation Company, Inc. v. Sotelo, GR 163786, February 16, 2005, Yanres-
Santiago, J., First Division,
FACTS:
Petitioner Times is engaged in the business of land transportation. The Times Employees Union
(TEU) was formed and issued a certificate of union registration. TEU held a strike in response to
Times’ alleged attempt to form a rival union and dismissal of active union members. DOLE Sec.
Quisumbing assumed jurisdiction and referred the matter to NLRC.

Later, TEU was certified in a certification election as the exclusive bargaining agent in Times.
TEU’s president wrote Times for collective bargaining. Times refused. TEU filed a notice of
strike. Times implemented a retrenchment program and retrenched some employees, including
respondents.

Meanwhile, Mencorp Transport Systems Inc. had acquired ownership over Times’ certificate of
public convenience (CPC) and a number of its buses. Mencorp is controlled and operated by
Virginia Mendoza, daughter of Santiago Rondaris, majority stockholder of Times.

In 1998, after the closure of Times, the retrenched employees, including respondents, filed cases
for illegal dismissal and ULP against Times in the RAB. Respondents impleaded Mencorp and
Sps. Reynaldo and Virginia Mendoza.

LA ruled in favor of respondents and ordered Times, Rondaris, Mencorp, Sps. Mendoza to cause
reinstatement of respondents and to pay solidarily full backwages of P43M. NLRC, on appeal to
it, remanded the case to LA for further proceedings and vacated LA’s decision. CA reversed and
reinstated LA’s decision. Hence this petition.

ISSUE:
Whether Mencorp, Sps. Mendoza, and Rondaris were properly impleaded under the doctrine of
piercing the corporate veil.
HELD: YES.
We have held that piercing the corporate veil is warranted only in cases when the separate legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, such
that in the case of two corporations, the law will regard the corporations as merged into one. It
may be allowed only if the following elements concur: (1) control — not mere stock control, but
complete domination — not only of finances, but of policy and business practice in respect to
the transaction attacked; (2) such control must have been used to commit a fraud or a wrong to
perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust
act in contravention of a legal right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of.

Here:
1. The sale was transferred to a corporation controlled by Virginia Mendoza, daughter of
Rondaris of Times where she is also a director.
2. All stockholders of Mencorp: Reynaldo, Virginia, Vernon Vivian, Vevey Mendoza are all
relatives of Rondaris.
3. The timing of the sale was to negate the employees’ right to organization as it was effected
when TEU was just organized.
4. Mencorp never obtained a franchise for its incorporation but all of Times’ buses are already
being operated by Mencorp, the franchise of Times having been transferred to it.

The sale of the franchise and bus units to a company owned by Rondaris’ daughter and family
members in the middle of a labor dispute is highly suspicious. The transaction is evidently to
remove Times’ remaining assets from the reach of any judgment that may be rendered in the
ULP cases filed against it.

8. Yao Sr. v. People, GR 168306, June 19, 2007, Chico-Nazario, J., Third Division.
FACTS:
Petitioners are incorporators and officers of Masagana Gas Corporation, an entity engaged in
refilling, sale, and distribution of LPG products. Respondents Petron and Pilipinas Shell sell their
LPG products under the marks “GASUL” and “SHELLANE”.

NBI agent Oblanca filed 2 applications for search warrant in RTC for violation of S155 (TM
infringement) in relation to S170 of RA 8293, alleging that per personal verification of Oblanca,
petitioners are producing, selling, and distributing LPG products using steel cylinders owned by
and bearing the trademarks, tradenames, and devices of Petron and Pilipinas Shell in violation of
their rights. The attached affidavit states that she, with Alajar, conducted a test-buy. RTC issued
the search warrants for seizure of LPG containers bearing the tradename SHELL/GASUL etc.
NBI operatives then searched the premises of Masagana and obtained LPG cylinders with the
tradenames of Shell and Petron, one motor compressor for filing system, LPG refilling machine,
etc.

Petitioners moved to quash search warrants. Masagana filed a motion as a third-party claimant
for return of motor compressor and LPG refilling machine, claiming that it is the owner of these
items. RTC denied the two motions, holding that Masaga is not a third party claimant since
petitioenrs are stockholders of Masagana. To rule otherwise would be a misapplication of the
veil of corporate fiction. CA affirmed. Hence this petition.

ISSUE:
Whether the seized items may be returned on the ground that it is owned by Masagana and not
by petitioners.
HELD: NO.
1) Contention: Oblanca and Alajar had no personal knowledge of the matters on which they
testified since they were not the ones who conducted the test-buys but such persons were “Nikko
Javier” and “G. Villanueva” as shown in the entry/exit slips of Masagana. If Oblanca and Alajar
had used different names, they should have mentioned this in their applications for search
warrants and testimonies during preliminary examination.
Held:
The facts required for probable cause pertain to facts personally known to the applicant and his
witnesses. That Oblanca and Alajar used different names do not negate their personal
knowledge. There is no law which mandates the applicant for search warrant to state in their
affidavits that they used different names while conducting undercover investigations or to
divulge such fact during preliminary examination.

2) Contention: Petitioners claim that the applications for search warrant did not specify the
particular area to be searched since the Masagana compound is about 10,000m2 with several
structures, thus the warrants were general warrants.
Held:
A description of the place to be searched is sufficient if the officer can, with reasonable effort,
ascertain and identify the place intended and distinguish it from other places in the community.
The warrants here commanded a search of Masagana compound in Trece Martires, Cavite City.
the raiding team ascertained the Masagana compound without difficulty since Masagana does not
have any other offices in Cavite, Trece Martires. The structures in the compound are essential
components of petitioners’ business and cannot be treated separately as they form part of one
entire compound.

3) Contention: Petitioners claim that Masagana has the right to intervene and move for the return
of the seized items since these were being used in Masagana’s business. Since there is no action
for infringement filed against Masagana, the articles must be returned to the owner.
Held:
A corporation is an entity separate and distinct from its stockholders, directors or officers.
However, when the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an association of persons;
or, in the case of two corporations, merge them into one. Here, petitioners, as officers/directors
of Masagana, are utilizing Masagana in violating the IP rights of Petron and Shell. Thus,
petitioners collectively and Masagana should be considered as one and the same person for
liability purposes. Thus, Masagana’s third party claim serves no refuge for petitioners.

Even if we sustain Masagana’s separate personality, the law does not require the property to be
seized to be owned by the person against whom the warrants are directed. Ownership is of no
consequence. It is sufficient that the person against whom the warrants are directed has control or
possession of the property sought to be seized. Thus, even if Masanaga owned the properties,
their seizure under the search warrants is still valid.

9. Seventh Day Adventist Conference Church of Southern PH, Inc. v. Northeastern

Mindanao Mission of Seventh Day Adventist, Inc., GR 150416, July 21, 2006, Corona, J.,
Second Division. (De Facto Corporation)
FACTS:
Sps. Cosio donated a 1,069m2 lot in Bayugan, Agusan del Sur to South PH Union Mission of 7th
Day Aventist Church of Bayugan (SPUM-SDA Bayugan). This was accepted by an elder of the
church. 21 years later, the same land was sold by Sps. Cosio to the 7th Day Adventist Church of
Northeastern Mindanao Mission (SDA-NEMM). New title was issued in SDA-NEMM’s name.
Petitioners, successors-in-interest of the donee, filed a case to cancel the title of SDA-NEMM,
for quieting of ownership, and reconveyance in RTC.

RTC upheld the sale. CA affirmed. Hence this petition.

ISSUE:
Contention: Petitioners allege that as a de facto corporation, they should benefit from the
donation.
HELD:
1) Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in
favor of another person who accepts it. The donation could not have been made in favor of an
entity yet inexistent at the time it was made. The donation here was made not to any informal
group of SDA members but a supposed SPUM-SDA Bayugan which at the time had neither
juridical personality nor capacity to accept such gift.

There are stringent requirements before one can qualify as a de facto corporation:
(a)  the existence of a valid law under which it may be incorporated;
(b)  an attempt in good faith to incorporate; and
(c)  assumption of corporate powers.
The filing of articles of incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation. An organization not registered with SEC
cannot be considered a corporation in any concept, not even as a corporation de facto.

Here, petitioners admitted that at the time of the donation, they were not registered with SEC
nor did they even attempt to organize to comply with legal requirements.

1.1) Corporate existence begins only from the moment a certificate of incorporation is issued.
No such certificate was issued to petitioners or their supposed predecessor in interest.

2) The de facto doctrine thus effects a compromise between two conflicting public interest[s] —
the one opposed to an unauthorized assumption of corporate privileges; the other in favor of
doing justice to the parties and of establishing a general assurance of security in business dealing
with corporations."
Generally, the doctrine exists to protect the public dealing with supposed corporate entities, not
to favor the defective or non-existent corporation.

Thus, there was no donation to petitioners or to their predecessor-in-interest.

3) Respondent’s title is valid. The sale has the requisites of a contract under Art. 1318 of NCC.
Although the P2,000 consideration is somewhat insufficient, “inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake, or undue influence.” (Art. 1355,
NCC). There is no evidence of fraud, mistake, or undue influence.

Under Art. 1477 of NCC, ownership of the thing sold shall be transferred to the vendee upon
actual or constructive delivery. The execution of a public instrument transfers ownership from
vendor to vendee. Here, transfer of ownership from Sps. Cosio to SDA-NEMM was made upon
constructive delivery of the property when the sale was made thru a public instrument.

10. Lim Tong Lim v. PH Fishing Gear Industries, Inc., GR 136448, November 03, 1999,
Panganiban, J., Third Division. (Third person who, knowing that an association of persons
is unincorporated, treats it as a corporation may be estopped from denying the corporate
existence in a suit against the alleged corporation)
FACTS:
Chua and Yao, on behalf of “Ocean Quest Fishing Corporation”, entered into a contract for the
purchase of fishing nets of various sizes from PH Fishing Gear Industries, Inc. (respondent).
They claimed that they were engaged in a business venture with petitioner Lim who was not a
signatory to the agreement. The buyers failed to pay for the fishing nets and floats. Respondent
thus filed a collection suit against Chua, Yao, and petitioner as general partners, on the allegation
that “Ocean Quest” was a nonexistent corporation.

RTC issued a writ of attachment which was enforced on the fishing nets on board FB Lourdes.
Petitioner moved to lift attachment. RTC maintained the writ and ordered the sale of the nets at
public auction and the P900k proceeds were deposited with RTC.

RTC then ruled that petitioner, Chua, and Yao, as general partners, were jointly liable to pay
respondent. CA affirmed. Hence this petition.

ISSUE:
Whether Lim is also liable despite him not being a signatory to the purchase.
HELD: YES.
1) Contention: Petitioner disclaims any participation in the purchase of nets, arguing that the
negotiations were done by Chua and Yao only. Also, he is merely a lessor of FB Lourdes, not a
partner of Chua and Yao.
Held:
Petitioner, Chua, and Yao bought boats worth P3.35M financed by a loan acquired from Jesus
Lim, petitioner’s brother. They also intended to pay the loan with the proceeds of the sale of the
boats and to divide equally among them the excess or loss. These boats, the purchase, and the
repair of which were financed with borrowed money fell under the term “common fund” under
Art. 1767. The partnership extended not only to the purchase of the boat but also to that of the
nets and the floats. Thus, there was a partnership.

2) Contention: Petitioner argues that under the doctrine of corporation by estoppel, liability can
be imputed to Chua and Yao only, and not to him since only Chua and Yao dealt in the name of
the ostensible corporation and his name does not appear in the purchase contract of the nets and
floats.
Held:
S21 of Corporation Code (S20, RCC) states:
"Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof: Provided however, That
when any such ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
"One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation."
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. "The reason behind this doctrine is obvious — an
unincorporated association has no personality and would be incompetent to act and appropriate
for itself the power and attributes of a corporation as provided by law; it cannot create agents or
confer authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. A person who acts as an
agent without authority or without a principal is himself regarded as the principal,
possessed of all the right and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid existence assumes such privileges
and obligations and becomes personally liable for contracts entered into or for other acts
performed as such agent."

The doctrine may apply to the alleged corporation AND TO A THIRD PARTY. In the first, an
unincorporated association which represented itself as a corporation will be estopped from
denying its corporate capacity. On the other hand, a third party who, knowing an association
to be unincorporated, nonetheless treated it as a corporation and received benefits from it,
may be barred from denying its corporate existence in a suit brought against the alleged
corporation. In such case, all those who benefited from the transaction made by the ostensible
corporation despite knowledge of its legal defects may be held liable for contracts they impliedly
assented to or took advantage of.

Here, petitioner benefited from the use of the nets. He in fact questions the attachment of the
nets since such has effectively stopped his use of the fishing vessel FB Lourdes.

11. International Express Travel & Tour Services, Inc. v. CA, GR 119020, October 19,
2000, Kapunan, J., First Division.
FACTS:
Petitioner sent a letter to PH Football Federation (PFF) thru the federation’s president,
respondent Henri Kahn, where petitioner offered its services as a travel agency. The offer was
accepted. Petitioner secured the airline tickets for the trips of athletes and officials of the
federation to the South East Asian Games in Kuala Lumpur and other trips to China and
Brisbane. The total cost amounted to P449k. PFF paid only P176k, P31k, and Henri Kahn paid
thru personal check P50k. No further payments were made.

Thus, petitioner filed a civil case in RTC against Henri as president of the federation and
impleading PFF as alternative defendant. Petitioner sought to hold Henri liable on the ground
that Henri allegedly guaranteed the obligation. Henri averred that petitioner had no cause of
action against him since he did not guarantee payment but merely acted as agent of PFF which
has a separate and distinct juridical personality.

RTC held Henri liable, finding that the corporate existence of PFF was not proven, thus the
officers or agents are themselves personally liable. CA reversed, recognizing the juridical
existence of PFF. Hence this petition.

ISSUE:
Whether the PH Football Federation has juridical existence such that Henri cannot be held
personally liable for the services rendered by petitioner.
HELD: NO.
1) RA 3135 and PD 604 recognized the juridical existence of national sports commissions. This
may be gleaned from the powers and functions granted to these associations. They are
empowered to a) adopt a constitution and by laws, b) to purchase, sell, lease, encumber property,
c) affiliate with international/regional sports associations etc. The power to purchase, sell, lease,
and encumber property are acts which may only be done by persons with juridical capacity.
However, while the national sports associations may be accorded corporate status, such does not
automatically take place by the mere passage of these laws.

2) PFF has no juridical personality- Before a corporation may acquire juridical personality, the
state must give its consent either in the form of a special law or a general enabling act. Nowhere
in RA 3135 and PD 604 is a provision creating the PFF. These laws merely recognized the
existence of national sports associations and provided the manner by which these entities may
acquire juridical personality.

RA 3135, S11 provides that applications for recognition as a national sports association shall be
filed with the executive committee with a copy of its constitution and bylaws. The executive
committee may give the recognition or reject it. PD 604, S7 similarly provides for such
application for accreditation/recognition as a national sports association. These provisions
require that before an entity may be considered a national sports commission, the entity must be
recognized by the accrediting organization therein provided.

Here, Henri only attached a copy of PFF’s constitution and by laws in his MR. But this does not
prove that PFF has been accredited. Thus, Henri should be held liable for the unpaid
obligations of the unincorporated PFF. It is settled principle in corporation law that any person
acting or purporting to act on behalf of a corporation which has no valid existence assumes such
privileges and becomes personally liable for contract entered into or for other acts performed as
such agent. As president of the Federation, Henri Kahn is presumed to have known about the
corporate existence or non-existence of the Federation.

3) Erroneous application of corporation by estoppel doctrine- We do not agree with CA that

even assuming that the Federation was defectively incorporated, the petitioner cannot deny the
corporate existence of the Federation because it had contracted and dealt with the Federation in
such a manner as to recognize and in effect admit its existence. The doctrine of corporation by
estoppel is mistakenly applied by CA to petitioner. The application of the doctrine applies to a
third party only when he tries to escape liabilities on a contract from which he has benefited on
the irrelevant ground of defective incorporation. Here, petitioner is not trying to escape liability
from the contract but rather is the one claiming from the contract.

12. Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational Center-Bicol
Christian College of Medicine, GR 141994, January 17, 2005, Carpio, J., First Division.
(Moral damages can be awarded to a corporation for libel under Art. 2219[7])
FACTS:
Exposé is a radio documentary program hosted by Rima and Alegre. It is aired every morning
over DZRZ-AM which is owned by petitioner FBNI and is heard over Legazpi City, Albay, and
Bicol. On Dec. 14 and 15 of 1989, Rima and Alegre exposed various complaints from students,
teachers, and parents against respondent AMEC:
Students are required to take and pay for the subject even if the subject does not have an
instructor — such greed for money on the part of Amec’s administration.
The administrators of Amec, to minimize expenses in salary, continue to accept “rejects”
(former teachers removed because of immorality. Amec is a dumping ground, garbage,
not merely of moral and physical misfits.
It is likely that the students would be influenced by evil. When they become members of
society outside of campus will be liabilities rather than assets.
Amec and Ago, as dean, filed a complaint for damages against FBNI, Rima, and Alegre,
claiming that the broadcasts were defamatory.

RTC found FBNI and Alegre liable for libel, awarding P300k moral damages to Amec. CA
affirmed, making Rima also liable. Hence this petition.

ISSUE:
Whether Amec, a juridical person, is entitled to moral damages for the libelous remarks.
HELD: YES.
SC found that the broadcasts were libelous. The broadcasts are not based on established facts and
thus not privileged communication under Borjal.

A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feelings, etc.
Nonetheless, Amec’s claim for moral damages falls under Art. 2219, (7) which expressly
authorizes recovery of moral damages in cases of libel, slander, or any other form of defamation.
Art. 2219 (7) does not qualify whether plaintiff is a natural or juridical person. Where the
broadcasts are libelous per se, the law implies damages.
But since there is no showing that Amec actually suffered material damages to its reputation, the
moral damages was reduced from P300k to P150k.

FBNI was held solidarily liable with Rima and Alegre since Rima and Alegre were performing
official duties as hosts of FBNI’s program and there is no proof that FBNI exercised due
diligence in the selection and supervision of Rima and Alegre.

13. Coastal Pacific Trading Inc. v. Southern Rolling Mills, Co., Inc., GR 118692. July 28,
2006, Panganiban, CJ., First Division.
FACTS:
Southern Rolling Mills was organized in 1959 to engage in a steel processing business. It was
later renamed to Visayan Integrated Steel Corporation (VISCO).

DBP loan/ Respondents loan- In 1961, VISCO loaned from DBP P836k secured by a recorded
REM over VISCO’s 3 lands, including the machineries and equipment found there. In 1963,
VISCO entered into a loan agreement with respondent banks FEBTC et al. (Consortium) for
P21M to finance importation of raw materials secured by a second unrecorded mortgage over the
same land, machineries, and equipment. VISCO defaulted in its loan to the Consortium. VISCO
and Consortium agreed to convert the unpaid loan into equity in the corporation and thus,
Consortium acquired more than 90% of VISCO’s equity, leaving the balance of the debt to
P16M.

Petitioner’s credit- In 1964-1965, VISCO entered into a processing agreement with petitioner
Coastal. Petitioner delivered 3000 metric tons of hot rolled steel coils to VISCO for processing
into block iron sheets. But VISCO delivered to petitioner only 1600 metric tons of those sheets,
leaving 1400 metric tons unaccounted for.

Change of bank account name- In 1972, because of government takeovers of other corporations,
VISCO renamed its bank deposit with FEBTC of its unexpended funds from “Board of Trustees
VISCO Consortium of Banks” into “Board of Trustees Consortium of Banks” to protect its
interests.

Sale of VISCO generator sets to pay DBP- In 1974, the VISCO board of directors met in the
FEBTC Boardroom and decided to sell two generator sets to Filmag Phil to pay VISCO’s debt to
DBP. The proceeds were deposited in a special account in FEBTC held in trust for the
consortium.

Assignment of DBP mortgage to respondents- In 1975, petitioner filed with RTC a petition for
recovery of property and damages with attachment (Case 21272), alleging that VISCO
misapplied the steel sheets entrusted to it. RTC issued a writ of preliminary attachment. While
this was pending, VISCO acquired a cash advance of P1.3M from FEBTC to pay the DBP debt.
On June 29, 1976, DBP issued a check for P1.3M payable to DBP. On the same date, DBP
executed a deed of assignment of mortgage rights in favor of respondent Consortium of Banks.
Thus, the Consortium obtained DBP’s recorded primary lien over the properties of VISCO.
The Consortium foreclosed this mortgage and acquired the properties as highest bidder. VISCO
assigned the right of redemption thereof to National Steel Corporation (NSC) for P100k.

In 1985, petitioner filed against respondents Consortium a complaint to annul the sale with
damages, alleging that despite its writ of attachment in Case 21272, Consortium sold the
properties to NSC beyond the reach of VISCO’s other creditors. The assignment of mortgage by
DBP to Consortium was fraudulent since DBP was paid with proceeds from the sale of generator
sets owned by VISCO, and not with Consortium’s funds.

RTC ruled in favor of Consortium. CA affirmed. Hence this petition.

ISSUE:
Whether respondents Consortium disposed of VISCO’s assets in fraud of creditors.
HELD: YES.
1) Since Consortium acquired 90% of VISCO’s equity, it occupied 9 of 10 directors thereof and
thus controlled the board. As such directors of VISCO, the Consortium officials were in a
position of trust and owed it a duty of loyalty. Because they were trustees of the creditors, they
should have managed the corporate assets with strict regard for the creditor’s interests. The
change of VISCO’s unexpended funds name in FEBTC shows an effort to hide the funds for
Consortium themselves by removing the name “VISCO” to avoid takeover by the government,
also a creditor of VISCO.

The DBP’s assignment of mortgage to Consortium was fraudulent. Consortium’s mortgage was
unrecorded and not binding on the other creditors. Thus, if Consortium had paid DBP directly,
DBP’s recorded mortgage would have been satisfied and VISCO’s properties would have been
freed up to the satisfaction of all of VISCO’s other creditors. This would have been fair to all.
Instead, Consortium obtained DBP’s primary registered lien by allowing it to pay VISCO’s loan
to DBP. This scheme of Consortium continued the efficacy of the primary lien in its favor to the
detriment of the other creditors. The assignment in favor of Consortium was a rescissible
contract for having been taken in fraud of creditors (Art. 1385, NCC).

Mutual restitution is required in rescission but since it is not possible anymore due to the sale to
NSC (who is not proved to have acted in BF), an indemnity for damages operates as restitution.

2) Petitioner’s actual damages is its final and executory judgment in Case 21272 of P851k which
it could not enforce against VISCO due to respondent Consortium’s fraudulent disposition of
VISCO’s assets. Also, exemplary damages (P250k) is proper due to the finding of fraud as a
warning to other creditors not to abuse their rights.

As a rule, a corporation is not entitled to moral damages because, not being a natural person,
it cannot experience physical suffering or sentiments like wounded feelings, serious anxiety,
mental anguish and moral shock. The only exception to this rule is when the corporation has a
good reputation that is debased, resulting in its humiliation in the business realm. Here, the
records do not show any evidence that the name or reputation of petitioner has been sullied as a
result of the Consortium's fraudulent acts. Accordingly, moral damages are not warranted.
14. California Manufacturing Company, Inc. v. Advanced Technology System, Inc., GR
202454, April 25, 2017, Sereno, CJ., First Division.
FACTS:
Petitioner CMCI is engaged in the food and beverage manufacturing business. Respondent ATSI
fabricates and distributes food processing equipment. CMCI leased from ATSI a propodak
machine used to pack products in 20ml pouches for P98k monthly rental. ATSI filed a complaint
for sum of money against CMCI to collect unpaid rentals for June-September 2003.

CMCI alleged that ATSI is one and the same with Processing Partners and Packaging
Corporation (PPPC), a toll packer of CMCI products. ATSI was even a stockholder of PPPC.
PPPC had agreed to transfer the processing of CMCI’s product line from its factory in
Meycauayan to Malolos, Bulacan. Upon request of PPPC thru its EVP Felicisima, CMCI
advanced P4M as mobilization fund. PPPC allegedly committed to pay in 12 equal monthly
installments. Also, in a letter, Felicisima proposed to set off PPPC’s obligation to pay the
mobilization fund with rentals for the Propodak machine. CMCI claims that this proposal binds
both PPPC and ATSI since Felicisima was an officer and majority stockholder of both
corporations. CMCI thus argues that legal compensation had set in and ATSI is even liable for
the balance of PPPC’s unpaid obligation. When ATSI filed suit in Nov. 2003, PPPC’s debt
allegedly amounted to P10.7M.

RTC ruled for ATSI. CA affirmed, also refusing to pierce corporate veil. Hence this petition.

ISSUE:
Contention: CMCI argues for piercing of corporate veil due to 1) interlocking board of directors,
incorporators, and majority stockholder of PPPC and ATSI, 2) control of both corporations by
Sps. Celones, 3) the two corporations are mere alter egos of each other.
HELD:
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1)
defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion
of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce
since it is a mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.

Here, mere ownership by a single stockholder of even all or nearly all of the capital stocks of a
corporation, by itself, is not sufficient ground to disregard corporate veil. The
instrumentality/control test of the alter ego doctrine requires not mere majority or complete
stock control, but complete domination of finances, policy, and business practice. The
corporate entity must be shown to have no separate mind, will, or existence of its own at the
time of the transaction.

While Sps. Celones are incorporators, directors, and majority stockholders of ATSI and PPPC,
this is all that CMCI has proven. There is no proof that PPPC controlled the financial policies
and business practices of ATSI either when Felicisima proposed to set off the unpaid
mobilization fund with CMCI’s rental of propodak machines, or when the lease agreement
between CMCI and ATSI commenced.

The fraud test, which is the second of the three-prong test to determine the application of the
alter ego doctrine, requires that the parent corporation's conduct in using the subsidiary
corporation be unjust, fraudulent or wrongful. Under the third prong, or the harm test, a causal
connection between the fraudulent conduct committed through the instrumentality of the
subsidiary and the injury suffered or the damage incurred by the plaintiff has to be established.
None of these are shown. Thus, there is no mutuality of parties to justify legal compensation in
Art. 1279 (bound principally, principal creditor of the other).

15. Dutch Movers Inc. v. Lequin, GR 210032, April 25, 2017, Del Castillo, J., First Division.
FACTS:
Respondents Lequin et al. filed an illegal dismissal complaint against Dutch Movers, Inc. (DMI)
and Sps. Cesar and Yolanda Lee (petitioners), its alleged president and manager. They alleged
that Cesar Lee told them that DMI was closing for no reason, but it was not. NLRC ruled that
they were illegally dismissed. This decision became final and executory. Respondents moved for
execution. Pending resolution of this motion for execution, respondents filed a motion to implead
petitioners (Sps. Lee) and Sps. Smith, stating that DMI no longer operates but Sps. Lee, who
managed DMI, were not included in DMI’s articles of incorporation as officers. Sps. Smith are
the ones named therein. The creation of DMI was attended with fraud, making it convenient for
Sps Lee to evade their legal obligations to them.

Respondents moved to quash writ of execution. LA denied. NLRC quashed, holding that DMI
has a separate personality from the persons comprising it. CA reversed hence this petition.

ISSUE:
Whether petitioners are personally liable to pay the judgment awards in favor of respondents.
HELD: YES.
The separate personality of a corporation may be disregarded, attaching personal liability against
the responsible person, if the corporation’s personality is “used to defeat public convenience
etc.” By responsible person, we refer to an individual or entity responsible for and who acted in
BF in committing the illegal dismissal or violation of LC or who actively participated in the
management of the corporation. Piercing is also allowed where a corporation is a mere alter
ego or conduit of a person or another corporation.

Here, the veil of corporate fiction must be pierced because they controlled DMI. They actively
participated in its operation such that DMI existed not as a separate entity but only as business
conduit of petitioners. Petitioners controlled DMI by making it appear to have no mind of its
own and used DMI as a shield in evading legal liabilities, including payment of the judgment
awards to respondents:
1) Petitioners and DMI jointly filed their position papers. While petitioners argued that they were
not privy to DMI’s dealings, they disclosed circumstances as to respondents’ employment such
as their compensation, length of service. 2) Sps. Smith declared that they merely lent their names
to DMI and identified petitioners as owners of DMI. This was not refuted by petitioners. 3)
Piercing the veil is allowed and responsible persons impleaded and be held solidarily liable even
after final judgment and execution provided such persons deliberately used the corporate
vehicle to unjustly evade the judgment obligation or resorted to fraud, BF, or malice in
evading their obligation.

While one’s control does not by itself result in piercing, but considering the irregularity of
DMI’s incorporation, there is sufficient basis to hold that the corporation was used for an
illegal purpose, including evasion of legal duties to its employees.

16. Zambrano v. PH Carpet Manufacturing, GR 224099, June 21, 2017, Mendoza, J.,
Second Division.
FACTS:
Petitioners filed complaints for illegal dismissal and ULP against PH Carpet. They claim that
they were employees of respondent PH Carpet. Their employment was terminated due to serious
business losses. They believe that their termination was merely a pretense for the transfer of PH
Carpet’s operations to Pacific Carpet Manufacturing Corporations because job orders of some
regular clients of PH Carpet were transferred to Pacific Carpet and several machines were moved
from the premises of PH Carpet to Pacific Carpet.

ISSUE:
Contention: The separate personality of Pacific Carpet must be disregarded and it must be liable
for the obligations of PH Carpet since Pacific Carpet is a subsidiary of PH Carpet.
HELD: No piercing.
SC found that the termination was for an authorized cause or for retrenchment due to serious
business losses and that there was no ULP.

1) SC cited the 3 basic areas in which piercing the veil doctrine applies: 1) defeat of public
convenience, 2) fraud cases, 3) alter ego cases. SC also cited the 3 pronged test to determine the
application of the alter ego theory or instrumentality theory: 1) Control/complete domination
(Control test), 2) Control is used to commit fraud (Fraud test), 3) proximate cause of injury
(Harm test).

Here, none of the three-pronged test has been met. Although ownership by one corporation of all
or a great majority of stocks of another corporation and their interlocking directorates may serve
as indicia of control, by themselves and without more, these are insufficient to establish an alter
ego relationship. Mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient ground to disregard the
separate corporate personality. Interlocking directors, corporate officers, and shareholders is not
enough justification to pierce the corporate veil in the absence of fraud or other public policy
considerations.

Pacific Carpet was registered with SEC on January 29, 1999, such that it cannot be said that
Pacific Carpet was set up to evade PH Carpet’s liabilities.

2) As to the transfer of PH Carpet’s machines to Pacific Carpet, it is settled that where one
corporation sells or transfers all its assets to another corporation for value, the latter is
NOT, by that fact alone, liable for the debts of the transferor.
17. International Academy of Management and Economics v. Litton and Company, Inc.,
GR 191525, December 13, 2017, Sereno, CJ., First Division.
FACTS:
Atty. Santos, a lessee to 2 buildings owned by respondent Litton, owed Litton rental arrears and
his share of realty taxes. Later, Litton filed a complaint for unlawful detainer against Santos in
MeTC. MeTC ruled for Litton and ordered Santos to vacate and pay various sums of money.
This decision became final and executory.

On Nov. 11, 1996, MeTC’s sheriff levied on a real property covered by a TCT registered in the
name of petitioner IAME in order to execute the judgment against Santos. IAME filed in MeTC
a motion to lift, claiming that it has a separate and distinct personality from Santos and thus its
properties should not be made to answer for Santos’ liabilities. MeTC denied the motion in an
order dated Oct. 29, 2004. Upon MR, MeTC reversed itself and lifted the levy and writ of
execution.

RTC reversed. CA affirmed RTC. CA took note of how Santos used IAME to insulate the
Makati real property from execution: in a deed of absolute sale dated 1979, it is indicated that
Santos, being president, represented IAME as vendee, but IAME was organized only in 1985.
Hence this petition.

HELD:
1) Contention: IAME claims that its right to due process was violated when it was dragged into
the case and its real property made an object of a writ of execution in a judgment against Santos.
It was not impleaded in the main case and thus MeTC has no jurisdiction over it.
Held:
The resistance of the Court to offend the right to due process of a corporation that is a nonparty
in a main case may disintegrate not only when its director, officer, shareholder etc. is a party to
the main case, but when it finds facts showing that piercing the corporate veil is merited. A
party whose corporation is vulnerable to piercing of its corporate veil cannot argue
violation of due process. Here, Santos used IAME as a means to defeat judicial processes and to
evade his obligation to Litton. Thus, while IAME was not impleaded in the main case and yet
was named in the writ of execution against Santos, it is vulnerable to piercing the corporate veil.

2) Contention: The doctrine of piercing corporate veil applies only to stock and not to non-stock
non profit corporations like IAME since there are no stockholders to hold liable but only
members. They do not have investments or shares to answer for possible liabilities.
Held: Doctrine of piercing can apply to nonstock corporations.
In a number of cases, in determining applicability of piercing corporate veil, SC did not put in
issue whether a corporation is a stock or nonstock corporation. SC cites Sulo ng Bayan v.
Araneta.

Equitable remedy- In US, where we adopted our law on corporations, nonprofit corporations are
not immune from piercing. Piercing is viewed as an equitable remedy, which justifies courts to
scrutinize any organization however organized and in whatever manner it operates. Also, control
of ownership does not hinge on stock ownership. While it may appear impossible for a person
to exercise ownership control over a nonstock corporation, a person can be held personally
liable under the alter ego theory if evidence shows that the person controlling the
corporation did in fact exercise control even though there was no stock ownership.

Equitable ownership- The concept of equitable ownership for stock or nonstock corporations
may also be considered. An equitable owner is an individual who is a non-shareholder defendant,
who exercises sufficient control or considerable authority over the corporation to the point of
completely disregarding the corporate form and acting as though its assets are his or her
alone to manage and distribute.

3) Contention: Piercing cannot be applied to a natural person, here Santos, simply because as a
human being, he has no corporate veil covering his person.
Held: Reverse piercing applied here.
In Cease v. CA, we considered a deceased natural person as one and the same with his
corporation to protect the succession rights of his legal heirs. SC pierced the corporate veil of the
decedent’s corporation, finding that the corporation was his alter ego. Thus, the properties
acquired by the corporation were the properties of the decedent and should be inherited by his
legitimate children.

In Arcilla v. CA, a complaint for sum of money was filed against Arcilla for failure to pay his
loan. Arcilla claimed that the loan was in the name of his family corporation CSAR and that it
was not impleaded as a party in the case. SC pierced corporate veil, holding that Arcilla used his
capacity as CSAR’s president to avoid complying with his adjudged liability and treated CSAR
as his alter ego.

The facts here are similar to those in Arcilla. We agree with CA that IAME is the alter ego of
Santos and Santos-the natural person- is the alter ego of IAME. Santos falsely represented
himself as IAME president in the deed of absolute sale when he bought the Makati real property
at a time when IAME had not yet existed. Also, 1) Santos contribution is P1.2M out of the
P1.5M, making him majority contributor of IAME and 2) the building occupied by IAME is
named after Santos using his nickname (Noli Santos International Tower).

3.1) Reverse piercing- We borrow from American parlance what is called reverse piercing or
reverse corporate piercing or piercing the corporate veil “in reverse.” Reverse piercing flows in
the opposite direction and makes the corporation liable for the debt of the shareholders. It
has 2 types: 1) outsider reverse piercing- when a party with a claim against an individual or
corporation attempts to be repaid with assets of a corporation owned or substantially controlled
by the defendant, 2) insider reverse piercing- the controlling members will attempt to ignore
the corporate fiction in order to take advantage of a benefit available to the corporation, such as
an interest in a lawsuit or protection of personal assets.

Outsider reverse piercing is applicable. Litton seeks to make IAME’s Makati real property
answer for a judgment against Santos who formerly owned and still substantially controls IAME.
We applied reverse piercing in Cease and Arcilla.
3.2) But the equitable remedy of reverse piercing was not meant to encourage a creditor’s failure
to undertake such remedies that could have otherwise been available to the detriment of other
creditors. Ordinary judgment collection procedures are preferred over that which would risk
damage to third parties (like innocent stockholders) with unprotected interests in the assets of the
corporation. But here, if we recommend that Litton run after the other properties of Santos, we
will unwittingly condone Santos’ action in hiding behind the corporate form to evade paying his
obligation

The MeTC Oct. 29, 2004 decision was reinstated.

18. The Missionary Sisters of Our Lady of Fatima v. Alzona et al., GR 224307, August 06,
2018, Reyes, Jr., J., Second Division. (Corporation by estoppel)
FACTS:
Purificacion, unmarried, is the registered owner of lands. Impelled by her desire to be a nun, she
decided to devote her life in helping others in 1996. In 1997, during a doctor’s appointment,
Purificacion, accompanied by Mother Concepcion, discovered that she was suffering from lung
cancer. Purificacoin requested Mother Concepcion to take care of her in her house to which
Mother agreed.

On Oct. 11, 1999, Purificacion called Mother Concepcion to her house and told her thru a
handwritten letter that she is donating her house and lot to petitioner Missionary thru Mother
Concepcion. Petitioner, upon advice of Atty. Arcillas, applied for registration with SEC on Aug.
28, 2001. On Aug. 29, 2001, Purificacion executed a deed of donation inter vivos in favor of
petitioner, notarized and witnessed by Purificacion’s nephews. Mother accepted on the same date
in behalf of petitioner. SEC issued petitioner’s certificate of registration on Aug. 31, 2001.
Purificacion died without issue.

ISSUE:
Contention: Amando Alzona, Purificacion’s brother, filed a complaint to annul the donation on
the ground that at the time the donation was made, petitioner was not registered with SEC and
thus had no juridical personality and cannot legally accept the donation.
HELD: Petitioner was a corporation by estoppel.
1) Under Art. 737, the donor’s capacity shall be determined as of the time of making the
donation. By analogy, the legal capacity of the donee or the authority of the latter’s
representative is determined at the time of acceptance of the donation.

2) Petitioner not a de facto corporation- The filing of articles of incorporation AND issuance
of certificate of incorporation are essential for the existence of a de facto corporation. The
issuance of certificate marks the beginning of an entity’s corporate existence. Here, petitioner
filed its articles of incorporation and by laws on Aug. 28, 2001. SEC issued its certificate of
incorporation only on Aug. 31, 2001, 2 days after Purificacion executed a deed of donation on
Aug. 29, 2001. Thus, at the time of the donation, petitioner cannot be a de facto corporation.

3) Corporation by estoppel- Rather, petitioner is a corporation by estoppel under (RCC, S20, 2nd
paragraph [assumes an obligation to an ostensible corporation]). The doctrine of corporation by
estoppel applies when a non-existent corporation enters into contracts with third persons. While
the doctrine is generally applied to protect the sanctity of dealings with the public, nothing
prevents its application in the reverse. In fact, the very wording of the law permits such
interpretation, such that a person who has assumed an obligation in favor of a non-existent
corporation, having transacted with the latter as if it was duly incorporated, is prevented
from denying the existence of the latter to avoid enforcement of the contract.

The doctrine of corporation by estoppel applies as long as there is no fraud and when the
existence of the association is attacked for causes attendant at the time the contract was
entered into, and not thereafter.

Here, Purificacion dealt with petitioner as if it were a corporation. She executed 2 documents
conveying the properties to petitioner- the Oct. 11, 1999 handwritten letter and the Aug. 29, 2001
deed of donation.

3.1) The doctrine rests on the idea that if the court were to disregard the existence of an entity
which transacted with a third person, unjust enrichment would result as some benefit has
already accrued on the part of one of the parties. Here, Purificacion’s benefit is the past
services rendered to her during her illness. Thus, the donation partakes of a
remuneratory/compensatory donation for the purpose of rewarding the done for past services
which services do not amount to a demandable debt. Although, strictly speaking, petitioner
did not perform these services on the expectation of something in return. The existence of
petitioner is upheld to ensure that the primary objective of the donation is achieved.

19. Narra Nickel Mining and Development Corporation v. Redmont Consolidated Mines
Corp., GR 195580, April 21, 2014, Velasco, Jr., J., Third Division. ***NOT ASSIGNED
FACTS:
In 2006, Redmont, a domestic corporation, took interest in mining certain areas in Palawan. It
found out that the areas it wanted to mine were already covered by Mineral Production Sharing
Agreement (MPSA) applications of petitioners Narra Mining, Tesoro Mining, and McArthur
Mining. Redmont filed before the DENR Panel of Arbitrators petitions for denial of petitioners’
applications for MPSA, alleging that at least 60% of the capital stock of petitioners are owned
and controlled by MBMI Resources Inc., a 100% Canadian Corporation.

HELD:
1) There are 2 tests in determining the nationality of a corporation- control test and the
grandfather rule. DOJ Opinion 20, S.2005, adopting the 1967 SEC Rules, provides:
First part- control test or the liberal rule: “shares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino citizens shall be considered as of
Philippine nationality,"
Second part- stricter, more stringent grandfather rule- "if the percentage of the Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as Philippine nationality,"

1.1) Contention: RA7042, as amended by RA 8179, Foreign Investments Act’s control test,
rather than the grandfather rule, should be applied. Since S3 of FIA does not provide for the
grandfather rule, said rule has no leg to stand on. S3 allows for a corporate layering scheme.
Held:
S3 of FIA provides:
Xxx That where a corporation and its non- Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent
(60%) of the capital stock outstanding and entitled to vote of each of both corporations
must be owned and held by citizens of the Philippines and at least sixty percent (60%) of
the members of the Board of Directors, in order that the corporation shall be considered a
Philippine national.
Corporate layering is admittedly allowed by FIA. But if it is used to circumvent the constitution
and laws, it becomes illegal. Art. XII, S2 of the constitution provides that the state may
undertake development and utilization of natural resources directly or thru joint venture with
Filipino citizens or corporations at least 60% of whose capital is owned by such citizens. This
case is centered on the utilization of the country’s natural resources- mining. The framers
intended also to apply the grandfather rule in cases where corporate layering is present.
The constitution prevails over S3 of FIA.

2) The grandfather rule applies only when the 60-40 Filipino foreign equity ownership is in
DOUBT. If there is no doubt, the grandfather rule will not apply. Under grandfather rule, the
combined totals in the investing and the investee corporations must be traced (grandfathered) to
determine the total percentage of Filipino ownership. Here, there is doubt as to petitioners’
corporate ownership since their common investor, the 100% Canadian corporation MBMI,
funded them.

2.1) Contention: There is “doubt” only when the stockholdings of Filipinos are less than 60%.
Held:
It would be ludicrous to limit the application of the rule to instances where the stockholdings of
non-Filipino stockholders are more than 40% of the total stockholdings. The corporations
interested in circumventing our laws would clearly strive to have 60% Filipino ownership at face
value.

3) Applying Grandfather rule:

3.1) McArthur Mining, Inc. – owned by: Madridejos Mining (Filipino) – 59.97%; MBMI
(Canadian) 39.98%; Salazar (Filipino): 0.01% or 1/10,000 shares; Esguerra (Filipino): 0.01%;
Agcaoili (Filipino): 0.01%; Mason (American): 0.01%; Cawkell (Canadian): 0.01%.

Madridejos Mining Corporation – owned by: Olympic Mines (Filipino): 66.63%; MBMI:
33.31%; etc.
Olympic Mines is owned by MBMI with 60% equity interest. Thus, McArthur, when it is
grandfathered, company layering was utilized by MBMI to gain control over McArthur. MBMI
has more than 60% equity interest in McArthur, making the latter a foreign corporation.

3.1.1) Tesoro Mining is owned by Sara Marie Mining (Filipino) at 59.97% and MBMI at
39.98%. Sara Marie is owned by Olympic at 66.63% and MBMI at 33.31%. Olympic is owned
by MBMI at 60%. Thus, MBMI is in control of Tesoro and owns 60% or more equity
interest in Tesoro. This makes Tesoro a non-Filipino corporation and disqualifies it to
participate in the exploitation of our natural resources.
3.1.2) Narra Nickel Mining is owned by Patricia Louise Mining (Filipino) at 59.97% and MBMI
at 39.98%. Patricia Louise is owned by Palawan Alpha South Resources (Filipino) at 65.96%
and MBMI at 33.96%. MBMI owns Alpha at 60.4%.

Thus, McArthur, Tesoro, and Narra are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests. This conclusion is derived from
grandfathering petitioners’ corporate owners. The ownership of the “layered” corporatiosn
boils down to MBMI, Olympic, or Alpha.

19.1 Narra Nickel and Mining Development Corp. v. Redmont Consolidated Mines Corp.,
GR 195580, January 28, 2015, Velasco, Jr., J., Special Third Division.
FACTS:
MR of Case 19.
HELD:
1) The grandfather rule implements the intent of Filipinization in the constitution. Art. XII, S2
reserves exploitation of natural resources to Filipino citizens and corporations 60% of whose
capital is owned by such citizens. PH Mining Act has a similar requirement. The GFather rule
was originally conceived to look into the citizenship of the individuals who ultimately own
and control the shares of a corporation.

The Grandfather Rule is "the method by which the percentage of Filipino equity in a corporation
engaged in nationalized and/or partly nationalized areas of activities, provided for under the
Constitution and other nationalization laws, is computed, in cases where corporate shareholders
are present, by attributing the nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder. Thus, both direct and indirect
shareholdings in the corporation are determined.

BIR applies the grandfather rule to determine ultimate ownership in a corporation in applying
NIRC, S127(B) on taxes imposed on close corporations. BIR Ruling 148-10:
In the case of a multi-tiered corporation, the stock attribution rule must be allowed to
run continuously along the chain of ownership until it finally reaches the individual
stockholders. This is in consonance with the "grandfather rule" adopted in the Philippines
under Section 96 of the Corporation Code (**S95[c], RCC) xxx.
2) Grandfather rule may apply even if 60-40 rule is satisfied- The method employed in the
Grandfather Rule of attributing the shareholdings of a given corporate shareholder to the second
or even the subsequent tier of ownership hews with the rule that the "beneficial ownership" of
corporations engaged in nationalized activities must reside in the hands of Filipino citizens.
Thus, EVEN IF the 60-40 Filipino equity requirement appears to have been satisfied, an
agreement that may distort the actual economic or beneficial ownership of a mining
corporation may be struck down as violative of the constitutional requirement. It is implicit
that even if Art. XII, S12 refers to ownership of stock, beneficial ownership of the right to
dispose, exploit etc. natural resources shall pertain to Filipino citizens, and that the nationality
requirement is not satisfied unless Filipinos are the principal beneficiaries in the exploitation of
the country’s natural resources.
2.1) Situs of control + beneficial ownership- The beneficial ownership requirement was used in
tandem with situs of control to determine the nationality of a corporation thru the GFather rule
despite the fact that both investee and investor corporations satisfy the 60-40 Filipino equity
requirement. The nationality requirement is not satisfied unless it meets the criterion of
beneficial ownership, i.e. Filipinos are the principal beneficiaries in the exploration of
natural resources, and in applying the same, the primordial consideration is situs of control.
Any arrangement which attempts to defeat the constitutional purpose should be eschewed.

The GFather rule is applied where the corporation has corporate stockholders with alien
stockholdings. The presence of such corporate stockholders could diminish the effective
control of Filipinos.

3) Contention: The application of the grandfather rule is without basis in the constitution, FIA,
PH Mining Act, and SEC Rules. These laws and rules espouse the application of the control test
to determine compliance with Art. XII, S2.
Held:
But the grandfather rule does not eschew the control test. The control test is still the prevailing
mode of determining whether a corporation is a Filipino corporation under Art. XII, S2.
When in the mind of the court, there is DOUBT based on the facts in the 60-40 Filipino equity
ownership in the corporation, THEN it may apply the grandfather rule. Thus, the use of the
grandfather rule as a supplement to the control test is not proscribed by the constitution or PH
Mining Act.

3.1) The control test and GFather rule can be used cumulatively. It is only when the control
test is first complied with that the GFather rule may be applied. If the corporation’s Filipino
equity falls below the 60% threshold, the corporation is immediately considered foreign-owned
and the need to resort to the GFather rule disappears.

A corporation that complies with the 60-40 requirement can be considered a Filipino corporation
if there is no DOUBT as to who has “beneficial ownership” and control of the corporation.
There would be no need for further inquiry on corporate ownership or the application of the
GFather rule. Corollarily, even if the 60-40 requirement is met, a resort to GFather rule is
necessary if DOUBT exists as to the locus of the “beneficial ownership” and control.

3.2) Indicators of doubt- “Doubt” refers to various INDICIA that the beneficial ownership and
control of a corporation do not in fact reside in Filipino shareholders but in foreign stakeholders.
In DOJ Opinoin 165, S.1984, applying the Anti-Dummy Law, “significant indicators of the
dummy status” have been recognized. These are:
1. That the foreign investors provide practically all the funds for the joint investment
undertaken by these Filipino businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically all the technological
support for the joint venture;
3. That the foreign investors, while being minority stockholders, manage the company
and prepare all economic viability studies.
In In the matter of the petition for revocation of the certificate of registration of Linear Works
Realty Development Corporation, SEC held that the fact that Japanese shareholders holding
shares with greater par value have similar rights as PH citizens holding shares with lower par
value is highly suspicious, indicating secret arrangements where Japanese nationals actually have
greater control and economic rights than the Filipino shareholders.

4) Here, petitioners’ corporate structure are:

4.1) Tesoro:

Sara Marie holds 59.97% of 10,000 common shares while MBMI (Canadian) owns 39.98%. In
turn, Olympic owns 66.63% of Sara Marie’s shares while MBMI holds 33.31%.

Olympic did not pay a single centavo for its shares; MBMI paid 99% of Sara Marie’s paid up
capital. That MBMI had provided practically all of Sara Marie and Tesoro’s funds creates
serious doubt as to the true extent of MBMI’s control over both Sara Marie and Tesoro since a
reasonable investor would expect to have greater control and economic rights than other
investors who invested less capital than him.

Thus, Filipino participation in Tesoro is 40.01% only:

(Filipino equity in Sara Marie) 66.67% x 59.97% (Sara Marie’s share in Tesoro) = 39.98%
39.98% + 0.03% (shares of individual Filipino shareholders (SH) in Tesoro) = 40.01%

Foreign participation: 59.99%

(Foreign equity in Sara Marie) 33.33% x 59.97 (Sara Marie’s share in Tesoro) = 19.99%
19.99% + 39.98% (MBMI’s direct participation in Tesoro) + 0.02%(shares of foreign individuals
in Tesoro) = 59.99%.

4.2) For McArthur, SC, doing the same formula, also found that MBMI had practically provided
all the funds in McArthur and Madridejos (59.97% Filipino shareholder in McArthur) and thus
there is doubt. SC found that Filipino participation in McArthur is only 40.01% and Foreign
participation is 59.99%.

4.3) For Narra MBMI also paid almost all (99.75%) of PLMDC’s (59.97% Filipino shareholder
of Narra) paid up capital. This creates serious doubt. SC found that Filipino participation in
Narra is 39.64% and foreign participation is 60.36%.

Thus, the 3 petitioners did not comply with Art. XII, S2.

5) SEC MC 8, S.2013, S2 provides:

Section 2. All covered corporations shall, at all times, observe the constitutional or
statutory requirement. For purposes of determining compliance therewith, the required
percentage of Filipino ownership shall be applied to BOTH (a) the total outstanding
shares of stock entitled to vote in the election of directors; AND (b) the total number of
outstanding shares of stock, whether or not entitled to vote in the election of directors.
Here, there is no indication that petitioners issued any other class of shares besides the 10,000
common shares and there is no suggestion that such shares were divided into voting or non-
voting common shares. Thus, for the purposes of this case, items (a) and (b) in S2 both refer to
the 10,000 common shares of petitioners and there is no need to separately apply the 60-40 ratio
to any segment of said common shares.

20. Roy III v. Herbosa, GR 207246, November 22, 2016, Caguioa, J., En Banc.
FACTS:
SC’s ruling in Gamboa v. Finance Secretary Teves attained finality on Oct. 18, 2012,
interpreting Art. XII, S11 of the constitution. SEC posted a notice in its website soliciting public
comments and suggestions on a draft memorandum circular on the guidelines to be followed in
determining compliance with Filipino ownership requirement in public utilities in Art. XII, S11.
Atty. Roy submitted his written comments on the draft guidelines. The SEC, thru respondent
Chairperson Herbosa issued SEC-MC No. 8, which provides:
Section 2. All covered corporations shall, at all times, observe the constitutional or
statutory ownership requirement. For purposes of determining compliance therewith, the
required percentage of Filipino ownership shall be applied to BOTH (a) the total number
of outstanding shares of stock entitled to vote in the election of directors; AND (b) the
total number of outstanding shares of stock, whether or not entitled to vote in the election
of directors.
Petitioner Roy assails the validity of SEC-MC No.8 for not conforming to the letter of Gamboa.

ISSUE:
Contention: Roy contends that the 60-40 Filipino ownership requirement applies separately to
each class of shares of a public utility corporation, whether common, preferred nonvoting,
preferred voting, or any other class of shares.
HELD: Only to voting and non-voting.
Art. XII, S11 provides:
Sec. 11. No franchise, certificate, or any other foam of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of
whose capital is owned by such citizens, nor shall such franchise, certificate or
authorization be exclusive in character or for a longer period than fifty years. Neither
shall any such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive
and managing officers of such corporation or association must be citizens of the
Philippines.

1) Voting Control Test- In Gamboa, SC held that the term “capital” in Art. XII, S11 refers only
to shares of stock entitled to vote in the election of directors and thus only to common shares,
and not to total outstanding capital stock (consisting of common and nonvoting preferred shares).
This interpretation was in furtherance of the intent of the constitution that the state shall develop
an independent national economy “effectively controlled” by Filipinos because voting stock
equates to control of the public utility. Mere legal title is insufficient to meet the 60%. Full
beneficial ownership of 60% of the outstanding capital stock coupled with 60% of the voting
rights is required.

2) S2 of SEC-MC 8 incorporates the voting control test or the controlling interest requirement. In
fact, S2 goes beyond requiring 60-40 in the voting stocks. It requires 60-40 in the total number
of outstanding shares of stock, whether voting or not. SEC formulated this to adhere to SC’s
pronouncement that “full beneficial ownership of 60% of the outstanding capital stock, coupled
with 60% of the voting rights is required.” Clearly, SEC did not commit gadalej; SEC-MC 8
simply implemented Gamboa.

For example, Company X’s outstanding capital stock is as follows:

100 common shares
100 Class A preferred shares (with right to elect directors)
100 Class B preferred shares (without right to elect directors)
Voting Control Test: if at least a total of 120 of common shares and class A preferred shares (in
any combination) are owned and controlled by Filipinos, Company X complies with the 60%
requirement.
Full beneficial ownership of 60% of both outstanding and voting- If at least 180 shares of all the
outstanding capital stock of Company X are owned and controlled by Filipinos, provided that
among those 180 shares a total of 120 common and class A preferred shares (in any
combination) are owned and controlled by Filipinos, then Company X complies with SEC-
MC 8 and Gamboa.
3) Full beneficial ownership test- Mere legal title is not enough to meet the required Filipino
equity, which means that it is not sufficient that a share is registered in the name of a Filipino
citizen or national, i.e., he should also have full beneficial ownership of the share. If the voting
right of a share held in the name of a Filipino citizen or national is assigned or transferred to an
alien, that share is not to be counted in the determination of the required Filipino equity. In the
same vein, if the dividends and other fruits and accessions of the share do not accrue to a
Filipino citizen or national, then that share is also to be excluded or not counted.

4) Effective control by Filipino citizens of a public utility is already assured in Art. XII, S11 in
its 3 safeguards: (1) 60% of its capital must be owned by Filipino citizens; (2) participation of
foreign investors in its board of directors is limited to their proportionate share in its capital; and
(3) all its executive and managing officers must be citizens of the Philippines.

5) The application of the 60-40 requirement to each class of shares, whether common, preferred
nonvoting, preferred voting, or any other class fails to appreciate the nature of stocks as financial
instruments. There are basically only two types of shares of stocks: 1) common stock and 2)
preferred stock. The variety of shares that a corporation may issue are dictated by the
corporation’s financial position and needs, short and long term targets, risks, etc. They can also
be reclassified from time to time.

Given the innumerable permutations of the classes of stocks may take, requiring SEC to keep
track of the ever-changing capital classes of corporations will be impossible. The law does not
require the impossible.

Going back to the example in (*par.2 of this digest), the term “capital” will be complied with
only if 60% of each of the three classes of shares of Company X (common, class A, and class B)
is owned by Filipinos. However, what if the 60% is not fully subscribed or achieved because
there are not enough Filipino takers? X will be deprived of capital that would otherwise be
accessible to it were it not for this unwarranted “restrictive” meaning of “capital.”

5.1) All shares have the right to vote in 8 specific corporate actions under S6 of the
Corporation Code (Amendment of AoI, of by-laws, sale etc. of corporate property,
increase/decrease bonded debt, of capital stock, etc.), but this does not justify the restrictive
interpretation of “capital” petitioner insists. These 8 corporate matters are more in furtherance of
the stockholder’s right of ownership rather than as a mode of control.

21. Lyceum of the PH, Inc. v. CA, GR 101897, March 05, 1993, Feliciano, J., Third
Division. (Corporate name)
FACTS:
Petitioner filed a case against Lyceum of Baguio to require it to change its name to one not
similar to that of petitioner. The SEC ordered Lyceum of Baguio to change its name. When LoB
assailed the SEC order in SC, the SC, in a minute resolution, denied the petrev for lack of merit.
Petitioner, armed with this minute resolution, advised all educational institutions it could find
using the word “Lyceum” as part of their corporate name to change their name. As this recourse
failed, petitioner filed this case in SEC.
Petitioner was first registered with SEC on September 21, 1950. It filed the case against the
following and their corresponding SEC registration dates:
Western Pangasinan Lyceum — 27 October 1950; Lyceum of Cabagan — 31 October
1962; Lyceum of Lallo, Inc. — 26 March 1972; Lyceum of Aparri — 28 March 1972;
Lyceum of Tuao, Inc. — 28 March 1972; Lyceum of Camalaniugan — 28 March 1972
SEC hearing officer ruled for petitioner. SEC en banc reversed. CA affirmed SEC en banc.
Hence this petition.

ISSUE:
Whether the private respondents’ corporate names are confusingly similar to that of petitioner
due to the use of the word “lyceum.”
HELD: NO.
Corporation Code provides:
SECTION 18. Corporate name. — No corporate name may be allowed by the Securities
and Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws. Xxx.
(**S17 of RCC now provides “distinguishable”, “protected by law”, “contrary to existing
law xxx.”)
The policy behind S18 is the avoidance of fraud upon the public, the evasion of legal obligations
and duties, and reduction of difficulties of administration and supervision over corporations.

1) Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn
referred to a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to
Apollo and adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus
frequented by the youth for exercise and by the philosopher Aristotle and his followers for
teaching." In time, the word "Lyceum" became associated with schools and other institutions
providing public lectures and concerts and public discussions. Thus today, the word "Lyceum"
generally refers to a school or an institution of learning. While the Latin word "lyceum" has been
incorporated into the English language, the word is also found in Spanish (liceo) and in French
(lycee). Roman Catholic schools frequently use the term; e.g., "Liceo de Manila," "Liceo de
Baleno", "Liceo de Masbate," "Liceo de Albay." "Lyceum" is in fact as generic in character as
the word "university." In the name of the petitioner, "Lyceum" appears to be a substitute for
"university;" in other places, however, "Lyceum," or " Liceo" or "Lycee" frequently denotes a
secondary school or a college. It is clear that a not inconsiderable number of educational
institutions have adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum"
or "Liceo" denotes a school or institution of learning, it is not unnatural to use this word to
designate an entity which is organized and operating as an educational institution.

2) Contention: Petitioner claims that “Lyceum” has acquired a secondary meaning.

Held: No evidence of exclusivity of use.
The doctrine of secondary meaning originated in the field of trademark law. Its application has
been extended to corporate names since the right to use a corporate name to the exclusion of
others is based on the same principle which underlies the right to use a particular trademark or
tradename. This doctrine means that:
 A word or phrase originally incapable of exclusive appropriation with reference to an
article on the market, because it is geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively by one producer with reference to
his article that, in that trade and to that branch of the purchasing public, the word or
phrase has come to mean that the article was his product.
Thus, the question is whether petitioner’s use of “Lyceum” has been for such length of time and
with such exclusivity as to have become associated or identified with petitioner in the mind of the
public or at least that portion of the general public which has to do with schools.

Here, petitioner’s evidence only tend to prove that it had been using “Lyceum” for a long period
of time. The exclusive use was never established or proven. Educational institutions of the
Roman Catholic Church had been using the same or similar word like “Liceo de Manila” etc.
long before petitioner started using “Lyceum.” The number alone of private respondents shows
that petitioners’ use of “Lyceum is not exclusive. One of respondents, Western Pangasinan
Lyceum, Inc., used “Lyceum” 17 years before petitioner registered its corporate name.

22. Ang mga Kaanib sa Iglesia ng Dios kay Kristo Hesus, HSK, Sa Bansang Pilipinas, Inc.
v. Iglesia ng Dios kay Cristo Jesus, Haligi at Suhay ng Katotohanan, GR 1375892,
December 12, 2001, Ynares-Santiago, J., First Division.
FACTS:
Respondent (Church of God in Christ Jesus, the Pillar and Ground of Truth), is a nonstock
religious corporation registered in 1936. In 1976, one Eliseo Soriano and others disassociated
themselves from respondent and registered a new corporation named Iglesia ng Dios kay Kristo
Hesus, Haligi at Saligan ng Katotohanan. Respondent petitioned SEC to compel this corporation
to change its name. SEC ordered this corporation to change its corporate name.

While the above case was pending, Soriano registered in 1980 petitioner corporation, Ang mga
Kaanib sa Iglesia ng Dios kay Kristo Hesus, H.S.K., sa Bansang Pilipinas. “HSK” stands for
Haligi at Saligan ng Katotohanan. Respondent petitioned SEC to compel petitioner to change its
corporate name. Petitioner was declared in default for filing a MtD instead of answer. SEC
ordered petitioner to change its name. SEC En Banc affirmed. CA affirmed. Hence this petition.

ISSUE:
Whether the differences in petitioner’s name with that of respondent (i.e. “Ang mga kaanib”,
Saligan vs. Suhay, “Sa bansang Pilipinas”) are enough to distinguish petitioner corporation from
respondent.
HELD: NO.
1) Petitioner’s counsel only committed simple negligence, not gross negligence as to exempt
petitioner from the effects of such negligence. The counsel had filed a motion for lifting of order
of default and motion for reconsideration of the default judgment.

2) Contention: Petitioner raises the issue of prescription.

Held:
SEC has the authority to de-register at all times and under all circumstances corporate
names which, in its estimation, are likely to spawn confusion. SC cited S18 of Corporation
Code (**See S17, par. 3 and 4 of RCC).
3) SEC Guidelines on Corporate Names also states:
(d) If the proposed name contains a word similar to a word already used as part of the
firm name or style of a registered company, the proposed name must contain two other
words different from the name of the company already registered;
Contention: Petitioner claims that it added not only 2 but 8 words to its registered name: “Ang
Mga Kaanib”, “Sa Bansang Pilipinas, Inc.” which distinguished it from respondent.
Held: Additional words merely descriptive.
These additional words are merely descriptive of and also referring to the members, or
kaanib, of respondent who are likewise residing in PH. These are not effective differentiating
medium. In holding out their corporate name to the public, petitioner highlights the dominant
words “Iglesia ng Dios kay Kristo Hesus, Haligi at Saligan ng Katotohanan, thus showing that
the additional words Ang mga Kaanib and Sa Bansang Pilipinas are merely descriptive of the
members of respondent. Both corporations also use the same acronym- HSK, and both also
espouse religious beliefs and operate in the same place.

3.1) The words “Saligan” and “Suhay” are synonymous, both meaning ground, foundation, or
support. Thus, this case is on all fours with Universal Mills Corporation v. Universal Textile
Mills, Inc. where SC ruled that the corporate names Universal Mills Corporation and Universal
Textile Mills, Inc., are so similar that even under the test of "reasonable care and observation"
confusion may arise.

4) Contention: Ordering petitioner to change its corporate name violates its right to religious
freedom.
Held:
SEC merely compelled petitioner to abide by SEC’s guidelines in the approval of corporate
names, namely its undertaking to manifest its willingness to change its corporate name in the
event another person, firm, or entity has acquired a prior right to the use of said firm name or one
confusingly similar to it.

23. Young Auto Supply Co. v. CA, GR 104175, June 25, 1993, Quiason, J., First Division.
FACTS:
Petitioner YASCO, represented by Nemesio Garcia, its president, sold their shares of stock in
Consolidated Marketing & Development Corporation (CMDC) to Roxas for P8M- P4M DP,
P4M payable in 4 post-dated checks. These four other checks were dishonored. Roxas sold one
of the markets of CMDC to a third party. YASCO got P600k of the proceeds, leaving a balance
of P3.4M.

Petitioners YASCO and Nemesio filed against Roxas a complaint to recover the P3.4M in RTC
Cebu. Roxas moved to dismiss on the ground that the venue was improperly laid. On certiorari to
CA, CA ordered the dismissal on the ground of improper venue.

ISSUE:
Contention: Venue should be in Pasay City, not Cebu City, because the deed of sale to Roxas
and YASCO’s letters and commercial documents in the possession of Roxas all state that
YASCO’s address is in Pasay City. As for Nemesio, he gave his address as Pasay City in his 3
letters to Roxas’ siblings.
HELD: Residence of corporation is stated in AoI.
YASCO’s AoI state:
"THIRD. That the place where the principal office of the corporation is to be established
or located is at Cebu City, Philippines.
The complaint also avers that Nemesio’s address is in Cebu.

1) A corporation has no residence in the same sense in which this term is applied to a natural
person. But for practical purposes, a corporation is in a metaphysical sense a resident of the
place where its principal office is located as stated in the articles of incorporation. The
Corporation Code precisely requires each corporation to specify in its articles of incorporation
the "place where the principal office of the corporation is to be located which must be within the
Philippines" (Sec. 13, [c], *RCC). The purpose of this requirement is to fix the residence of a
corporation in a definite place, instead of allowing it to be ambulatory.

1.1) Actions cannot be filed against a corporation in its branch offices since such would create
confusion and work untold inconvenience to said entity. By the same token, a corporation cannot
be allowed to file personal actions in a place other than its principal place of business unless such
place is also the residence of a co-plaintiff or defendant.

2) If it was Roxas who sued YASCO in Pasay and YASCO questioned venue on the ground that
its principal place of business was in Cebu, Roxas could raise estoppel since YASCO misled
Roxas to believe that Pasay was its principal place of business. But this is not the case (*YASCO
was the one who filed the complaint).

24. De La Salle Montessori International of Malolos, Inc. v. De La Salle Brothers, Inc., GR

205548, February 07, 2018, Jardeleza, J., First Division.
FACTS:
Petitioner reserved with SEC its corporate name DLSMIM. SEC issued a certificate of
incorporation to petitioner. Petitioner was granted by DEPED government recognition for pre-
elementary, elementary courses and secondary courses. Later, respondents De La Salle Brothers,
Inc., De La Salle University, Inc., La Salle Academy, Inc., De La Salle-Santiago Zobel School,
Inc., and De La Salle Canlubang, Inc. filed a petition with SEC seeking to compel petitioner to
change its corporate name. Respondents claim that petitioner’s corporate name is misleading or
confusingly similar to those of respondents. Respondents claim that petitioner’s use of the
dominant phrases “La Salle” and “De La Salle” gives an erroneous impression that petitioner is
part of the “La Salle” group.

SEC directed petitioner to change its corporate name. SEC En Banc. Affirmed. CA affirmed.
Hence this petition.
ISSUE:
Whether petitioner can use “De La Salle” in its corporate name.
HELD: NO.
1) A corporation’s right to use its corporate and trade name is a property right, a right in rem. It
cannot be defeated by subsequent appropriation by another corporation in the same field. Our
Corporation Code established a restrictive rule insofar as corporate names are concerned (SC
cites S18 of old Corporation Code).

2) To fall within the prohibition of S18, two requisites must be proven: (1) that the complainant
corporation acquired a prior right over the use of such corporate name (priority of adoption);
and (2) the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law; or (c) patently
deceptive, confusing or contrary to existing law.

As to the first requisite, respondents’ corporate names were registered thus: (1) De La Salle
Brothers, Inc. on October 9, 1961; (2) De La Salle University, Inc. on December 19, 1975; (3) La
Salle Academy, Inc. on January 26, 1960; (4) De La Salle-Santiago Zobel School, Inc. on
October 7, 1976; and (5) De La Salle Canlubang, Inc. on August 5, 1998. Petitioner was issued a
certificate of registration only on July 5, 2007. Thus, respondents have prior right.

2.1) As to the second requisite, this is also satisfied since there is confusing similarity. “De La
Salle” is the dominant phrase used.

2.1.1) Contention: The words “Montessori International of Malolos, Inc.” are 4 distinctive words
not found in respondents’ names.
Held:
All these words, when used with the name “De La Salle”, can reasonably mislead a person
using ordinary care and discretion into thinking that petitioner is an affiliate or branch of,
or is likewise founded by, the respondents, thus causing confusion.

2.1.2) Contention: Petitioner claims that it obtained the words “De La Salle” from the French
word meaning “classroom” while respondents obtained it from the French priest named Saint
Jean Baptiste de La Salle.
Held:
“Salle” means only “room” in French. “La” is a definite article “the.” Thus, since “Salle” is
room, respondents’ use thereof is suggestive. A suggestive mark is a word, picture, or other
symbol that suggests, but does not directly describe something about the goods services in
connection with which it is used as a mark and gives a hint as to the quality or nature of the
product. It is thus distinctive and registrable. “La salle”, roughly translated, means “the room.”
The room could be anything- a room in a house, in a building, or in an office.

In fact, respondents appropriation is fanciful, whimsical, and arbitrary since there is no

inherent connection between the words “la salle” and education, and it is thru respondents’
efforts that the term has become associated with one of the top educational institutions in the
country. Even if “La Salle” means classroom, imagination is required to associate the term with
an educational institution and its brand of service.

SC notes the similarity not only in the parties’ names, but also the business they are engaged
in- private educational institutions offering pre-elementary, elementary, and secondary courses.
Petitioner’s name gives the impression that it is a branch or affiliate of respondents. Actual
confusion need not be shown. It suffices that confusion is likely.
2.1.3) The ruling in Lyceum v. CA (*case 21) does not apply. SC held therein that “Lyceum”
today generally refers to a university or institution of learning. There is also no proof that
petitioner’s use of “Lyceum” was exclusive.

Here, “De La Salle” is not generic in relation to respondents. It is not descriptive of

respondent’s business as institutes of learning, unlike the meaning of “Lyceum.” Also,
respondents had been using the name decades before petitioner’s corporate registration, whereas
there is no evidence of the exclusive use of “Lyceum.”

25. Gamboa v. Finance Secretary Teves, GR 176579, June 28, 2011, Carpio, J., En Banc.
FACTS:
Philippine Telecommunications Investment Corporation (PTIC) owned 26% of PLDT’s
outstanding common shares after this was sold to it by General Telephone and Electronics
Corporation (GTE). Prime Holdings, Inc. (PHI) owns 111,415 shares of PTIC or 46.125% of its
OCS. The 111,415 PTIC shares were later sequestered by PCGG and SC declared that it is
owned by Republic of the PH.

First Pacific, Hong Kong based investment firm, acquired the remaining 54% of PTIC’s shares.
The government conducted public bidding of the 46.125% OCS of PTIC. Parallax Venture Fund
won with a P25.6B bid. First Pacific announced that it would exercise its right of first refusal as a
PTIC stockholder and will buy the 46.125% OCS instead. Thus, First Pacific, thru its subsidiary
Metro Pacific Assets Holdings, Inc. (MPAH), entered into a conditional sale of the 46.125%
OCS of PTIC with the PH Government for P25.217B.

Since PTIC is a stockholder of PLDT, the sale of 46.125% PTIC shares is actually an indirect
sale of 6.3% of PLDT’s outstanding common shares. With this sale, First Pacific’s common
shareholdings in PLDT increased from 30.7 to 37%, increasing common shareholdings of
foreigners to about 81.47%.

Petitioner Gamboa, PLDT stockholder, filed the instant petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares. Gamboa is a
stockholder of PLDT.

**Relevant facts in SC’s ruling.

Common- The 2010 General Information Sheet of PLDT shows that 120,046,690 or 64.27% of
PLDT’s common shares are held by foreigners while 66,750,622 or 35.73% are held by
Filipinos.
Preferred- 99.44% of PLDT’s preferred shares are held by Filipinos. 0.56% are held by
foreigners.
Dividends- In PLDT’s 2009 Dividend Declaration, the dividends for common shares were P70
while that for the preferred shares were P1.
Par value- Par value of preferred shares: P10; Par value of common shares: P5.
Voting- Under PLDT’s Articles of Incorporation, only Common shares can vote. “Holders of
preferred stock shall not be entitled to vote at any meeting of the stockholders for the election of
directors or for any other purpose xxx.”
ISSUE:
Whether the term “Capital” in Art. XII, S11 refers to voting or non-voting shares or both.
HELD: Voting shares.
Art. XII, S11:
Section 11. No franchise, certificate, or any other form of authorization for the operation
of a public utility shall be granted except to citizens of the Philippines or to corporations
or associations organized under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens; xxx.
1) S6 of the (*old) Corporation Code classifies shares as common or preferred and states that
only “preferred” or “redeemable” shares may be deprived of voting rights. One of the rights of a
stockholder is the right to participate in the control/management of the corporation exercised thru
his vote in the election of directors since the board controls/manages the corporation. In the
absence of provisions in the AoI denying voting rights to preferred shares, preferred shares have
the same voting rights as common shares. But often, preferred shareholders are deprived of the
right to vote on the theory that the preferred shareholders are merely investors for income in the
same manner as bondholders.

The term “Capital” in Art. XII, S11 refers to common shares which have the right to vote and to
preferred shares if these have the right to vote in the election of directors. In short, the term
“capital” refers only to shares of stock that can vote in the election of directors. Mere title is
insufficient to meet the 60% Filipino-owned “capital” required in the constitution. Full
beneficial ownership of 60% of the OCS, coupled with 60% of the voting rights, is
required.

1.1) Reinforcing this interpretation is the definition of “Philippine national” in the Foreign
Investments Act of 1991:
SEC. 3. Definitions. — As used in this Act:
a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines;

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

1.3) To construe broadly the term “capital” as the total OCS, including both common and non-
voting preferred shares, grossly contravenes the intent and letter of the Constitution that the
"State shall develop a self-reliant and independent national economy effectively controlled by
Filipinos." (Art. II, S19) A broad definition unjustifiably disregards who owns the all-important
voting stock, which necessarily equates to control of the public utility.

1.4) For example, if a corporation has 100 common shares owned by foreigners and 1,000,000
non-voting preferred shares owned by Filipinos, under the broad definition, the term “capital”
would be considered complied with since more than 99.999% of the OCS is Filipino owned. This
is absurd since the Filipinos holding 99.999% cannot vote in the election of directors and thus
have no control. It renders illusory the state policy of an independent national economy
effectively controlled by Filipinos.

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

Incidentally, the PLDT common shares with P5 par value have a current stock market value of
P2,328 per share while preferred shares with a P10 par value have only P10.92-P11.06. This is a
confirmation by the market that control and beneficial ownership of PLDT rests in the common
shares.

3) Art. XII, S11 is self-executing. “Unless the contrary is intended, the provisions of the
Constitution should be considered self-executing, as a contrary rule would give the legislature
discretion to determine when, or whether, they shall be effective.” (Manila Prince Hotel v. GSIS)

25.1. Heirs of Gamboa v. Finance Secretary Teves, GR 176579, October 09, 2012, Carpio,
J., En Banc.
FACTS:
MR of the June 28, 2011 decision.

HELD: Denied.
1) Contention: SC’s interpretation of “capital” in the June 28, 2011 decision introduced a new
definition and redefinition of “capital.” SEC has long interpreted “capital” to refer to total
outstanding shares.
Held:
SC cites DOJ Opinion 130, s.1985 which stated that the 60% requirement should apply to voting
shares. This opinion stated that the 60-40 requirement is not complied with unless the
corporation satisfies the criterion of beneficial ownership and in applying this, the primordial
consideration is situs of control.

Opinion 23-10 of SEC General Counsel applied the Voting Control test- using only the voting
stock to determine whether a corporation is a PH national.

Thus, SC said these 2 opinions are compatible with the June 28 decision and shows that the DOJ
and SEC had inconsistent positions on the interpretation of “capital.”

1.1) Only SEC en banc can issue rules- The opinions of SEC legal officers do not have the force
and effect of SEC rules and regulations because only SEC en banc can adopt rules and
regulations. Under S4.6 of Securities Regulation Code (SRC), SEC cannot delegate to any
individual commissioner or staff the power to adopt any rule or regulation. Under S5.1 of SRC, it
is SEC as a collegial body, and not its legal officers, that is empowered to issue opinions that
have the force of rules and regulations. Thus, any opinion of individual SEC Commissioners
does not constitute a rule or regulation of SEC. SEC en banc adopted even the Grandfather Rule
in determining compliance with the 60-40 ownership requirement in its March 25, 2010 SEC en
banc ruling in Redmont v. McArthur Mining. This was to thwart any circumvention of the
required Filipino “ownership and control.” This SEC en banc ruling conforms to the June 28
decision.

Also, SEC and DOJ interpretation of the term “capital” in various opinions is merely preliminary
and not binding on SC. Any interpretation of the law by administrative agencies is only
preliminary and never conclusive on SC.

2) Both the Voting Control Test and the Beneficial Ownership Test must be applied to
determine if a corporation is a PH national.

3) SC cites the preamble (“conserve and develop our patrimony”) and Art. II, S19 of the 1987
constitution (“effectively controlled by Filipinos”). Art. XII, S10 also states that Congress shall
reserve to citizens or corporations with 60% capital owned by such citizens or a higher
percentage as congress may provide certain areas of investments. Pursuant to Art. XII, S10,
Congress has in numerous laws reserved areas of investments to such citizens/corporations (RA
5183, RA 3850 etc.)

3.1) Art. XII, S11 mandates Filipinization of public utilities. For a corporation to own and
operate a public utility, its capital must at least be 60% owned by Philippine Nationals.

3.2) “Philippine nationals”- The Foreign Investments Act, like all its predecessor statutes
(EO226 or Omnibus Investments Code of 1987, Omnibus Investments Code of 1981, RA 5186
or Investment Incentives Act of 1967), defines a “Philippine national” as a Filipino citizen or a
domestic corporation at least 60% of the capital stock outstanding and entitled to vote is
owned by Filipino citizens. The FIA reiterates and clarifies Art. XII, S11.
Among the areas of investment covered by FIA’s Negative List A, which reserves to Filipino
nationals certain areas of activities, is the operation/ownership of public utilities. Thus, from FIA
and its predecessor statutes for more than 4 decades, the statutory definition of the term “PH
national” has been uniform and consistent. It means a Filipino citizen or domestic corporation
at least 60% of the voting stock is owned by Filipinos.

The SEC cannot ignore FIA’s provisions. FIA is the basic statute regulating foreign investments
in the PH. SEC legal officers’ opinions that contradict FIA should raise a red flag.

3.2.1) Contention: The term “Philippine national” defined in FIA should be limited to refer to
corporations seeking to avail of tax and fiscal incentives under investment incentives laws and
cannot be equated with the term “capital” in Art. XII, S11.
Held:
FIA does not grant tax or fiscal incentives. Also, there is nothing in FIA or even in its
predecessor statutes that states that they do not apply to enterprises not availing of tax and fiscal
incentives. FIA applies to investments in all domestic enterprises, whether or not they enjoy tax
and fiscal incentives. The mere non-availment of tax and fiscal incentives by a non-Philippine
national cannot exempt it from Art. XII, S11 of the constitution regulating foreign investments in
public utilities.

4) The June 28 decision states: “Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is required.” The right to elect
directors, coupled with beneficial ownership, translates to effective control. Since the
constitutional requirement applies not only to voting control but also to beneficial ownership,
such requirement thus applies uniformly and across the board to all classes of shares,
regardless of nomenclature and category, comprising the capital of the corporation.

The Corporation Code states that preferred and redeemable shares may be deprived of the right
to vote in the election of directors. Nonetheless, preferred shares can vote on the matters in S6
of the Corporation Code (amendment of AoI, increase/decrease of capital stock, etc.). Thus, the
60-40 requirement must apply not only to shares with voting rights but also to shares without
voting rights since preferred shares denied the right to vote in election of directors are still
entitled to vote on the 8 specific corporate matters in S6.

Thus, if a corporation engaged in a nationalized industry issues a mixture of common and

preferred non-voting shares, at least 60% of the common and 60% of the preferred non-voting
shares must be owned by Filipinos. The 60-40 ownership requirement must apply separately to
each class of shares, whether common, preferred, non-voting, preferred voting, or any
other class of shares. Such uniform application to each class of shares insures that “controlling
interest” in public utilities always lies in the hands of Filipino citizens. (**But see ruling in Roy
v. Herbosa, 2016)

5) To construe “capital” broadly as the total OCS treated as a single class regardless of the
classification of shares grossly contravenes the intent of the constitution that the “State shall
develop a self-reliant and independent national economy effectively controlled by Filipinos.”
(Art. II, S19)
6) The last sentence of Art. XII, S11 mandates that (1) the participation of foreign investors in
the governing body of the corporation or association shall be limited to their proportionate share
in the capital of such entity; and (2) all officers of the corporation or association must be Filipino
citizens. This was included by the framers to prevent management contracts to circumvent the
Filipinization of public utilities.

7) The June 28 dispositive portion is addressed to SEC only. Although it found that PLDT’s
voting shares were 64.27% Foreign owned (etc.), SC did not decide and refrained from ruling on
whether PLDT violated the 60-40 ownership requirement in Art. XII, S11. Such question
requires presentation and determination of evidence thru a hearing which is outside the province
of SC’s jurisdiction, but well within SEC’s statutory powers. SC’s June 28 decision is thus
limited on the purely legal issue of the definition of “capital” in Art. XII, S11 and directed SEC
to apply such definition in determining the exact percentage of foreign ownership in PLDT.

IV. Control and Management of a Corporation

26. Grace Christian High School v. CA, GR 108905, October 23, 1997, Mendoza, J., Second
Division.
FACTS:
Petitioner GCHS is an educational institution offering prep, kinder, and secondary courses at
Grace Village in QC. Private respondent Grace Village Association, Inc. (GVAI) is an
organization of lot/bldg. owners, lessees, and residents at Grace Village. In 1975, it amended its
by-laws:
The Charter and Associate Members shall elect the Directors of the Association. The
candidates receiving the first fourteen (14) highest number of votes shall be declared and
proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN
HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.
From 1975 to 1990, GCHS was given a permanent seat in GVAI’s board. In 1990, the
association’s committee on election informed GCHS’s principal that it was reconsidering
GCHS’s permanent membership in its board since all directors should be elected.

GCHS thus filed this suit for mandamus in the Home Insurance and Guaranty Corporation
(HIGC) to compel the board of GVAI to recognize its right to a permanent seat, citing the
amended by-laws. HIGC ruled for GVAI, citing S92 of the Corporation Code (Election and term
of trustees). CA affirmed, ruling that the by-law amendment was not ratified in a regular/special
meeting called for the adoption of amendment to the by-laws.

ISSUE:
Whether GCHS can claim a permanent seat in GVAI’s board without being elected.
HELD: NO.
1) The proposed amendment to the by-laws was never approved by the majority of the members
of the association as required by S22 of the Corporation Law (Act 1459) and GVAI’s by-laws.

2) Contention: Since GCHS had a permanent seat for 15 years in implementation of the by-law
amendment, the proposed amendment, for all intents and purposes, should be considered to have
been ratified already. Some corporations grant its members a permanent seat in its board, such as
the Pius XII Catholic Center, Inc, in which whoever the Archbishop of Manila is is automatically
considered a member of its board of trustees without need of election.
Held:
BP 68 or the Corporation Code provides:
§23. The Board of Directors or Trustees. — Unless 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 to be ELECTED from among the holders of stocks, or where
there is no stock, from among the members of the corporation, who shall hold office for
one (1) year and until their successors are elected and qualified.
Thus, the board of directors of corporations must be elected from among the stockholders or
members. There may be corporations in which there are unelected members in the board but it is
clear that in the examples cited by petitioner the unelected members sit as ex officio members,
i.e., by virtue of and for as long as they hold a particular office. But in the case of petitioner,
there is no reason at all for its representative to be given a seat in the board.

Since the provision in question is contrary to law, the fact that for 15 years it has not been
questioned or challenged but, on the contrary, appears to have been implemented by the
members of the association cannot forestall a later challenge to its validity. Neither can it attain
validity through acquiescence because, if it is contrary to law, it is beyond the power of the
members of the association to waive its invalidity. The members of the association cannot adopt
a provision which is contrary to law.

27. Gokongwei, Jr. v. SEC, GR L-45911, April 11, 1979, Antonio, J., En Banc.
FACTS:
Petitioner filed this petition for declaration of nullity of SMC’s amended by-laws.

Delegation- He alleges that the board of SMC amended the bylaws based on authority to do so as
delegated to the board by the stockholders in 1961 when the OCS of SMC was only P70M. At
the time of amendment, the OCS is P301M already. Under S22 of Corporation Law, the
delegation of the power to amend bylaws may be made by 2/3 of stockholders vote. This 2/3
should be based on the OCS at the time of amendment, not delegation. (*Can’t find SC ruling on
this)

Disqualification as director- Petitioner claims that corporations have no power to disqualify a

stockholder from being elected as director. Thus, the by-law amendment stating that the board, in
considering factors like business and family relationship, may determine if a stockholder is
engaged in competitive business and disqualified from being elected as board of directors, is
void.

Inspection- Petitioner also filed with SEC a motion for production and inspection of documents,
alleging that SMC refused to allow him to inspect its records. Among the documents requested
were the authority of the stockholders to invest funds of SMC in San Miguel International, Inc.
(SMI). SMC claims that the demand is not in good faith.
Investing in other corporations- Petitioner alleges that he discovered that SMC is investing
corporate funds in other corporations outside of SMC’s primary purpose in violation of S17-1/2
of Corporation Law. Thus, he filed in SEC a petition to have respondents Andres and Jose
Soriano and SMC to account for such investments.

Respondent Tanjuatco filed his comment, alleging that the petitioner has become moot since in
the stockholder’s meeting of SMC on May 10, 1977, petitioner was allowed to run and be voted
for as director

HELD:
1) Power to prescribe qualifications for directors- Every corporation has the inherent power to
adopt by-laws 'for its internal government, and to regulate the conduct and prescribe the rights
and duties of its members. At common law, the rule was "that the power to make and adopt by-
laws was inherent in every corporation as one of its necessary and inseparable legal incidents. In
PH, S21 of the (*old old) Corporation Law provides that a corporation may prescribe in its by-
laws “qualifications, duties, and compensation of directors xxx.” This is in addition to that in
S30 thereof that requires directors to own at least 1 share of capital stock. Thus, in Government
v. El Hogar, SC sustained the by-law provision requiring directors to hold shares with paid-up
value of P5k.

2) No vested right to be elected director- A person who invests in a corporation to buy stocks is
considered to have parted with his right to regulate the disposition of the property invested
and surrendered it to the majority of his fellow incorporators because he knows, when he buys
stocks, that the affairs of the corporation are dominated by a majority of the stockholders and he
impliedly contracts that the will of the majority governs all matters within the limits of the act of
incorporation. This contract is not infringed by any act of the corporation authorized by a
majority. Under S18 of Corporation Law, a corporation may amend its AoI by a vote of 2/3 of
stockholders. The dissenting minority can only “object thereto in writing and demand
payment for his share” (*appraisal right?). Thus, petitioner cannot be said to have a vested
right to be elected director since the law at the time when his right as stockholder was acquired
contained the prescription that the corporate charter and by-law shall be subject to amendment.

3) Director a fiduciary- Although strictly, directors are not regarded as trustees, their character is
that of fiduciary for the stockholders since they are entrusted with the management of the
corporation for the stockholders’ collective benefit. In this sense, the relation is one of trust.
This relation is not a matter of law but springs from the fact that directors have control and
guidance of corporate affairs and property, and thus the property interests of the stockholders.

4) Corp can make additional qualifications for directors- In US, it is settled state law that
corporations have the power to make bylaws declaring a person employed in the service of a
rival company ineligible for the corporation’s board. This is based on the principle that the
director cannot serve both, but must betray one or the other. Exceptions are in states where
statutes prescribed the only qualifications and corporations cannot add more.

In PH, S21 of the Corporation Law expressly provides that a corporation may make bylaws for
the qualifications of directors.
4.1) Doctrine of “corporate opportunity”- Corporate officers are not permitted to use their
position of trust and confidence to further their private interests. Thus, in a case where
directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign
firm's products, and after establishing a rival business, the directors entered into a new contract
themselves with the foreign firm for exclusive sale of its products, the court held that equity
would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of
the corporation. The doctrine of “corporate opportunity” rests on the unfairness of a
director/officer taking advantage of an opportunity for his own personal profit when the interest
of the corporation justly calls for protection.

4.2) The directors of SMC have access to sensitive information such as marketing strategies and
pricing structure, sources of funding, personnel, etc. The by-law amendment is obviously to
prevent the creation of an opportunity for a director/officer of SMC who is also an
officer/director of a competing corporation from taking advantage of these information.

4.3) In McKee & Co. v. First National Bank of San Diego, the US court upheld an amendment to
the by-laws of a bank requiring its directors not to be directors etc. of any other bank. Also
upheld were these provisions:
"(1) A director shall not be directly or indirectly interested as a stockholder in any other
firm, company, or association which competes with the subject corporation.
(2) A director shall not be the immediate member of the family of any stockholder in any
other firm, company, or association which competes with the subject corporation.
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other
firm, company, or association which compete with the subject corporation.
(4) A director shall be of good moral character as an essential qualification to holding
office.
(5) No person who is an attorney against the corporation in a law suit is eligible for
service on the board."

4.4) Monopolies and combinations in restraint of trade- Also, the constitution prohibits
combinations in restraint of trade and unfair competition. SC also cited Art. 186 of RPC. A
common director of two or more competing corporations would have access to confidential sales,
pricing and marketing information and would be in a position to coordinate policies or to aid one
corporation at the expense of another, thereby stifling competition. Shared information on cost
accounting may lead to price fixing.

4.5) Petitioner assures that to avoid the possibility of his taking unfair advantage of his position
as SMC director, he would absent himself from meetings where confidential matters would be
discussed. But such conduct would be contrary to a director’s duty of fidelity to the corporation,
for the policy of the law is to encourage and enforce responsible corporate management.

4.6) While we sustain the validity of the amended by-laws, petitioner must be given due process
and heard, at which he must be given the fullest opportunity to show that he is not covered by the
disqualification.
5) Right to inspection of stockholder- S51 of Corporation Law states:
"(t)he record of all business transactions of the corporation and minutes of any meeting
shall be open to the inspection of any director, member or stockholder of the corporation
at reasonable hours."
The stockholder’s right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is an incident of ownership. This right
is predicated on the necessity of self-protection. Where the right is granted by statute to the
stockholder, it must be exercised by him with respect to his interest as stockholder and for
some purpose germane thereto or in the interest of the corporation. The right to examine
must be exercised in good faith and not to gratify curiosity. However, the stockholder does not
have the burden of showing propriety of purpose, but the corporation has the burden of
showing impropriety of purpose.

5.1) As to subsidiaries of corporations- The right of a stockholder to examine the records of a

wholly-owned subsidiary of a corporation in which he is a stockholder is a different thing.

It had been held that where a corporation owns approximately no property except the shares of
the subsidiary which are merely agents of the holding company, the legal fiction of distinct
corporate entities may be disregarded and the books etc. of all the corporations may be required
to be examined; the records of the subsidiary are, for all intents and purposes, that of the parent
company even if the subsidiary is not named a party. But the right was refused where the
subsidiary corporation is a separate and distinct corporation domiciled with its books and records
in another jurisdiction, and is not legally subject to the control of the parent company ,
although it owned a vast majority of the stock of the subsidiary.

Here, since the foreign subsidiary is wholly owned by SMC and thus under its control, it is
more in accord with equity to extend construe petitioner’s right to inspect as extending to books
and records of the wholly owned subsidiary which are in SMC’s possession and control.

6) Contention: SMC invested corporate funds in a foreign corporation without prior authority of
stockholders, violating S17-1/2 of the Corporation Law.
Held:
S17-1/2 allows a corporation to invest its funds in any other corporation or business or for any
purpose other than the main purpose for which it was organized if the board is authorized by 2/3
of the stockholders. But if the investment is made pursuant to the corporate purpose, it does not
need approval of the stockholders. (**S41, RCC)

Here, SMC purchased beer manufacturing facilities, which is an investment in the same
business stated as its main purpose in its AoI, which is to manufacture and market beer.
The original invest was made in 1947-48 when SMC purchased a beer brewery in Hongkong
Brewery & Distillery, Ltd. for manufacture of SM beer thereat.

The petition was granted insofar as petitioner is allowed to examine SMI’s books and records.
But denied insofar as it assails the validity of the amended by-laws and ratification of the foreign
investment of SMC.
28. People’s Aircargo and Warehousing Co., Inc. v. CA, GR 117847, October 07, 1998,
Panganiban, J., First Division.
FACTS:
First contract- Petitioner is a domestic corporation organized to operate a customs bonded
warehouse at the old MIA in Pasay city. To obtain a license for the corporation from Bureau of
Customs (BoC), Punsalan, Jr., petitioner’s president, solicited a proposal from private respondent
Stefani Saño, who was part of the task force supervising the transition of BoC from the Marcos
government to the Aquino administration, for a feasibility study. Saño submitted a letter-
proposal to Punsalan, stating that the price for the feasibility study, market study, etc. is P350k
(First contract). The feasibility study was prepared for petitioner which paid Saño the contract
price.

Second Contract- Upon Punsalan’s request, Saño sent petitioner another letter-proposal for the
preparation of an Operations Manual and seminar/workshop for petitioner’s employees for
P400k (Second contract). Petitioner received the operations manual and submitted it to BoC for
its application to operate a bonded warehouse. BoC issued to it a license. Saño also conducted a
3-day training seminar for petitioner’s employees.

Saño filed a collection suit against petitioner, alleging that it had prepared an operations manual
and conducted the seminar but petitioner refused to pay him.

Contention: Petitioner alleges that the letter-agreement was signed by Punsalan without
authority.

RTC ruled that the second contract was simulated/unenforceable, but awarded P60k to Saño
based on unjust enrichment. CA ruled that the second contract was valid. Hence this petition.

ISSUE:
Whether the second contract, which Punsalan entered into without authority from petitioner’s
board of directors, is valid.
HELD: YES.
1) The general rule is that, in the absence of authority from the board, no person, not even its
officers, can bind a corporation, which has a separate personality. A corporation, being a
juridical entity, may act thru its board of directors (S22, RCC).

2) Petitioner previously allowed its president to enter into the first contract with Saño
without a board resolution expressly authorizing him. Thus, it had clothed Punsalan with
APPARENT AUTHORITY to execute the second contract.

2.1) Contention: Petitioner claims that a single isolated agreement prior to the second contract
does not constitute corporate practice, which is “frequent customary action.”
Held:
But apparent authority is derived not merely from practice. Its existence may be ascertained
through (1) the general manner in which the corporation holds out an officer or agent as having
the power to act or, in other words, the apparent authority to act in general, with which it clothes
him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or beyond the scope of his ordinary powers.

Here, petitioner, thru its president Punsalan Jr., entered into the first contract without first
securing board approval. Despite such lack of approval, petitioner did not object to or
repudiate the contract, thus “clothing” its president with the power to bind the
corporation. Petitioner paid the P350k. The first contract was thus consummated, implemented,
and paid without a hitch.

Hence, it has been held in other jurisdictions that the president of a corporation possesses the
power to enter into a contract for the corporation, when the "conduct on the part of both the
president and the corporation [shows] that he had been in the habit of acting in similar matters on
behalf of the company and that the company had authorized him so to act and had recognized,
approved and ratified his former and similar actions."

Thus, Saño cannot be faulted for believing that Punsalan’s conformity to the second contract was
also binding on petitioner.

3) Furthermore, petitioner accepted the operations manual, submitted to the BoC, and allowed
the seminar for its employees. Thus, even if the second contract was outside the usual powers of
the president, petitioner’s ratification and acceptance of benefits have made it binding. The
enforceability of contracts under Art. 1403(3) is ratified “by the acceptance of benefits under
them” under Art. 1405 of NCC.

29. Marc II Marketing, Inc. v. Joson, GR 171993, December 12, 2011, Perez, J., Second
Division.
FACTS:
Petitioner Marc II took over the business operations of Marc Marketing, Inc. Before petitioner
was incorporated, respondent Alfredo Joson was already engaged by petitioner Lucila, president
of Marc Marketing, to work as general manager of Marc II. This was formalized thru a
management contract where Joson is entitled to 30% of net income and 30% of net profit. When
Marc II was incorporated, Marc Marketing was made non-operational. Joson continued as
general manager of Marc II. Pursuant to Marc II’s by-laws, its corporate officers are: Chairman,
President, one or more Vice-President(s), Treasurer and Secretary. The board of directors may
also appoint such other officers as it may deem necessary.

On June 30, 1997, Marc II stopped operations due to poor sales collection and mismanagement.
Thus, it informed Joson of his termination of services as general manager. Joson filed a
complaint for reinstatement with the Labor Arbiter.

Petitioner moved to dismiss on the ground of lack of jurisdiction of LA, alleging that the case is
an intercorporate controversy. LA ruled for Joson and declared the dismissal illegal. NLRC ruled
for Marc II, giving credence to Marc II’s board resolution which appointed Joson as its corporate
officer with designation as general manager. NLRC thus reversed LA. CA ruled that LA had
jurisdiction. Hence this petition.
ISSUE:
Whether Joson is a corporate officer such that the LA has no jurisdiction over his dismissal.
HELD: NO.
1) Under Section 5 of PD 902-A, intra-corporate controversies are those arising 1) between and
among stockholders, members or associates; 2) between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively;
and 3) between such corporation, partnership or association and the State insofar as it concerns
their individual franchise or right to exist as such entity. It also includes controversies in the
election or appointments of directors, trustees, officers or managers of such corporations,
partnerships or associations.

2) Corporate officers- Corporate officers, in the context of PD 902-A, are those officers of a
corporation who are given that character either by the Corporation Code or by the
corporation’s by-laws. S25 of Corporation Code enumerates the corporate officers: (1)
president; (2) secretary; (3) treasurer; and (4) such other officers as may be provided for in the
by-laws.

In Matling Industrial v. Coros, we held that a position must be expressly mentioned in the by-
laws in order to be considered a corporate office. Thus, the creation of an office pursuant to
or under a by-law enabling provision is NOT enough to make a position a corporate office.
A different interpretation can let the board of directors circumvent security of tenure of the
employee by the expedient inclusion in the by-laws of an enabling clause on the creation of just
any corporate office.

3) Resolution making GM a corporate office under enabling clause in by-laws- Here, Marc II’s
by-laws shows that its corporate officers are only: (1) Chairman; (2) President; (3) one or more
Vice-President; (4) Treasurer; and (5) Secretary. The position of General Manager was not
among those enumerated. Marc II’s by-laws empowered its board to appoint such officers as it
may deem proper. It was by virtue of this enabling provision that Marc II’s board approved a
resolution to make the position of general manager a corporate office and appointed Joson
thereto. However, Joson is not a corporate officer since his position was not mentioned in the by-
laws. The enabling clause in the by-laws allowing its board to create additional officers (i.e.
general manager) and the passage of the board resolution to that effect cannot make such
position a corporate office. Unless and until Marc II’ by-laws is amended to include General
Manager in the list of its corporate officers, such position cannot be considered as such.

4) That Joson was also a director and stockholder of Marc II does not automatically make the
case intra-corporate and subjected to RTC’s jurisdiction. Not all conflicts between stockholders
and the corporation are classified intra-corporate. Other factors, like the status or relationship of
the parties and the nature of the question subject of the controversy must be considered. There
was no evidence that Joson’s removal as GM carried with it his removal as its director or
stockholder.

5) SC held that the closure of Marc II does not fall under the authorized cause of closure due to
serious business losses since the reason for the closure was mismanagement and poor sales
collection. But Marc II still had the right to close since this is a right. Since the closure is not due
to serious business losses, Joson is entitled to separation of 1 mo pay or ½ mo per yr of service
whichever is higher. The lack of 1-month prior notice to DOLE and to Joson of the closure
entitles Joson to nominal damages.

6) Management Contract- Contention: Marc II contends that the management contract has no
binding effect on Marc II for being executed way before its incorporation.
Held: Not binding.
S19 of Corporation Code (**S18, RCC) provides that the corporation commences juridical
personality and is deemed incorporated from the date the SEC issues a certificate of
incorporation under its official seal. Logically, there is no corporation to speak of prior to an
entity’s incorporation, and no contract entered into before incorporation can bind the
corporation. Here, the management contract was executed (Jan. 16, 1994) between Joson and
Lucila months before Marc II’s incorporation (Aug. 15, 1994). Thus, it does not bind Marc II.
There is no evidence that Marc II ratified the management contract and is not estopped. Thus, the
30% of net profit compensation in the management contract cannot be the basis for computing
the separation pay.

SC thus remanded the case to LA for the sole purpose of determining the compensation that
Joson was actually receiving while he was general manager of Marc II.

7) Lucila, president of Marc II, acted in bad faith in dismissing Joson. Although Marc II has a
valid cause for dismissing Joson due to cessation of operations, the dismissal was done abruptly
by Lucila and Joson was not given the 1-month prior notice. Joson was dismissed on the same
day the corporation ceased operations. Thus, SC pierced the veil of corporate fiction and held
Lucila solidarily liable with Marc II for payment of separation pay and P50k nominal damages.

30. Sps. David v. CIAC, GR 159795, July 30, 2004, Puno, J., Second Division.
FACTS:
Petitioner Coordinated Group, Inc. (CGI) is a corporation engaged in the construction business
with petitioner Sps. Roberto and Evelyn David as its president and treasurer respectively.
Respondent Sps. Narciso and Aida Quiambao engaged the services of CGI to construct a 5-
storey building on their land in Tondo, Manila. Under the contract, CGI shall prepare the
working drawings and Sps. Quiambao shall pay CGI P7.3M. But petitioners failed to follow the
specifications as previously agreed upon. Sps. Quiambao demanded correction of the errors but
petitioners failed to act on their complaint. Thus, Sps. Quiambao rescinded the contract after
paying 74.84% of the cost of construction.

Sps. Quiambao engaged another contractor to assess petitioners’ actual accomplishment. It was
found that petitioners deviated from the structural plan of the building without notice to or
approval of Sps. Quiambao. Thus, Sps. Quiambao filed a case for breach of contract against
petitioners in RTC. The parties agreed to submit the case to CIAC. RTC transmitted the records
to CIAC.

CIAC’s sole arbitrator awarded P4.8M to Sps. Quiambao. CA affirmed, only deleting the award
for lost rentals. Hence this petition for review on certiorari.
ISSUE:
Whether Sps. David may be held liable with CGI for the award.
HELD: YES.
Under S19 of EO 1008, CIAC’s arbitral award is appealable to SC only on questions of law.

1) Contention: Petitioners claim that they had already completed 80% of the construction work
and still had 15 days to finish the project when the contract was rescinded and that they
constructed the building in accordance with the contract.
Held:
This is a question of fact. CA upheld the factual findings of the sole arbitrator that there were
deviations from the approved plans for the building and that there were defects. The arbitrator
found that the revision was due to the engineer wanting to reduce the cost of construction. He
held that whether the reason is for economy or due to underdesign of the foundation, CGI is at
fault if it made a mistake in designing the foundation or in estimating the cost of construction. It
cannot correct such mistake by revising the plans without informing Sps. Quiambaos. SC upheld
these factual findings made by the arbitrator and affirmed by CA.

2) Contention: Sps. David claims that they cannot be held solidarily liable with petitioner CGI in
payment of the arbitral award as they are merely its corporate officers.
Held: Solidarily liable.
At first glance, the issue may appear to be a question of law as it would call for application of the
law on the separate liability of a corporation. However, the law can be applied only after
establishing a factual basis, i.e., whether petitioner-spouses as corporate officers were grossly
negligent in ordering the revisions on the construction plan without the knowledge and
consent of the respondent-spouses. On this issue, the Court of Appeals again affirmed the
factual findings of the arbitrator:
As a general rule, the officers of a corporation are not personally liable for their official
acts unless it is shown that they have exceeded their authority. However, the personal
liability of a corporate director, trustee or officer, along with corporation, may so validly
attach when he assents to a patently unlawful act of the corporation or for bad faith
or gross negligence in directing its affairs . These findings of CIAC supports the ruling
that Sps. David are solidarily liable with CGI:
When asked whether the Building was underdesigned considering the poor quality
of the soil, Engr. Villasenor defended his structural design as adequate. He
admitted that the revision of the plans which resulted in the construction of
additional columns was in pursuance of the request of Engr. David to revise the
structural plans to provide for a significant reduction of the cost of construction.
When Engr. David was asked for the justification for the revision of the plans, he
confirmed that he wanted to reduce the cost of construction.
3) The factual findings of construction arbitrators are final and conclusive and not reviewable by
this Court on appeal. None of the exceptions to this rule were proven.

31. Inter-Asia Investments Industries, Inc. v. CA, GR 125778, June 10, 2003, Carpio-
Morales, J., Third Division.
FACTS:
Petitioner Inter-Asia, by a stock purchase agreement, sold to Asia Industries, Inc. (private
respondent) for P19.5M all its right, title, and interest in and to all the outstanding shares of stock
of FARMACOR, Inc. The agreement was signed by Leonides and Jesus, presidents of petitioner
and respondent respectively. The agreement provided that pending submission by SGV and Co.
of FARMACOR’s audited financial statements as of Oct. 31, 1978, respondent may retain
P7.5M of the P19.5M purchase price. Petitioner agreed to pay any shortfall on the Minimum
Guaranteed Net Worth of P12M of FARMACOR. When SGV later submitted its financial
report, FARMACOR had a net worth deficiency of P1.244M. Thus, the total shortfall was
P13.244M (12M guaranteed + 1.244 deficit). Thus, the purchase price adjusted amounted to
P6.225M (P19.5M-P13.224M). Respondent having already paid P12M was thus entitled to a
P5.744M refund.

Petitioner sent a proposal, by letter of Jan. 24, 1980, signed by its president, that respondent’s
claim for refund be reduced to P4.093M, promising to pay the cost of Northern Cotabato
Industries, Inc. (NOCOSII) superstructures of P759k. Respondent agreed. Petitioner did not pay.
Thus, respondent filed a complaint against petitioner for the balance of the purchase price
totaling P4.853M.

RTC ruled for respondent. CA affirmed. Hence this petition.

ISSUE:
Whether petitioner is bound by the Jan. 24, 1980 letter proposal signed by its president but not
authorized by its board of directors.
HELD: YES.
Contention: The Jan. 24, 1980 letter-proposal which was signed by petitioner’s president has no
legal effect against it as it was not authorized by its board of directors.

SC cites People’s Aircargo v. CA:

The general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation . A corporation is a juridical
person, separate and distinct from its stockholders and members, "having . . . powers,
attributes and properties expressly authorized by law or incident to its existence."
However, just as a natural person may authorize another to do certain acts for and on his
behalf, the board of directors may validly delegate some of its functions and powers to
officers, committees or agents. The authority of such individuals to bind the corporation
is generally derived from law, corporate bylaws or authorization from the board, either
expressly or impliedly by habit, custom or acquiescence in the general course of business.

[A]pparent authority is derived not merely from practice. Its existence may be ascertained
through (1) the general manner in which the corporation holds out an officer or agent as
having the power to act or, in other words the apparent authority to act in general, with
which it clothes him; or (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, within or beyond the scope of his ordinary
powers. It requires presentation of evidence of similar acts executed either in its favor or
in favor of other parties. It is not the quantity of similar acts which establishes apparent
authority, but the vesting of a corporate officer with the power to bind the corporation.
An officer of a corporation who is authorized to purchase the stock of another corporation has
the implied power to perform all other obligations arising therefrom, such as payment of
the shares of stock. By allowing its president to sign the Agreement on its behalf, petitioner
clothed him with apparent capacity to perform all acts which are expressly, impliedly and
inherently stated therein.

32. Megan Sugar Corporation v. RTC of Iloilo, GR 170352, June 01, 2011, Peralta, J.,
Second Division.
FACTS:
Respondent New Frontier Sugar Corporation (NFSC) obtained a loan from respondent Equitable
PCI Bank (EPCIB). The loan was secured by a REM over NFSC’s 92ha land in Passi City, Iloilo
and a chattel mortgage over NFSC’s sugar mill. Due to liquidity problems, NFSC entered into a
MOA with Central Iloilo Milling Corporation (CIMICO) where CIMICO agreed to take-over the
management of NFSC facilities for crop years 2002-2003. NFSC filed a complaint for specific
performance and collection against CIMICO. CIMICO, in turn, filed in RTC a complaint for sum
of money and breach of contract against NFSC.

Because of NFSC’s failure to pay its debt, EPCIB instituted EJ foreclosure proceedings where it
was the sole bidder. EPCIB eventually consolidated title in its name. CIMICO impleaded EPCIB
and moved for a restraining order, to stop EPCIB from taking possession, which was granted.

CIMICO and petitioner Megan entered into a MOA where Megan assumed CIMICO’s rights and
obligations over the property.

Passi Iloilo Sugar Central Inc. (Passi) filed a motion for intervention in RTC, claiming to be
EPCIB’s vendee. During the hearing for the motion for intervention, Atty. Sabig appeared in
RTC and entered his appearance as counsel for Megan. Several counsels objected since Megan
was not a party to the case. But Sabig explained that Megan had purchased the interest of
CIMICO and manifested that his statements would bind Megan.

EPCIB moved for deposit of Mill shares/resntals. RTC granted the motion to hold in escrow
sugar quedans or proceeds of sugar sales equivalent to miller’s shares. EPCIB moved for
execution, which was granted.

Megan filed in CA a petition for certiorari, arguing that RTC had no jurisdiction over Megan.
CA dismissed. Hence this petition.
ISSUE:
Whether Megan may still claim that Atty. Sabig had no authority to represent it.
HELD: NO.
Contention: Megan’s board did not issue a resolution authorizing Sabig to represent the
corporation before RTC. Thus, Sabig is an unauthorized agnet and his actions cannot bind the
corporation.
Held:
1) While it is true that Sabig said in court that he was only appearing for the hearing of Passi’s
motion for intervention and not for the case itself, his subsequent acts, coupled with Megan’s
inaction and negligence to repudiate his authority, bars Megan from assailing the validity of the
RTC proceedings under estoppel.

1.1) Atty. Sabig is not a stranger to Megan since Sabig and his law firm has represented Megan
in other cases where the opposing parties were also CIMICO and EPCIB. Such fact shows that
Megan knew Atty. Sabig.

Megan clothed Sabig with apparent authority. When Sabig entered his appearance, he was
accompanied by Concha, Megan’s director and general manager. Concha attended several
court hearings and even sent a letter to RTC asking for the status of the case. Concha’s
appearance made the parties assume that Megan had knowledge of Sabig’s actions and thus
clothed Sabig with apparent authority. Apparent authority is also referred to as the “holding
out” theory, or “doctrine of ostensible agency.”

Megan never repudiated Sabig’s authority when all the motions, pleadings, and court orders
were sent not to the office of Sabig but to the office of Megan who, in turn, would forward all of
these to Sabig. Megan had all opportunity to repudiate Sabig’s authority since all motions etc.
were sent to Megan’s office. But it never did.

The Jan. 16, 2003 RTC order directed Megan to deposit a sizable number of sugar quedans. It is
inconceivable for Sabig or Concha not to inform Megan’s board of such an order. Megan is a
family corporation, and Concha is the son-in-law of Eduardo, president of Megan. Elizabetn, a
director, is the daughter of Eduardo. Megan’s treasurer, Ramon, is their cousin. Thus, it is
unimaginable that not a single director was aware of this RTC order.

Sabig even filed motions asking for affirmative relief, like the March 27, 2003 urgent motion
asking RTC to direct Sugar Regulatory Administration (SRA) to release certain quedans in favor
of Megan on the ground that these were not covered by the RTC orders.

SC denied the petition of Megan for review on certiorari.

33. Bernas v. Cinco, GR 163356-57, July 01, 2015, Perez, J., First Division.
FACTS:
Jose Bernas et al. (Bernas Group) were among the members of the board of directors/officers of
Makati Sports Club (MSC), a domestic corporation organized for recreational and athletic
activities among its members. Jovencio Cinco et al. (Cinco group) are stockholders of the
corporation.

The MSC Oversight Committee (MSCOC), composed of past presidents of the club, alarmed
with anomalies in handling of corporate funds, called for the resignation of the Bernas group.
This call was supported by stockholders representing at least 100 shares. MSCOC called a
special meeting to remove the sitting Bernas group and electing new ones. The meeting
proceeded on Dec. 17, 1997 where Bernas group were removed from office and replaced with
Cinco group.
Bernas group filed an action with SEC, alleging that under S28 of the Corporation Code, the
Dec. 17, 1997 meeting was improperly called since the authority to call the meeting is with the
corporate secretary and not MSCOC.

Contention: Cinco group argues that it would be useless to course the request to call a meeting
thru the corporate secretary since he repeatedly refused to call a special stockholders’ meeting
despite demands and even filed suit to restrain the holding of a special meeting.

Meanwhile, the new board resolved to expel Bernas from the club by selling his shares at public
auction. An annual stockholder’s meeting was held on April 20, 1998 where majory of 2/3 of the
outstanding shares resolved to ratify the Dec. 17, 1997 special stockholder’s meeting. There was
also ratification on April, 19, 1999 and April, 17, 2000 stockholder’s annual meeting.

SEC ruled that the Dec. 17, 1997 stockholder’s meeting and the annual stockholder’s meeting on
April of 1998 and 1999 were invalid. It also nullified Bernas’ expulsion and sale of his shares.
SEC en banc reversed. CA reversed SEC en banc, holding that the Dec. 17 meeting was invalid
but the April 1998-2000 annual stockholders’ meeting were valid. Hence this petition.

ISSUE:
Whether the MSCOC has the authority to call a special stockholders’ meeting to oust the board
of directors.
HELD: NO.
The Corporation Code laid down the rules on removal of directors by providing, among others,
the persons authorized to call the meeting and the number of votes: (*S27, RCC)
Sec. 28. Removal of directors or trustees. -Xxx. A special meeting of the stockholders or
members of a corporation for the purpose of removal of directors or trustees, or any of
them, must be called by the secretary on order of the president or on the written demand
of the stockholders representing or holding at least a majority of the outstanding capital
stock, xxx. Should the secretary fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no secretary, the call for the
meeting may be addressed directly to the stockholders or members by any stockholder or
member of the corporation signing the demand.
Under MSC bylaws, special meetings may be called upon call of the president, by the board, or
on request of stockholders representing at least 100 shares.

1) Textually, only the president and board of directors are authorized by the bylaws to call a
special meeting. Here, the Dec. 17, 1997 special meeting was called by MSCOC. Nowhere in
the bylaws state that it is authorized to exercise corporate powers, like calling a special
meeting, solely vested by law and MSC bylaws on the president and board of directors.

The board of directors is a creation of the stockholders and derives its power to control the
affairs of the corporation from them. It occupies a position of trusteeship in relation to the
stockholders. The policy of the CorpCode is that corporate affairs must be governed by a board
of directors whose members have stood for election and actually elected by the stockholders
on an annual basis. Only in that way can the continued accountability to shareholders be
assured. S23 (*S22, RCC) of CorpCode is categorical that corporate powers are exercised thru its
board. The fiduciary relation is between the stockholders and board.

1.1) Illegal vs ultra vires acts- MSCOC is not empowered by law or MSC bylaws to call a
meeting and the subsequent ratification made by the stockholders did NOT cure the
substantive infirmity. There is a distinction between corporate acts/contracts which are illegal
and those which are merely ultra vires. The former contemplates the doing of an act which are
contrary to law, morals, or public policy or public duty and are void. They cannot acquire
validity by performance, ratification, or estoppel. Mere ultra vires acts, or those which are not
illegal or void ab initio, but are merely not within the scope of the AoI, are merely voidable
and may become binding when ratified by the stockholders. The Dec. 17, 1997 meeting is
void ab initio and cannot be validated.

Thus, since the special meeting of Dec. 17 is void, the removal of Bernas group and election of
Cinco group, is void. The expulsion of Bernas and sale of his shares are void also.

2) De facto officership doctrine- Cinco group cannot invoke the application of de facto
officership doctrine to justify the actions taken after the invalid election. In Cojuanco v. Roxas,
SC ruled that where PCGG sequestered the shares of petitioners, PCGG has no right to vote such
shares. Only their owners may vote them. Thus, the election of the directors thereunder was
invalid. But the respondents therein were declared de facto officers who in good faith assumed
their duties and responsibilities as duly elected members of the board. Here, Cinco group have no
colorable authority and thus cannot bind the corporation to third persons who acquired Bernas’
shares and the third persons cannot be deemed buyers in good faith.

3) Remedy if secretary refuses to call special meeting- S50 of CorpCode provides:

Sec.50. Regular and special meetings of stockholders or members- xxx. Whenever, for
any cause, there is no person authorized to call a meeting, the Securities and Exchange
Commission, upon petition of a stockholder or member, and on a showing of good cause
therefore, may issue an order to the petitioning stockholder or member directing him to
call a meeting of the corporation by giving proper notice required by this Code or by the
by-laws.
Thus, Cinco group cannot claim to have no recourse when the corporate secretary refused to
heed its demand to call a meeting despite demand from MSCOC. The remedy of the
stockholders would have been to file a petition to SEC to direct him to call a meeting by
giving proper notice. To rule otherwise would allow abuse where any stockholder could call a
special stockholder’s meeting to remove sitting officers in violation of the rules as to the call of
meeting laid down in the bylaws.

4) Bernas group cannot rely on the holdover principle to perpetuate in office since there were
new officers already duly elected in the April 1998 and 1998 annual stockholders meetings. The
conduct of the SEC-supervised April 19, 1999 annual stockholders’ meeting gave rise to the
presumption that the corporate officers who won the elections were duly elected and thus de jure
officers.
SC ruled that the Dec. 17, 1997 meeting is void. The April 1998-2000 annual stockholders’
meeting were valid except as to the ratification of the removal of Bernas Group and sale of
Bernas’ shares.

34. Federated LPG Dealers Association v. Del Rosario, GR 202639, November 09, 2016, Del
Castillo, J., Second Division.
FACTS:
Petitioner sought assistance of the PNP for the prosecution of establishments in Metro Manila for
violating BP 33 by 1) refilling LPG cylinders branded as Shellane, Petron Gasul, Caltex etc.
without authorization, 2) underfilling of LPG cylinders, and 3) refilling of LPG cylinders without
giving receipts. ACCS Ideal Gas Corporation was confirmed to be refilling branded LPG
cylinders in QC without authority. A group was organized who conducted surveillance and test-
buy. Inspection of the test-bought refilled LPG cylinders revealed that they were underfilled by
0.4 to 1.3kg. Having reasonable grounds to believe that ACCS was violating BP 33, PSupt
Esguerra filed with RTC applications for search warrant against ACCS officers, among others
respondents Cristina del Rosario, Celso Escobido, Shiela Escobido, and Resty Capili.

After the search, LPG cylinders of various brands were seized. Inspection of the filled cylinders
showed that they were underfilled by 0.5 to 0.9kg. Complaints were thus filed with DOJ against
respondents for illegal trading of petroleum products and underfilling LPG cylinders under BP
33.

Contention: Respondents claim that they cannot be liable under BP 33 since the AoI of ACCS
did not state that they were the president, general manager, managing partner, or such other
officer charged with the management of business affairs. The AoI only indicated that they were
the incorporating stockholders of ACCS.

DOJ found probable cause against Antonio, ACCS general manager, but not against respondents.
CA affirmed. Hence this petition.

ISSUE:
Whether respondents, as members of the board of directors of ACCS, can be criminally
prosecuted under BP 33.
HELD: NO.
S4, BP 33 provides:
When the offender is a corporation, partnership, or other juridical person, the president,
the general manager, managing partner, or such other officer charged with the
management of the business affairs thereof, or employee responsible for the violation
shall be criminally liable.

1) The enumeration of persons who may be held liable under BP 33 excludes members of the
board of directors. This stands to reason for the board of directors of a corporation is generally
a policy making body. Even if the corporate powers of a corporation are reposed in the board of
directors under the first paragraph of S23 of the Corporation Code, the board of directors is not
directly engaged or charged with the running of the recurring business affairs of the corporation.
Depending on the powers granted to them by the AoI, the members of the board generally do not
concern themselves with the day-to-day affairs of the corporation, except those corporate officers
who are charged with running the business of the corporation and are concomitantly members of
the board, like the President. S25 of the Corporation Code requires the president of a corporation
to be also a member of the board of directors.

Expressio unius est exclusion alterius.

1.1) Thus, if one is not president, general manager, or managing partner, then it must be shown
that he falls under the catch-all “such other officer charged with the management of the
business affairs” before he can be prosecuted. This is a factual issue which must be alleged
and supported by evidence. Here, neither of the respondents was the president/GM/MP of
ACCS. Also, the complaint merely states that respondents were members of the board of
directors of ACCS. There is no allegation that they were in charge of the management of the
corporation’s business affairs.

Thus, it is only the ACCS general manager Antonio who can be prosecuted.

35. Wesleyan University-Philippines v. Maglaya, Sr., GR 212774, January 23, 2017,

Peralta, J., Second Division.
FACTS:
Petitioner WUP is a non-stock non-profit educational corporation. Respondent Atty. Maglaya
was appointed as a corporate member on Jan. 01, 2004 and elected as member of the board of
trustees on Jan. 09, 2004, both for a period of 5y. On May 25, 2005, he was elected president for
5y. The incumbent Bishops of the United Methodist Church (Bishops) apprised all the corporate
members of the expiration of their terms on Dec. 31, 2008 unless renewed by the Bishops. The
members, including Maglaya, sought renewal of their membership. The Bishops, on April 24,
2009, introduced the new corporate members, trustees, and officers. Manuel Palomo, the new
chairman of the board, informed Maglaya of the termination of his services and authority as
president.

Maglaya filed this illegal dismissal case against WUP, Palomo et al., claiming that his 5-year
term of office was disregarded. WUP argues that Maglaya’s removal is an intra-corporate
controversy under RTC’s jurisdiction.

LA dismissed, ruling that the case was intra-corporate and within RTC’s jurisdiction. NLRC
reversed, finding that Maglaya was an employee, applying the control test. CA affirmed NLRC,
ruling that NLRC’s decision has become final. Hence this petition.

ISSUE:
Whether Maglaya is a corporate officer such that the dispute is intracorporate and within RTC’s
jurisdiction.
HELD: YES.
1) Corporate officers are those given that character by the Corporation Code or by the
corporation’s by-laws. The 3 specific officers whom a corporation must have under S25 of
Corporation Code are the president, secretary, and treasurer. A corporation may have other
officers in its by-laws. An "office" is created by the charter of the corporation and the officer is
elected by the directors or stockholders, while an "employee" usually occupies no office and
generally is employed not by action of the directors or stockholders but by the managing officer
of the corporation who also determines the compensation to be paid to such employee.

Thus, creation of the position under the corporation’s charter/bylaws and election of the
officer by the directors/stockholders must concur for an individual to be a corporate officer.

Here, WUP’s bylaws provide:

ARTICLE VI. BOARD OF TRUSTEES
xxx xxx xxx
Section 2. Membership. — (a) The Board of Trustees shall be composed of Ten (10)
members of the corporation from among themselves provided, that six (6) shall come
from the Ministry and Laity of the United Methodist [C]hurch in the Philippines xxx; (b)
provided further that the incumbent area bishop and the President of the Wesleyan
University-Philippines shall be honorary members of the Board.
Thus, the president was one of the officers of the corporation and an honorary member of the
board. He was appointed by the board and not by a managing director.

1.1) The alleged “appointment” of Maglaya instead of “election” does not convert the president
as a mere employee. With the office specifically mentioned in the bylaws NLRC erred in
taking cognizance of the case and in concluding that Maglaya was a mere employee and
subordinate official because of the manner of his appointment, his duties and responsibilities,
salaries and allowances.

Jurisdiction over subject matter is conferred by law. Since NLRC has no jurisdiction, its
judgment is void.

36. Calubad v. Ricarcen Development Corporation, GR 202364, August 30, 2017, Leonen,
J., Third Division.
FACTS:
Respondent Ricarcen was a domestic corporation engaged in renting out real estate. It was the
owner of a land in QC. It was a family corporation. Marilyn Soliman was its president. The other
members of the board were Marilyn’s mother, brother, aunt, and her sisters.

Marilyn, acting on Ricarcen’s behalf, took out a P4M loan from Calubad and mortgaged
Ricarcen’s QC property as evidenced by a deed of REM. The loan was increased by P1M thru an
Amendment of Deed of Mortgage. The loan was again increased by P2M as evidenced by a
Second Amendment of Deed of Mortgage. To prove her authority to execute the 3 mortgage
contracts for Ricarcen, Marilyn showed Calubad a board resolution and secretary’s certificate.
These were eventually found to be fabricated.

After Ricarcen failed to pay the loan, Calubad extrajudically foreclosed the REM and was the
highest bidder. The certificate of sale was annotated to the title of the QC land.

Ricarcen claims that it learned of Marilyn’s transactions with Calubad only in July 2003. It
replaced Marilyn and appointed Josefelix as new president. Ricarcen then filed its complaint for
annulment of REM and EJ foreclosure and sale with damages against Marilyn and Calubad,
claiming that it never authorized Marilyn.

RTC annulled the mortgage and EJ foreclosure and sale. It held that the lack of SPA should have
put Calubad on guard. CA affirmed, also finding that the board resolution and secretary
certificates were proven by Ricarcen to be fabricated. Hence this petition.

ISSUE:
Whether the mortgages should bind Ricarcen.
HELD: YES.
1) Calubad claims that the 4 documents that prove Marilyn’s authority to act in behalf of
Ricarcen were the board resolution and 3 secretary’s certificate, authorizing Marilyn to loan from
Calubad and mortgage the QC land. These were signed by Elizabeth as corporate secretary. But
later, Elizabetn denied signing these 4 documents, saying that she regularly signed blank
documents and left them with her sister Marilyn. She opined that the 4 documents might be
some of these blank documents. Marilyn also had possession of the owner’s duplicate copy of
the TCT of the QC land. The loan proceeds were issued thru checks payable to Ricarcen
which were deposited in its bank account and were cleared. Calubad also presented several
checks issued by Elizabeth or Erlinda jointly with Marilyn representing loan payments.
Calubad also presented withdrawal slips signed by either Elizabeth or Erlinda jointly with
Marilyn authorizing a certain Lilydale to repeatedly withdraw from Ricarcen’s bank account.

2) As a corporation, Ricarcen exercises its powers thru its board of directors as provided in S23,
CorpCode. But the board of directors may validly delegate its functions and powers to its officers
or agents. The general principles of agency govern the relationship between a corporation and its
representatives.

The 2 types of authorities conferred upon a corporate officer/agent are actual authority and
apparent authority. Actual authority may be express or implied. Express actual authority refers
to the power delegated to the agent by the corporation, while implied authority can be measured
by his prior acts which have been ratified by the corporation or whose benefits have been
accepted by the corporation.

Apparent authority is based on the principle of estoppel (Art. 1431, Art. 1869, NCC). Apparent
authority may be ascertained thru 1) he general manner by which the corporation holds out an
officer or agent as having power to act or, in other words, the apparent authority with which it
clothes him to act in general, or (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether within or without the scope of his ordinary
powers. Apparent authority is determined by the acts of the principal and not of the agent.

3) Marilyn’s broad authority can be seen how the corporate secretary entrusted her with blank
yet signed sheets of paper to be used at her discretion. She also possessed the duplicate TCT of
the QC land. Calubad issued 2 checks payable to Ricarcen representing the loan proceeds.
Ricarcen issued several checks payable to Calubad which were monthly interest payments for the
loan. As payment for the additional P2M loan, Ricarcen issued several check payments to
Calubad which were drawn by either Erlinda or Elizabeth with Marilyn.
Thus, Calubad could not be faulted for continuing to transact with Marilyn since Ricarcen
clothed her with apparent authority. It reasonably appeared that Ricarcen’s officers knew of
the mortgage contracts as proven by the check payments. It appears that Ricarcen gravely erred
in putting too much trust in Marilyn. However, Calubad, as innocent third party dealing in GF
with Marilyn, should not be made to suffer because of Ricarcen’s negligence.

37. Mactan Rock Industries, Inc. v. Germo, GR 228799, January 10, 2018, Perlas-Bernabe,
J., Second Division.
FACTS:
Petitioner MRII is engaged in supplying water. Its president/CEO is Tompar. MRII, thru
Tompar, entered into a technical consultancy agreement (TCA) with Germo, whereby the parties
agreed that Germo shall shall be MRII’s marketing consultant who shall take charge of
negotiating and perfecting sales and contracts of MRII, and that Germo shall be paid on
commission plus P5k monthly allowance. During the effectivity of the TCA, Germo successfully
negotiated and closed with International Container Terminal Services, Inc. (ICTSI) a supply
contract of 700m3 of water per day. Thus ,MRII commenced supplying water to ICTSI and
ICTSI paid MRII monthly fees. MRII allegedly never paid Germo his commissions of P2.225M.
Germo thus filed this complaint, praying that MRII and Tompar be made to pay him P2.225M
as unpaid commissions, P1M moral and P1M exemplary damages.

RTC ruled for Germo and ordered MRII and Tompar to solidarily pay him P4.499M
commissions, moral and exemplary damages, and attorneys fees. CA affirmed. Hence this
petition.

ISSUE:
Whether Tompar should be held solidarily liable with MRII.
HELD: NO.
SC found that MRII is liable to Germo, upholding the factual findings of RTC as affirmed by CA
that there really was a TCA, Germo was to be paid on commission and P5k monthly, Germa
brokered MRII’s contract with ICTSI, and that MRII refused to pay Germo.

Be that as it may, the Court finds that the courts a quo erred in concluding that Tompar, in his
capacity as then-President/CEO of MRII, should be held solidarily liable with MRII for the
latter's obligations to Germo. A corporation is a juridical entity which is vested with legal and
personality separate and distinct from those acting for and in behalf of, and from the
people comprising it. As a general rule, directors, officers, or employees of a corporation
cannot be held personally liable for the obligations incurred by the corporation, unless it can be
shown that such director/officer/employee is guilty of negligence or bad faith, and that the same
was clearly and convincingly proven. Thus, before a director or officer of a corporation can be
held personally liable for corporate obligations, these must concur: (1) the complainant must
allege in the complaint that the director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.
Here, Tompar's assent to patently unlawful acts of the MRII or that his acts were tainted by gross
negligence or bad faith was not alleged in Germo's complaint, much less proven in the course of
trial. Thus, Tompar is not solidarily liable with MRII.

38. Ient v. Tullet Prebon (Philippines), Inc., GR 189158, January 11, 2017, Leonardo-de
Castro, J., First Division.
FACTS:
Petitioner Ient is a British national and CFO of Tradition Pacific, Ltd. (Tradition Asia) in
Singapore. Petitioner Schilze is a Filipino/German who does application support for Tradition
Financial Services Ltd. in London (Tradition London). Both Tradition Asia and London are part
of the Tradition Group, third largest group of inter-dealer brokers in the world. Tullet Prebon is
allegedly the second largest. Thus, Tullet and Tradition are competitors.

Tullet was first to have business presence in PH in 1995. In Aug. 2008, Tradition Group tasked
Ient and Schilze to establish Tradition PH. In Sept., 2008, Tradition PH was registered with SEC
with Ient and Shilze as incorporators and directors.

Tullet filed a complaint with the Makati Prosecution Office against Tradition Group officers for
violating the CorpCode, impleading Ient and Chilze, Villalon (former president of Tullet), and
Chuidian (former Tullet director). Tullet alleges that Villalon and Chuidian violated S31 and 34
of CorpCode and thus are criminally liable under S144.

The complaint alleged that Villalon and Chuidian used their former positions in Tullet to
sabotage Tullet by orchestrating the mass resignation of its entire brokering staff to convince
them to leave Tullet and go to Tradition PH. as for Ient and Schulze, Tullet claims that they
conspired with Villalon and Chuidian.

Ient argues that S144 cannot be applied to S31 and 34 which already contain the penalties for
their violation.

SOJ directed the filing of na information for violation of S31 and 34 in relation to S144 of
CorpCode against Villalon, Chuidian, Ient, and Chulze. Thus, 2 informations were filed, one for
violation of S31 and another for violation of S34 in MTC. Ient and Schulze filed a R65 petition
for certiorari of the SOJ’s order with CA. CA affirmed SOJ. Hence this petition for review.

ISSUE:
Whether S144 of the CorpCode applies to S31 and S34 thereof.
HELD: NO.
CorpCode S31 (*S30, RCC), 34 (*S33, RCC), and 144 (*S170, RCC) provide:
SECTION 31. Liability of Directors, Trustees or Officers. — Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the corporation or
who are guilty of gross negligence or bad faith in directing the affairs of the corporation
or acquire any personal or pecuniary interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed in
 him in confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.
SECTION 34. Disloyalty of a Director. — Where a director, by virtue of his office,
acquires for himself a business opportunity which should belong to the corporation,
thereby obtaining profits to the prejudice of such corporation, he must account to the
latter for all such profits by refunding the same, unless his act has been ratified by a vote
of the stockholders owning or representing at least two-thirds (2/3) of the outstanding
capital stock. This provision shall be applicable, notwithstanding the fact that the director
risked his own funds in the venture.
SECTION 144. Violations of the Code. — Violations of any of the provisions of this
Code or its amendments not otherwise specifically penalized therein shall be punished by
a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand
(P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more
than five (5) years, or both, in the discretion of the court. If the violation is committed by
a corporation, the same may, after notice and hearing, be dissolved in appropriate
proceedings before the Securities and Exchange Commission: Provided, That such
dissolution shall not preclude the institution of appropriate action against the director,
trustee or officer of the corporation responsible for said violation: Provided, further, That
nothing in this section shall be construed to repeal the other causes for dissolution of a
corporation provided in this Code.

Contentions: Petitioners posit that S144 does not apply to S31 and S34 which both prescribe the
penalties for their violation. Respondent argues that the term “penalized” under S144 should be
interpreted as referring to criminal penalty (fine/imprisonment) and it does not contemplate
“civil” penalties (damages/accounting/restitution) and thus applies to S31 and S34.
Held: S144 does NOT apply to S31 and S34.
1) Penal statutes are construed strictly against the state and liberally in favor of the accused.
Related to the in dubio pro reo principle is the rule of lenity- when the court is faced with two
possible interpretations of a penal statute, one that is prejudicial to the accused and another that
is favorable to him, the rule calls for the adoption of an interpretation more lenient to accused.

Here, there is textual ambiguity to S144. Thus, the rule of lenity applies.

1.1)In Romualdez v. Comelec, we upheld the constitutionality of S45(j) of RA 8189 making any
violation of RA 8189 a criminal offense. RA 8189 (Voter’s Registration Act) S45 and S46
provide:
SECTION 45. Election Offense. —The following shall be considered election offenses
under this Act:
j) Violation of any of the provisions of this Act.
SECTION 46. Penalties. — Any person found guilty of any Election offense under this
Act shall be punished with imprisonment of not less than one (1) year but not more than
six (6) years and shall not be subject to probation. In addition, the guilty party shall be
sentenced to suffer disqualification to hold public office and deprivation of the right of
suffrage. Xxx.
We held that from the wording of S45(j), there is a clear legislative intent to treat as election
offense any violation of RA 8189. Thus, S46 contemplates the term “penalty” primarily in the
criminal law concept. there is no provision in CorpCode using similarly emphatic language.

1.2) Other provisions of CorpCode are of interest:

SECTION 21. Corporation by Estoppel. — All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as general partners
for all debts, liabilities and damages incurred or arising as a result thereof; xxx.
SECTION 22. Effects of non-use of corporate charter and continuous inoperation of a
corporation. —If a corporation does not formally organize and commence the transaction
of its business or the construction of its works within two (2) years from the date of its
incorporation, its corporate powers cease and the corporation shall be deemed dissolved.
SECTION 65. Liability of directors for watered stocks. —Any director or officer of a
corporation consenting to the issuance of stocks for a consideration less than its par or
issued value or for a consideration in any form other than cash, valued in excess of its fair
value, or who, having knowledge thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary, shall be solidarily liable with the
stockholder concerned to the corporation and its creditors for the difference between the
fair value received at the time of issuance of the stock and the par or issued value of the
same.
SECTION 66. Interest on unpaid subscriptions. — Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions xxx.
SECTION 67. Payment of balance of subscription- xxx. Failure to pay on such date shall
render the entire balance due and payable and shall make the stockholder liable for
interest at the legal rate on such balance, unless a different rate of interest is provided in
the by-laws, computed from such date until full payment
SECTION 74. Books to be kept; stock transfer agent.- xxx. 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 of this Code:
Of all these, only S74 expressly states that a violation thereof is likewise considered an
offense under S144. The lack of specific language imposing criminal liability in S31 and S34
shows the legislative intent to limit the consequences of their violation to civil liabilities
mentioned therein. had it been the intent to define S31 and S34 as offenses, they could have
easily included similar language as that found in S74.

1.3) During the deliberations of the legislators on S31 and 34, their discussions focused on the
civil liabilities or consequences prescribed in said provisions themselves. When S31 and S34
were being taken up, the legislators did not veer away from the civil consequences as stated
within the 4 corners of these provisions. In contrast, the interpellations on S74 leave no doubt
that the legislators intended both civil and penal liabilities to attach to corporate officers who
violate S74.
It is noteworthy from the deliberations that the legislators intended to codify the common law
concepts of corporate opportunity (S34) and fiduciary obligations of corporate officers
found in American jurisprudence. In common law, the remedies available in the event of breach
of director’s fiduciary duties to the corporation are civil remedies. If a director/officer breaches
his duty of loyalty, an injunction may be issued or damages awarded. If guilty of fraud, he may
be held liable for lost profits. There is nothing in the deliberations to indicate that the drafters of
the CorpCode intended to deviate from common law practice.

V. Corporate Powers
39. Nielson & Company, Inc. v. Lepanto Consolidated Mining Company, GR L-21601,
December 28, 1968, Zaldivar, J., En Banc.
FACTS:
MR of SC’s decision dated Dec. 17, 1966. Facts in the original decision:
Before World War II, Nielson and Lepanto executed an operating agreement where Nielson
operated and managed the mining properties owned by Lepanto. The contract was made on Jan.
30, 1937 for 5 years. This was extended for another 5 years in the latter part of 1941. Under the
contract, Nielson was to receive 10% of dividends declared and paid during the period of the
contract and at the end of each year, 10% of depletion reserve, and 10% of any amount expended
during the year out of surplus earnings.

But in Dec. 1941, the Pacific War broke out. In Jan. 1942, operation of the mining properties was
disrupted due to the war. In Feb. 1942, the equipment, mill, supplies etc. were destroyed on
orders of the US army to prevent their use by the invading Japanese. The Japanese occupied the
mining properties until their ouster in Aug. 1945.

After the mining properties were liberated, Lepanto took possession and reconstructed and
rebuilt the mines and mill, repairing the mines, erecting staff quarters, repairing structures, etc.
This reconstruction was completed in 1948. On June 26, 1948, the mines resumed operation
under the exclusive management of Lepanto.

Shortly after the mines were liberated in 1945, a disagreement arose between Nielson and
Lepanto over the status of the contract which, as renewed, expired in 1947. Under the terms
thereof, the management contract shall be suspended in case of force majeure like war etc. which
adversely affects the work of mining.

Nielson brought this action against Lepanto on Feb. 06, 1958 in CFI to recover damages due to
refusal of Lepanto to comply with the management contract. Nielson claims that the contract was
suspended during the war and thus must be considered extended for the period of suspension.
Lepanto claims that the contract should expire in 1947.

ISSUE:
Whether Lepanto, in issuing stock dividends during the extended period of the management
contract, may be required to give 10% of such stock dividends to Nielson who is not a
stockholder of Lepanto.
HELD: NO.
1) Contention: Lepanto claims that the management contract is a contract of agency such that it
has the right to revoke it at any time (Art. 1920, NCC) because: 1) Nielson was to operate the
mining properties for Lepanto’s account, 2) Nielson was authorized to represent Lepanto and
enter into contracts for Lepanto’s behalf (juridical acts).
Held: Contract for lease of services.
Agency, however, is distinguished from lease of work or services in that the basis of agency is
representation, while in the lease of work or services the basis is employment. The lessor of
services does not represent his employer, while the agent represents his principal. The agent is
destined to execute juridical acts (creation, modification, or extinction of relations with third
parties). Lease of services contemplate only material (non-juridical) acts.

Here, the work undertaken by Nielson was to take complete charge, subject at all times to the
general control of the Board of Directors of Lepanto, of the exploration and development of the
mining claims, of the hiring of a sufficient and competent staff and of sufficient and capable
laborers, of the prospecting and development of the mine, etc. Nielson was to submit reports,
maps, plans and recommendations with respect to the operation and development of the mining
properties, make recommendations on the erection or enlargement of mills, etc. to Lepanto.
Nielson was also to "act as purchasing agent of supplies, equipment and other necessary
purchases by Lepanto, provided, however, that no purchase shall be made without the prior
approval of Lepanto.

Thus, the principal and paramount undertaking of Nielson under the management contract was
the operation and development of the mine and the operation of the mill. All the other
undertakings mentioned in the contract are necessary or incidental to the principal undertaking.
In performing this principal undertaking, Nielson was not executing juridical acts for Lepanto. It
was performing material acts for an employer for a compensation.

It is true the contract provides that Nielson would act as purchasing agent of supplies and enter
into contracts for sale of mineral, but the contract also states that Nielson could not make any
purchase, or sell minerals, without the prior approval of Lepanto. Thus, Nielson was to act only
as an intermediary, not as agent.

1.1) Also, the contract stated that “NIELSON agrees that LEPANTO may cancel this Agreement
at any time upon ninety (90) days written notice, in the event that NIELSON for any reason
whatsoever, except acts of God, strike and other causes beyond its control, shall cease to
prosecute the operation and development of the properties herein described, in good faith and in
accordance with approved mining practice." Thus, Lepanto cannot terminate the contract at will
but only if Nielson should prosecute in BF and giving 90d notice.

2) SC held in its main decision that the period of the contract was suspended during the war and
extended for the time when Nielson was unable to perform the work of mining and milling. Par.
II of the management contract provides:
"In the event of inundation, flooding of the mine, typhoon, earthquake or any other force
majeure, war, insurrection, civil commotion, organized strike, riot, fire, injury to the
machinery or other event or cause reasonably beyond the control of NIELSON and which
adversely affects the work of mining and milling; NIELSON shall report such fact to
 LEPANTO and without liability or breach of the terms of this Agreement, the same shall
remain in suspense, wholly or partially during the terms of such inability.
The suspension did not end upon liberation of the mines in August 1945. It was only on June 26,
1948 that the adverse effects of the war on the work of mining had ended since it was on that
date that operations resumed. The suspension is thus from Feb. 1942 to June 26, 1948.

A contract for management/operation of mines calls for a speculative and risky venture by the
manager-operator. He may not strike sufficient ore even until the end of the fifth year and thus
cannot expect any profit for his investments. And even if profits start to be realized, the expected
profits would still be subject to fortuitous events like war, fires, etc. which would result in
destruction of the mill. Thus, SC held that the nature of the contract for management and
operation of mines justifies the interpretation of Par.II that a period equal to the suspension
should be added to the original term as extension.

3) Contention: Lepanto claims that SC erred in awarding as damages 10% of the stock dividends
issued by Lepanto.
Held: Stock dividends can be issued only to stockholders.
On Nov. 28, 1949, Lepanto declared stock dividends worth P1M and on Aug. 22, 1950, worth
P2M. SC held in the main decision that Nielson is entitled to receive 10% of the stock dividends
declared or shares of stock worth P300k.

S16 of the Corporation Law (S42, RCC?*) provides:

"No corporation organized under this Act shall create or issue bills, notes or other
evidence of debt, for circulation as money, and no corporation shall issue stock or bonds
except in exchange for actual cash paid to the corporation or for: (1) property actually
received by it xxx or for (2) profits earned by it but not distributed among its stockholders
or members;
"No corporation shall make or declare any dividend except from the surplus profits
arising from its business,

Original shares of stock can be issued to non-stockholders- From S16, the consideration for
which shares of stock may be issued are: cash, property, and undistributed profits. A corporation
may legally issue shares of stock in consideration of services rendered to it by a person not a
stockholder, or in payment of its indebtedness. A share of stock issued to pay for services
rendered (or for indebtedness) is equivalent to a stock issued in exchange of property (or cash for
the debt), because services is equivalent to property. But a share of stock thus issued should be
part of the original capital stock of the corporation upon its organization, or part of the stocks
issued when the increase of the capitalization of a corporation is properly authorized. In other
words, it is the shares of stock that are originally issued by the corporation and forming part of
the capital that can be exchanged for cash or services rendered, or property; that is, if the
corporation has original shares of stock unsold or unsubscribed, either coming from the original
capitalization or from the increased capitalization, those shares of stock may be issued to a
person who is not a stockholder, or to a person already a stockholder in exchange for services
rendered or for cash or property.
But stock dividends can be issued only to stockholders- But a share of stock coming from stock
dividends declared cannot be issued to one who is not a stockholder of a corporation.

A stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and is
properly payable only out of surplus profits. So, a stock dividend is actually two things: (1) a
dividend, and (2) the enforced use of the dividend money to purchase additional shares of stock
at par. When a corporation issues stock dividends, it shows that the corporation's accumulated
profits have been capitalized instead of distributed to the stockholders or retained as surplus
available for distribution, in money or kind, should opportunity offer. Far from being a
realization of profits for the stockholder, it tends rather to postpone said realization, in that the
fund represented by
the new stock has been transferred from surplus to assets and no longer available for actual
distribution. Thus, it is apparent that stock dividends are issued only to stockholders. This is so
because only stockholders are entitled to dividends. They are the only ones who have a right
to a proportional share in that part of the surplus which is declared as dividends. A stock
dividend really adds nothing to the interest of the stockholder; the proportional interest of each
stockholder remains the same. Stock dividends are civil fruits of the original investment, and to
the owners of the shares belong the civil fruits.

“Dividend” is that portion of the profits that the corporation sets apart for ratable division among
the holders of capital stock. Thus, Nielson cannot be paid in shares of stock which are part of
Lepanto’s stock dividends.

3.1) The understanding between Lepanto and Nielson was simply to make the cash value of the
stock dividends declared as the basis for determining the amount of compensation that should be
paid to Nielson, in the proportion of 10% of the cash value of the stock dividends declared. In
other words, if, for example, cash dividends of P300,000.00 are declared. Nielson would be
entitled to a compensation of P30,000.00, but this P30,000.00 should not be taken from the
P300,000.00 to be distributed as cash dividends to the stockholders but from some other funds or
assets of the corporation which are not included in the amount to answer for the cash dividends
thus declared. This is so because if the P30,000.00 would be taken out from the P300,000.00
declared as cash dividends, then the stockholders would not be getting P300,000.00 as dividends
but only P270,000.00.

Thus, SC ruled that Nielson is entitled to payment not of the P300k stock dividends it had
originally ruled in its main decision, but to P300k in cash instead which is equivalent to 10% of
the P3M stock dividends declared.

40. Islamic Directorate of the PH v. CA, GR 117897, May 14, 1997, Hermosisima, Jr., J.,
First Division.
FACTS:
In 1971, Islamic leaders of all Muslim major tribal groups in the Philippines organized and
incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES (IDP), the primary
purpose of which is to establish an Islamic Center in Quezon City for, the construction of a
Mosque and Arabic School and other religious infrastructure to facilitate the practice of Islamic
faith in QC. The Libyan government donated money to IDP to purchase land at Culiat, Tandang
Sora, QC to be used as a center for the Islamic populace. The land, with an area of 49,652m2,
was registered in IDP’s name.

In 1971, the IDP board of trustees was composed of Senator Mamintal Tamano et al. (Tamano
group). In 1972, martial law was declared by Marcos. Most of the members of Tamano group
flew to the Middle East to escape political persecution.

SEC ruling that Carpizo and Abbas groups’ elections are void- Thereafter, 2 Muslim groups
sprung, Carpizo group, headed by Engr. Carpizo, and Abbas group, led by Atty. Abbas, both
claiming to be the legitimate IDP. In a suit between the two groups, SEC ruled that both Carpizo
and Abbas group’s elections as IDP board are void. SEC then authorized the IDP members to
adopt by-laws after which adoption they can elect board of trustees. But neither group took the
necessary steps prescribed by SEC, thus no valid election of the board took place.

SEC case 4012- Without being elected as board of trustees of IDP, Carpizo group signed a board
resolution, authorizing the sale of 2 lands to respondent Iglesia ni Cristo (INC) for P22M thru a
deed of absolute sale in 1989. In 1991, petitioner 1971 IDP Board of trustees Tamano group filed
a petition in SEC (SEC Case 4012) to declare this sale void.

Civil case Q-90-6937- Meanwhile, INC filed an action for specific performance (Case Q-90-
6937) against Carpizo group to compel it to deliver possession to INC. Tamano group sought to
intervene. RTC denied, ruling that the issues being raised are intra-corporate and thus SEC has
jurisdiction. RTC ruled that INC was the owner and SC later affirmed (GR 107751), ordering
that one Ligon deliver the titles to the property to INC.

In SEC Case 4012, SEC eventually ruled that the deeds of sale are void. INC’s motion to
intervene in this case was denied. It filed a R65 certiorari with CA. CA reversed the SEC ruling.
Hence this petition for review by Tamano group.

ISSUE:
Whether the sale of the property to INC by Carpizo group, whose election as board of trustees of
IDP was declared void by SEC, is valid.
HELD: NO.
1) The SC ruling in GR 107751 is not res judicata since there is no identity of parties. The
principal parties in GR 107751 was mortgagee Ligon as petitioner and INC as respondent.

Moreover, although it is true that Civil Case Q-90-6937, which gave rise to GR 107751, was
entitled Iglesia ni Kristo v. Islamic Directorate of the PH, IDP cannot be considered a formal
party thereto for the simple reason that it was not duly represented by a legitimate board of
trustees in that case. Thus, Case Q-90-6937 did not become final and executory insofar as
the true IDP is concerned since IDP, for want of legitimate representation, was deprived of
its day in court. Matters adjudged in cause do not prejudice those who were not parties to it.

2) SEC has authority to pass upon the issue as to who among the different contending groups is
the legitimate BoT of IDP since this falls within its original and exclusive jurisdiction under PD
902-A, S3 and 5(c):
"Section 3. The Commission shall have absolute jurisdiction, supervision and control
over all corporations, partnerships or associations, who are the grantees of primary
franchises and/or a license or permit issued by the government to operate in the
Philippines . . ."
xxx xxx xxx
Section 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:
xxx xxx xxx
c) Controversies in the selection or appointment of directors, trustees, officers, or
managers of such corporations, partnerships or associations xxx.

SEC here ruled that Carpizo group’s election as BoT is void, in effect finding Carpizo group a
bogus BoT. Thus, Carpizo group is bereft of any authority to bind IDP in any kind of
transaction including the sale to INC. Thus, all acts carried out by the Carpizo BoT,
particularly the sale of the Tandang Sora property, is void for being done without the consent of
IDP thru a legitimate BoT (Art. 1318, consent, requisite of contracts).

3) There is also failure to comply with S40 of CorpCode (*S39, RCC):

"Sec. 40. Sale or other disposition of assets. — xxx, a corporation may, by a majority
vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and assets, xxx, when
authorized by the vote of the stockholders representing at least two-third (2/3) of the
outstanding capital stock; or in case of non-stock corporation, by the vote of at least two-
thirds (2/3) of the members, in a stockholders' or members' meeting duly called for the
purpose.
Here, the Tandang Sora property constitutes the only property of IDP. Thus, it is a sale of all
corporate property of IDP falling within S40. The twin requirements of majority vote of the
legitimate BoT and 2/3 vote of the members were not met as the Carpizo group was a fake BoT
and those whose names and signatures were affixed by Carpizo group, together with the sham
board resolution authorizing the sale, were not bona fide members of IDP as they were made to
appear. Apparently, there are only 15 official members of the petitioner corporation including the
eight (8) members of the Board of Trustees.

41. Dee v. SEC, GR 60502, July 16, 1991, Paras, J., En Banc.
FACTS:
Naga Telephone Company (Natelco) was organized in 1954 with authorized capital of P100k. In
1974, it filed an application with the National Telecommunications Commission (NTC) to
increase its authorized “capital” to P3M, which application was required under the Public
Service Act for Natelco to increase its authorized capital. NTC granted subject to the condition
that the issuance of shares will be for 1 year only, after which no further issues will be made
without previous authority from NTC.

On April 12, 1977, Natelco entered into a contract with Communication Services, Inc. (CSI) for
the manufacture and installation of telephone equipment. Natelco issued 24k common shares to
CSI as downpayment. In 1979, another 12k common shares were issued to CSI. No prior
authorization from NTC was secured as required by the condition for the increase of its capital.

On May 19, 1979, Natelco held their annual stockholders’ meeting to elect 7 directors for 1979-
1980. Pedro Lopez Dee was unseated as chairman and elected as one of the directors with his
wife Amelia. CSI gained control of Natelco when the latter’s legal counsel, Atty. Maggay, won a
seat in the board with CSI’s help. Maggay became president.

SEC Case 1748- Petitioner Pedro Dee, having been unseated, filed a petition in SEC (SEC Case
1748) questioning the validity of the May 19, 1979 elections on the ground that there was no
valid list of stockholders thru which the right to vote could be determined. The Maggay board
did not reform the April 12, 1977 contract with CSI and entered into another contract with CSI
for supply and installation of additional equipment and also issued to CFI 113,800 common
shares.

SEC hearing officer in Case 1748 ordered a special stockholders’ meeting to elect a new board of
directors. SEC en banc, on certiorari by Dee, affirmed the order of new elections. Thus, SEC
hearing officer set the new elections on May 22, 1982.

Civil Case 1507- On May 20, 1982, petitioner Villasenor filed Civil Case 1507 in CFI
principally against Maggay group (**those elected with Maggay in the May 19, 1979 elections),
alleging that he was an assignee of an option to repurchase 36k common shares of Natelco and
that Maggay group refused to allow repurchase of said stocks. The complaint prayed for the
allowance of the repurchase and for the election of May 22, 1982 to be enjoined. CFI issued a
restraining order on May 21, 1982. But the majority of Natelco stockholders defied this and
proceeded with the May 22, 1982 elections under SEC supervision. SEC recognized the elections
and proclaimed the “duly elected directors” of Natelco, with Maggay as president.

Villasenor filed a charge for contempt alleging that respondents are claiming in press
conferences that they held elections on May 22, 1982 and that they have a new set of officers.
CFI found respondents guilty of contempt of court. CFI also commanded the sheriff with the aid
of law enforcement to “oust from the offices of directors of Natelco.”

Respondents filed a petition for certiorari against the CFI order and against petitioners. IAC
ruled that the “hold-over” directors of Natelco, petitioners, vacate their offices and directing
them to restore respondents to the position. Thus, Maggay group was restored as officers of
Natelco. Hence these petitions.

ISSUES:
1) Whether SEC had jurisdiction to rule on the validity of the issuance of shares to CSI.
3) Whether issuance of shares must be with notice and approval of the stockholders.
HELD:
1) NO. Contention: SEC en banc committed gadalej when it refused to declare void the shares
issued by Natelco to CSI which issuance is in violation of S20(h) of Public Service Act requiring
administrative approval of any sale of shares of any public service vesting in the transferee more
than 40% of the subscribed capital of the public service.
Held:
PD 902-A, S5 enumerates the jurisdiction of SEC. Before SEC can take cognizance of a case, the
controversy must pertain to any of the following relationships: (a) between corporation,
partnership or association and the public; (b) between the corporation, partnership, or association
and its stockholders, partners, members or officers; (c) between the corporation, partnership or
association and the state insofar as its franchise, permit or license to operate is concerned; and
(d) among the stockholders, partners, or associates themselves.

Thus, SEC’s jurisdiction in SEC Case 1748 is limited to deciding the controversy in the election
of directors and officers of Natelco. Thus, it was correct in refusing to rule on whether there was
violation of S20(h) of Public Service Act. SEC is empowered by PD 902-A to decide intra-
corporate controversies and that is precisely the only issue in this case.

2) The issuance of the 113,800 shares to CSI was valid since its issuance was pursuant to a board
resolution and stockholders’ approval prior to May 19, 1979 when CSI was not yet in control of
the board or of the voting shares, even if the actual issuance of the shares was after May 19, 1979
which was only pursuant to the original board resolution.

3) Pre-emption- NO. Contention: Petitioner Dee claims that the Maggay Board, in issuing the
113,800 shares without notifying Natelco shareholders, violated their right of pre-emption to the
unissued shares. In Benito v. SEC, petitioner bewailed the fact that due to the lack of notice of
the subsequent issuance, he was unable to exercise his right of pre-emption over the unissued
shares.
Held:
Pre-emptive right is recognized only with respect to new issues of shares, and NOT as to
additional issues of originally authorized shares. This is on the theory that when a corporation
at its inception offers its first shares, it is presumed to have offered all of those which it is
authorized to issue. An original subscriber is deemed to have taken his shares knowing that
they form a definite proportionate part of the whole number of authorized shares. When
the shares left unsubscribed are later reoffered, he cannot therefore claim a dilution of interest.

The questioned issuance of the 113,800 stocks is not invalid even assuming that it was made
without notice to the stockholders as claimed by the petitioner. The power to issue shares of
stocks in a corporation is lodged in the board of directors and no stockholders meeting is
required to consider it because additional issuance of shares of stocks does not need approval of
the stockholders. Consequently, no pre-emptive right of Natelco stockholders was violated by
the issuance of the 113,800 shares to CSI.

4) Nowhere does PD 902-A empower any CFI to interfere with the orders of SEC. Not even on
grounds of due process or jurisdiction. The Commission is, conceding arguendo a possible claim
of respondents, at the very least, a co-equal body with the CFI. Even as such co-equal, one would
have no power to control the other. Only SC can enjoin any actuation of SEC. thus, since CFI did
not have jurisdiction in issuing the restraining order of the May 22 election, disobedience thereof
is not contempt.

42. Jiao et al. v. NLRC, GR 182331, April 18, 2012, Reyes, J., Second Division.
FACTS:
Old plan- Petitioners were regular employees of PH Banking Corporation (Philbank) each with
at least 10y of service in the company. On Aug. 28, 1970, Philbank established a gratuity pay
plan (Old Plan) for its employees, which provided that any employee who has reached the age of
60yo or wishes to retire/resign prior to such age or is separated from services due to reasons
beyond his control can apply for benefits under the plan of 1mo salary per year of service based
on last salary received. An employee with 10y or more service is entitled to full gratuity pay
maximum of 2y salary.

New plan- On March 8, 1991, Philbank implemented a new Gratuity Pay Plan (New Plan), which
stated that employees involuntarily separated is entitled to either “100% of his accrued gratuity
benefit or the actual benefit due him under the plan, whichever is greater.”

SSP- In February 2000, Philbank merged with Global Business Bank, with Philbank as the
surviving corporation but the bank operated under the name Global Business Bank. Due to the
merger, petitioners’ positions became redundant. A Special Separation Progran (SSP) was
implemented and petitioners were granted a separation package of 150% of one month’s salary
per year of service based on current salary. Petitioners were required to sign an Acceptance
Letter and a Release, Waiver, Quitclaim.

Metrobank- In August 2002, respondent Metrobank acquired the assets and liabilities of
Globalbank thru a Deed of Assignment of Assets and Assumption of Liabilities.

Petitioners filed complaints for non-payment of separation pay in NLRC, claiming that under the
Old Plan, they were entitled to an additional 50% of gratuity pay on top of the 150% of one
month’s salary per year of service that they received under SSP. They claim that this is also the
same computation under the new plan.

Petitioners claim that they were defrauded into signing their quitclaims. Globalbank asserted that
SSP prevails and petitioners were not entitled to the additional 50%. Metrobank claims that there
is no employer-employee relationship between it and petitioners since petitioners’ employment
was already severed when it acquired Globalbank and that liabilities of Globalbank to its
employees were not among the obligations that it assumed.

LA dismissed the complaint of petitioners. NLRC affirmed. CA dismissed for failure to file MR
which is required under R65 certiorari. Hence this petition.

ISSUE:

HELD:
1) SC held that Globalbank is not liable for petitioners’ claims. SC held that petitioners’
unexplained failure to file MR of the NLRC’s resolution is enough to deny the certiorari with
CA. Petitioners’ benefits under SSP more than complies with the Labor Code which only
requires 1 month salary per year of service separation pay. Petitioners had no vested rights over
the benefits under the Old Plan since none of the events therein contemplated (retire/separation
due to reasons beyond control) occurred prior to its repeal by the New Plan. SC held that as long
as the minimum requirements of the Labor Code are met, it is within management prerogative of
employers to come up with separation packages to be given in lieu of what is provided under
Labor Code.

SC also held that the acceptance letters and quitclaims of petitioners are binding upon them in
the absence of vices of consent. The requisites for valid quitclaims were met: 1) employee
executes the quitclaim voluntarily, 2) no fraud or deceit by any party, 3) consideration of the
quitclaim is credible and reasonable, 4) the contract is not contrary to law, public order, public
policy, morals, good customs, or prejudicial to a third person with a right recognized by law.

2) SC discussed Metrobank’s liabilities supposing that Globalbank were liable. Even then, SC
said that Metrobank cannot be held liable for petitioners’ claims.

As a rule, a corporation that purchases the assets of another will NOT be liable for the debts of
the selling corporation, provided the former acted in good faith and paid adequate
consideration for such assets, except when any of the following circumstances is present: (1)
where the purchaser expressly or impliedly agrees to assume the debts; (2) where the transaction
amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation
is merely a continuation of the selling corporation; and (4) where the selling corporation
fraudulently enters into the transaction to escape liability for those debts.

Here, under the Deed of Assignments of Assets and Assumption of Liabilities between
Globalbank and Metrobank, Metrobank accepted Globalbank’s assets in exchange for assuming
its liabilities. The liabilities that Metrobank assumed are: deposit liabilities; interbank loans
payable; bills payable; manager's checks and demand drafts outstanding; accrued taxes, interest
and other expenses; and deferred credits and other liabilities. From this enumeration, Metrobank
assumed liabilities pertaining only to Globalbank’s banking operation. They do not include
Globalbank’s liabilities to pay separation pay to its former employees. This must be so
because it is understood that the same liabilities ended when the petitioners were paid the
amounts embodied in their respective acceptance letters and quitclaims. Hence, this obligation
could not have been passed on to Metrobank.

2.1) Contention: Metrobank is liable as the “parent” company of Globalbank and majority of
Globalbank’s board of directors are also members of Metrobank’s board.
Held:
But Globalbank has a separate and distinct personality. The fiction of corporate entity can
only be disregarded or pierced when it is used to defeat public convenience, justify wrong,
protect fraud, or defend crime. Moreover, to justify the disregard of the separate juridical
personality of a corporation, the wrongdoing must be clearly and convincingly established.
Here, none of these circumstances is present to warrant piercing.
43. Loyola Grand Villas Homeowners (South) Association v. CA, GR 117188, August 07,
1997, Romero, J., Second Division.
FACTS:
Loyola Grand Villas Homeowners Association (LGVHAI) was organized on Feb. 08, 1983 as
the association of homeowners and residents of the Loyola Grand Villas, a registered subdivision
in QC and Marikina City. But LGVHAI did not file its corporate by-laws. In 1988, when
LGVHAI officers tried to register its by-laws, they failed to do so. They discovered that there
were two other organizations in the subdivision: the Loyola Grand Villas Homeowners (North)
Association Inc. (North Association) and LGVH(South) Association (South Association).

Soliven, head of the South Association, had inquired about the status of LGVHAI with the Home
Insurance Guaranty Corporation (HIGC). HIGC legal department head said that LGVHAI had
been automatically dissolved because there was non-user of corporate charter. Thus, South
Association was registered.

Thus, LGVHAI officers filed a complaint with HIGC, questioning the revocation of LGVHAI’s
certificate of registration without due notice and hearing and prayed for cancellation of the
registration of the North and South Associations due to the earlier issuance of a certificate of
registration in favor of LGVHAI.

HIGC Hearing Officer revoked the North and South Association’s registration. HIGC Appeals
Board affirmed. CA affirmed. Hence this petition.

ISSUE:
Whether the non-filing by LGVHAI of its by-laws gives rise to its automatic dissolution.
HELD: NO.
Contention: Petitioner claims that since S46 of Corporation Code uses the word “must”, non-
compliance therewith results in self-extinction due to non-occurrence of a suspensive condition
or occurrence of a resolutory condition. S46 is thus a mandatory provision since the period of
compliance is “spelled out distinctly.” It claims that there is no sanction for non-compliance
provided in the Corporation Code because in the first place, no corporate identity has been
completed yet.
Held:
1) S46 of the Corporation Code provides:
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must, within
one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission, adopt a code of by-laws for
its government not inconsistent with this Code.

Ordinarily, “must” connotes an imperative act. But “must” in a statute is not always imperative.
In this jurisdiction, the tendency has been to interpret “shall” or “must” as the context or a
reasonable construction of a statute in which it is used means or requires. SC cited the
deliberations of the legislators of BP68 (Corporation Code) and found that it was never the
intention of the legislature that there would be automatic corporate dissolution for failure
to file the by-laws on time.
Moreover, S46 reveals the legislative intent to attach a directory, and not mandatory, meaning
for “must.” The second paragraph, which allows filing of by-laws even prior to incorporation,
rules out mandatory compliance with the 1 month period.

1.1) By-laws not needed for corporate existence- By-laws may be necessary for the
"government" of the corporation but these are subordinate to the articles of incorporation as well
as to the Corporation Code and related statutes. There are in fact cases where by-laws are
unnecessary to corporate existence or to the valid exercise of corporate powers. “In the absence
of statutory provisions to the contrary, by-laws are not necessary to the existence of a
corporation. Where the governing statute confers on the corporation the power to adopt by-laws,
failure to exercise the power will be ascribed to mere nonaction which will not render void any
corporate acts.”

2) The CorpCode does not provide for the consequences of non-filing of by-laws within the
1month period. But such omission has been rectified by PD902-A:
"SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess
the following powers:
xxx xxx xxx
(I) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships or associations, upon any of the grounds
provided by law, including the following:
xxx xxx xxx
5. Failure to file by-laws within the required period;

Even under PD902-A, there is no automatic corporate dissolution. The incorporators must be
given the chance to explain their neglect or omission and remedy the same. Failure to file
by-laws does automatically operate to dissolve a corporation but is now considered only a
ground for such dissolution.

2.1) Contention: Petitioner contends that PD 902-A cannot exceed the scope and power of the
Corporation Code which does not provide sanctions for non-filing of by-laws.
Held:
That the failure to file by-laws is not provided for by the Corporation Code but in another law is
of no moment. PD 902-A, which took effect immediately after its promulgation on March 11,
1976, is apposite to the Code. Accordingly, the provisions abovequoted supply the law governing
the situation in the case at bar, inasmuch as the Corporation Code and PD 902-A are statutes in
pari materia. Interpretare et concordare legibus est optimus interpretandi. Every statute must be
so construed and harmonized with other statutes as to form a uniform system of jurisprudence.

3) That the corporation herein involved is under the supervision of HIGC does not alter the result
of this case. The HIGC has taken over the specialized functions of the former Home Financing
Corporation by virtue of EO 90 dated December 17, 1986. With respect to homeowners
associations, the HIGC shall "exercise all the powers, authorities and responsibilities that are
vested on the SEC . . ., the provision of Act 1459, as amended by P.D. 902-A, to the contrary
notwithstanding.” (EO 535, May 3, 1979)
44. China Banking Corporation v. CA, GR 117604, March 26, 1997, Kapunan, J., First
Division.
FACTS:
In 1974, Calapatia, a stockholder of respondent Valley Golf & Country Club, Inc. (VGCCI),
pledged his stock certificate 1219 to petitioner CBC. CBC wrote VGCCI requesting that this
pledge be recorded in its books. VGCCI replied that the deed of pledge was duly noted in its
corporate books. Calpatia, in 1983, obtained a P20k loan from CBC secured by the pledge. He
failed to pay. CBC foreclosed the pledged stock. It was sold at public auction on September 17,
1985 with CBC as the highest bidder. CBC was issued the certificate of sale.

In 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account of P18k.
VGCCI then caused to be published in the newspaper Daily Express a notice of auction sale a
notice of auction sale of a number of its stock certificates, including Calapatia’s shares, to be
held on Dec. 10, 1986. Later VGCCI informed Calapatia of the termination of his membership
due to the sale of his share in the Dec. 10, 1986 auction.

In 1989, CBC advised VGCCI that it is the new owner of Calapatia’s stock certificate 1219 due
to the auction sale of September 17, 1985. VGCCI replied that “for reason of delinquency”,
Calapatia’s stock was sold at public auction on Dec. 10, 1986 for P25k.

CBC filed a case in RTC for nullification of the Dec. 10, 1986 auction and issuance of a new
stock certificate in its name. RTC dismissed, stating that it had no jurisdiction over the intra-
corporate controversy. CBC then filed a complaint with SEC to nullify the sale of Calapatia’s
stock by VGCCI and issuance of new stock certificate in its name. SEC ruled for VGCCO. SEC
en banc reversed and ruled for CBC. CA ruled that the case is not intra-corporate, thus SEC had
no jurisdiction; CA thus annulled the awards of SEC. Hence this petition.

ISSUES:
Whether the case is an intra-corporate controversy. -YES.
Whether CBC is bound by the by-laws of VGCCI. -NO.
HELD:
1) The purchase of the share or membership certificate at public auction by CBC and the
issuance to it of the certificate of sale transferred ownership to CBC, thus it was entitled to have
the share registered in its name as member of VGCCI. VGCCI did not assail the transfer and has
in fact expressly recognized the pledge agreement. Thus, CBC became a stockholder of
VGCCI and thus, the conflict is an intra-corporate controversy between a corporation and its
stockholder under PD 902-A, S5(b).

2) Contention: VGCCI claims a prior right based on Art. VIII, S3 of its by-laws which provides
that “after a member shall have been posted as delinquent, the Board may order his/her/its
share sold to satisfy the claims of the Club.” (SC said that this issue needed SEC’s technical
expertise, thus SEC has jurisdiction.) VGCCI claims that due to Calapatia’s failure to settle his
delinquent accounts, it had the right to sell the share in question in accordance with the express
provision in its by-laws. CBC is bound by VGCCI’s by-laws as it had actual or constructive
knowledge thereof.
Held:
But in order to be bound, the third party must have acquired knowledge of the by-laws at the
time the transaction or agreement between the third party and shareholder was entered
into, in this case, at the time the pleadge agreement was executed. VGCCI could have easily
informed CBC of its by-laws when it sent notice formally recognizing CBC as pledgee of the
share of Calapatia. CBC’s belated notice of the by-laws at the time of foreclosure will not
suffice.

It is the generally accepted rule that third persons are not bound by by-laws except when they
have knowledge of the provisions either actually or constructively. In Fleisher v. Botica
Nolasco, Inc., SC held that the by-law restricting the transfer of shares cannot have any effect on
the transferee of the shares in question as he "had no knowledge of such by- law when the
shares were assigned to him. He obtained them in good faith and for a valuable consideration.
He was not a privy to the contract created by the by- law between the shareholder . . . and
the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a purchaser."

Here, knowledge of the provisions of VGCCI by-laws must have been acquired at the time the
pledge agreement was contracted. Knowledge thereof at the time of foreclosure will not affect
pledgee’s right over the pledged share.

3) Contention: CBC is duty-bound to know VGCCI’s by-laws due to Art. 2099 of NCC, which
stipulates that the creditor must take care of the thing pledged with the diligence of a good father
of a family.
Held:
This argument was rejected by SC. CBC was never informed of Calapatia’s unpaid accounts and
the restrictive provisions in VGCCI’s by-laws.

45. Associated Bank v. CA, GR 123793, June 29, 1998, Panganiban, J., First Division.
(Agreement of Merger states that all references to absorbed corporation in contracts
executed after the merger shall be deemed to refer to surviving corporation)
FACTS:
In 1975, Associated Banking Corporaiton and Citizens Bank and Trust Company (CBTC)
merged to form just one banking corporation, known as Associated Bank, petitioner. In 1977,
respondent Lorenzo Sarmiento, Jr. executed a promissory note in favor of CBTC for P2.5M
with 15% interest per annum. Sarmiento failed to pay.

Contention: Lorenzo claims that petitioner is not the proper party in interest since the promissory
note was executed in favor of CBTC.

RTC ordered Sarmiento to pay. CA reversed, holding that Associated Bank had no cause of
action against Sarmiento since it was not privy to the promissory note executed by Sarmiento in
favor of CBTC. The earlier merger between the two banks could not have vested Associated
Bank with any interest arising from the promissory note executed in CBTC’s favor after the
merger. Hence this petition.

ISSUE:
Whether the surviving corporation in a merger may enforce a promissory note executed in favor
of the absorbed corporation after the merger.
HELD: YES if merger agreement provides that any reference to absorbed corporation after the
merger refers to surviving corporation.
1) 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 liabilities are acquired by the surviving corporation. Although there is
a dissolution of the absorbed 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.

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. Section
79 of said Code requires the approval by the SEC of the articles of merger which, in turn, must
have been duly approved by a majority of the respective stockholders of the constituent
corporations. The same provision further states that the merger shall be effective only upon the
issuance by the SEC of a certificate of merger. The effectivity date of the merger is crucial for
determining when the merged or absorbed corporation ceases to exist; and when its rights,
privileges, properties as well as liabilities pass on to the surviving corporation.

Consistent with S79, the September 16, 1975 Agreement of Merger, which Associated Bank
and CBTC entered into, provided that its effectivity "shall, for all intents and purposes, be the
date when the necessary papers to carry out this merger shall have been approved by the
Securities and Exchange Commission."

2) Contention: The records do not show when SEC approved the merger. Sarmiento claims that
the agreement took effect on the date of execution of September 16, 1975. Since he issued the
promissory note on September 07, 1977, 2y after the merger, CBTC could not have transferred to
Associated Bank its interest in the promissory note which was not yet existing when they
merged. Thus, Associated Bank cannot enforce the note.
Held:
But assuming the effectivity date of the merger was the date of execution, we still cannot agree
with Sarmiento. The Agreement of Merger provides:
Upon the effective date of the merger, 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].
The agreement itself provides that all contracts- irrespective of the date of execution- entered
into in CBTC’s name shall be understood as pertaining to the surviving bank, Associated Bank.
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.

46. Babst v. CA, GR 99398, January 26, 2001, Ynares-Santiago, J., First Division.
FACTS:
Elizalde Steel Consolidated, Inc. (ELISCON), respondent, obtained a loan from Commercial
Bank and Trust Company (CBTC) of P8M with 14% interest per annum, evidenced by a
promissory note. ELISCON defaulted, leaving a balance of P2.7M.

CBTC had also opened letters of credit for ELISCON using the credit facilities of Pacific Multi-
Commercial Corporation (MULTI). Antonio Chua and Chester Babst executed a continuing
suretyship whereby they bound themselves solidarily liablt to pay any existing debt of MULTI to
CBTC to the extent of P8M each. In 1978, CBTC opened for ELISCON in favor of National
Steel Corporation (NSC) 3 domestic letters of credit, which ELISCON used to purchase tin black
plates from NSC. But ELISCON defaulted in paying the letters of credit, leaving an outstanding
account of P3.9M.

In 1980, Bank of the PH Islands (BPI) and CBTC entered into a merger, with BPI as the
surviving corporation, acquiring all the assets and assumed all liabilities of CBTC.

Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to

Development Bank of the PH (DBP). ELISCON thus executed a deed of cession of property in
payment of debt, by way of dacion en pago of all its assets mortgaged to DBP as payment for all
its debt. DBP thus took over ELISCON’s assets, including its indebtedness to BPI. DBP
proposed formulas for the settlement of ELISCON’s obligations to its creditors, but BPI rejected
the formula.

Thus, BPI filed in RTC a complaint for sum of money against ELISCON, MULTI, and Babst.
RTC ruled that ELISCON must pay the debt on the promissory note and letters of credit, and that
MULTI and Babst are solidarily liable with ELISCON. CA affirmed, adding that ELISCON
should reimburse MULTI and Babst whatever they may pay on the letters of credit. Hence this
petition.

ISSUE:
Whether BPI, the surviving corporation on the merger between BPI and CBTC, has a right of
action to collect on the debts of ELISCON which ELISCON contracted with CBTC.
HELD: YES.
1) 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. Hence, BPI has a right to institute the case a quo.

2) As to the issue of whether BPI consented to the novation of debtor (Art. 1293, NCC) or to
DBP’s assumption of ELISCON’s obligations, SC held that BPI had consented. There is no need
for express consent to the novation since consent may be inferred from the creditor’s acts. Here,
BPI was aware of DBP’s assumption of ELISCON’s obligations. BPI even sent its account
officer who attended the June 1981 creditors’ meeting, which officer expressed consent to DBP’s
assumption of ELISCON’s debts. BPI did not object to the substitution of debtor.
47. Mindanao Savings and Loan Association, Inc. v. Willkom, GR 178618, October 20,
2010, Nachura, J., Second Division.
FACTS:
First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan
Association, Inc. (DSLAI) are entities duly registered with SEC, engaged in granting loans and
receiving deposits from the general public, and treated as banks. In 1985, FSLAI and DSLAI
entered into a merger with DSLAI as the surviving corporation. The articles of merger were
not registered with SEC due to incomplete documentation. DSLAI changed its corporate
name to MSLAI by way of an amendment to its AoI. SEC approved the change of name in 1987.

FISLAI BoD resolved in 1986 to assign its assets in favor of DSLAI which, in turn, assumed
FISLAI’s liabilities.

The business of MSLAI failed. Thus, the Monetary Board of CB of PH ordered its closure and
placed it under receivership since its continued business would involve probable loss to its
depositors and creditors. PDIC was assigned as liquidator of MSLAI.

But prior to the closure of MSLAI, Uy filed in RTC an action for collection of sum of money
against FISLAI. RTC ruled in favor of Uy, ordering FISLAI to pay Uy P136k. This became
final and executory. A writ of execution was thereafter issued. The sheriff levied on 6 lands
owned by FISLAI. During the public auction, Willkom was the highest bidder. A certificate of
sale was issued and registered. The redemption period expired. Thus, new titles were issued in
favor of Willkom.

Thus, MSLAI, represented by PDIC, filed in RTC a complaint for annulment of sheriff’s sale,
cancellation of title, and reconveyance of properties against respondent Willkom and Go (to
whom Willkom sold one of the properties). PDIC claims that assets of an institution placed under
receivership and liquidation should be deemed in custodia legis and exempt from levy and
execution.

Contention: Respondents claim that MSLAI had no cause of action against them since MSLAI is
a separate and distinct entity from FISLAI. The “unofficial merger” between FISLAI and
DSLAI did not take effect due to non-compliance with the Corporation Code.

RTC dismissed the case. CA affirmed. Hence this petition.

ISSUE:
Whether FISLAI and DSLAI validly merged and thus the liabilities of FISLAI had been
transferred to DSLAI (now MSLAI).
HELD: NO, no SEC approval/certificate of merger.
1) Merger of two or more existing corporations does not become effective upon mere
agreement of the constituent corporations. Since a merger or consolidation involves
fundamental changes in the corporation, as well as in the rights of stockholders and creditors,
there must be an express provision of law authorizing them. The steps necessary to
accomplish a merger or consolidation as provided under S76-79 of Corporation Code are:
 (1) The board of each corporation draws up a plan of merger or consolidation. Such plan
must include any amendment, if necessary, to the articles of incorporation of the
surviving corporation, or in case of consolidation, all the statements required in the
articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A
meeting must be called and at least two (2) weeks' notice must be sent to all stockholders
or 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 outstanding capital stock will be needed. Appraisal rights, when proper, must be
respected.
(3) Execution of the formal agreement, referred to as the articles of merger or
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.
Thus, the merger shall be effective only upon issuance of a certificate of merger by SEC
subject to its prior determination that the merger is not inconsistent with the Corporation Code or
existing laws. 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.

Here, the articles of merger between FISLAI and DSLAI were not registered with SEC due to
incomplete documentation. Thus, SEC did not issue the required certificate of merger. Even if
the Monetary Board of CB recognized the merger, the fact remains that no certificate was issued
by SEC. the merger is still incomplete without the certification. The issuance of the certificate of
merger is crucial since it marks the moment when the consequences of the merger take place
(i.e. the absorbed corporation ceases to exist but its rights, properties, and liabilities are
deemed vested in the surviving corporation).

The same rule applies to consolidation.

2) Thus, there being no merger between FISLAI and DSLAI (now MSLAI), for third parties,
the two corporations shall not be considered as one but two separate corporations.

Thus, the assets of FISLAO remain as its assets and not belinging to DSLAI and MSLAI,
notwithstanding the deed of assignment wherein FISLAI assigned its assets and properties to
DSLAI, and where DSLAI assumed FISLAI’s liabilities. Under Art. 1625 of NCC, “an
assignment of credit, right, or action shall produce no effect as against third persons, unless it
appears in a public instrument or the instruement is recorded in the registry of property in case
the assignment involves real property.” Here, the title of the properties contained no annotation
of the fact of assignment. Thus, MSLAI, as successor-in-interest of DSLAI, has no legal
standing to annul the execution sale of FISLAI’s properties. With more reason can it not
cause cancellation of the title to the properties of Willkom and Go.
3) There is also no novation by substitution of debtor since there is no showing that Uy, the
creditor, gave her consent to the agreement that DSLAI (now MSLAI) would assume FISLAI’s
liabilities.

48. Y-I Leisure Philippines, Inc. v. Yu, GR 207161, September 08, 2015, Mendoza, J, En
Banc.
FACTS:
Mt. Arayat Development Co., Inc. (MADCI) was a real estate development corporation.
Respondent James Yu was a businessman, interested in purchasing golf and country club shares.
MADCI sold shares of a golf and country club located in the vicinity of Mt. Arayat, Pampanga to
Yu, 500 golf and 150 country club shares for P650k. Upon full payment, Yu visited the area and
found that it was non-existent. Yu demanded refund of his P650k. He did not receive any refund.

Thus, Yu filed in RTC a complaint for collection of sum of money and damages against MADCI
and its president Sangil. MADCI, in its answer, claims that it was Sangil who defrauded Yu,
invoking the MOA entered into by MADCI, Sangil, and petitioner Yats International Ltd. (YIL)
where Sangil undertook to redeem MADCI shares sold to third persons or settle their claims in
full. Because of the violation of this MOA, MADCI was made to transfer its 120ha land to
petitioners.

Yu filed an amended complaint and impleaded YIL, Y-I Leisure Phils., Inc. (YILPI), and Y-I
Club & Resorts, Inc. (YICRI). Yu claims that he discovered in the registry of deeds of Pampanga
that substantially all the assets of MADCI, consisting of 120ha of land in Magalang,
Pampanga, were sold to YIL, YILPI, and YICRI. He claims that this transfer was done in fraud
of MADCI’s creditors and without the required approval of stockholders and BoD under S40.

RTC ruled that MADCIL and Sangil is solidarily liable to refund Yu’s payments. But it
exonerated YIL, YILPI, and YICRI from liability as they were not part of the transactions
between MADCI and Sangil, on one hand, and Yu, on the other. CA held YIL, YILPII, and
YICRI solidarily liable for Yu’s claim. Hence this petition.

ISSUE:
Whether the sale of the only land owned by MADCI (120ha land), which it failed to develop as a
golf course according to its corporate purpose, to YIL, YILPI, and YICRI renders the latter 3
corporations liable for the claims of MADCI’s creditors.
HELD: YES.
Contention: Petitioners claim that fraud must exist to hold third parties liable.
Held: No need for fraud (See par.4)
1) Nell doctrine- The 1965 case of Nell v. Pacific Farms, Inc. is where SC first pronounced the
rule regarding the transfer of all assets of one corporation to another:
Generally, where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, except:
1. Where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of the corporations;
 3. Where the purchasing corporation is merely a continuation of the selling corporation;
and
4. Where the transaction is entered into fraudulently in order to escape liability for such
debts

2) Statutory basis of general rule of non-liability- The general rule reflects the principle of
relativity under Art. 1311 of NCC. Contracts, including the rights and obligations arising
therefrom, are valid and binding only between the contracting parties and their successors-in-
interest. Thus, despite the sale of all corporate assets, the transferee corporation cannot be
prejudiced as it is not in privity with the contracts between the transferor corporation and its
creditors.

3) Statutory bases of exceptions:

3.1) First exception- The first exception is provided under Art. 2047 of NCC. When a person
binds himself solidarily with the principal debtor, then a contract of suretyship is produced.
Necessarily, the corporation which expressly or impliedly agrees to assume the transferor's debts
shall be liable to the same.

3.2) Second exception- The second exception on the merger and consolidation is well-established
under S76-80, Title X of the Corporation Code. If the transfer of assets of one corporation to
another amounts to a merger or consolidation, then the transferee corporation must take over the
liabilities of the transferor.

3.3) Third Exception- Another exception of the doctrine, where the sale of all corporate assets is
entered into fraudulently to escape liability for transferor's debts, can be found under Article
1388 of the Civil Code. It provides that whoever acquires in bad faith the things alienated in
fraud of creditors, shall indemnify the latter for damages suffered. Thus, if there is fraud in the
transfer of all the assets of the transferor corporation, its creditors can hold the transferee liable.

3.4) Last exception: Business-enterprise transfer- In Villa rey Transit, Inc. v. Ferrer, SC held
that when one were to buy the business of another, he would wish to keep it going. He would
wish to get the location, building, stock in trade, and the customers. He would wish to step
into the seller's shoes and to enjoy the same business relations with other men. He would be
willing to pay much more if he could get the "good will" of the business, meaning by this, the
good will of the customers, that they may continue to tread the old footpath to his door and
maintain with him the business relations enjoyed by the seller. Thus, the transferee purchases not
only the assets of the transferor, but also its business. The transferor is thus merely left with its
juridical existence, devoid of its industry and earning capacity.

Thus, the proper provision of law contemplated is S40 of the Corporation Code:
Sec. 40. Sale or other disposition of assets. — Subject to the provisions of existing laws
on illegal combinations and monopolies, a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets, including its goodwill xxx.
 A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which it was incorporated.
S40 reflects the business-enterprise transfer under the last exception. It must be clarified that not
every transfer of the entire corporate assets would qualify under S40. It does NOT apply:
(1) if the sale of the entire property and assets is necessary in the usual and regular course of
business of corporation, or (2) if the proceeds of the sale or other disposition of such property
and assets will be appropriated for the conduct of its remaining business. Thus, the TEST to
determine applicability of S40 would be the capacity of the corporation to continue its
business after the sale of all or substantially all its assets.

4) Fraud not essential in business-enterprise transfer- A cursory reading of S40 shows that it
does not require fraud against creditors. Under the Nell doctrine, the transferee corporation
may inherit the liabilities of the transferor despite the lack of fraud due to the continuity of the
latter’s business. The purpose of the business-enterprise transfer is to protect the creditors of
the business by allowing them a remedy against the new owner of the business and assets and
does not depend on deceit committed by the transferee corporation.

5) For S40 or business-enterprise transfer rule to apply, the requisites are: 1) the transferor
corporation sells all or substantially all of its assets to another entity; 2) the transferee
corporation continues the business of the transferor corporation. Both are present here.

The primary purpose of MADCI under its AoI was “to acquire by purchase, lease, donation
xxx and to own, use, improve, develop, xxx real estate of all kinds.” Sangil had testified that
MADCI was a development company which acquired the properties in Magalang, Pampanga to
be developed into a golf course pursuant to its primary purpose. MADCI had an entire asset of
120ha of land and its sale to petitioners rendered it incapable of continuing its intended golf
and country club business. MADCI was left without any property to develop. S40 must thus
apply.

Thus, S40 must be complied with, although this petition is not concerned with the validity of the
transfer, but Yu’s claim for refund of the P650k.

Thus, under the business-enterprise transfer, petitioiners have inherited the liabilities of
MADCI as they acquired all the assets of MADCI. The continuity of MADCI’s land
developments is now in the hands of petitioners. The only way for Yu to recover his money
would be to file a claim against petitioners as transferees.

6) Free and harmless clause- Petitioners are not left without recourse as they can invoke the free
and harmless clause under the MOA. In business-enterprise transfer, it is possible that the
transferor and the transferee may enter into a contractual stipulation stating that the transferee
shall not be liable for any or all debts arising from the business which were contracted prior to
the time of transfer. Such stipulations are valid, but only as to the transferor and the
transferee. These stipulations, though, are not binding on the creditors of the business
enterprise who can still go after the transferee for the enforcement of the liabilities.
49. Philippine Geothermal, Inc. Employees Union v. Unocal Philippines, Inc., GR 190187,
September 28, 2016, Leonen, J., Second Division. (Merger of a corporation with another
does not automatically result in dismissal of the employees of the absorbed corporation
from the surviving corporation)
FACTS:
Petitioner is a legitimate labor union that stands as the bargaining agent of the rank and file
employees of respondent Unocal PH. Unocal, formerly known as PH Geothermal, Inc., is
licensed to do business in PH for exploration and development of geothermal resources. It is a
subsidiary of Unocal California which, in turn, is a subsidiary of Unocal Corporation.

Unocal Corporation executed an Agreement and Plan of Merger (Merger Agreement) with
Chevron Texaco Corporation and Blue Merger Sub, Inc. Blue Merger is a subsidiary of Chevron.
Unocal merged with Blue Merger with Blue Merger as the surviving corporation. Chevron
became the parent corporation of the merged corporations. Blue Merger changed its name to
Unocal Corporation.

On Jan. 31, 2006, Unocal PH executed a CBA with petitioner. On Oct. 20, 2006, petitioner wrote
Unocal PH asking for separation benefits under the CBA, claiming that the Merger Agreement
of Unocal Corporation, Blue Merger, and Chevron resulted in the closure and cessation of
operations of Unocal PH and implied dismissal of its employees. Unocal PH refused,
asserting that the employees were not terminated.

On voluntary arbitration with DOLE, Secretary of Labor ruled that that Union’s members were
impliedly terminated due to the Merger Agreement, finding that the merger resulted in a new
employer. CA reversed SOLE, finding that Unocal PH is a separate and distinct entity from its
parent company Unocal Corporation. Hence this petition.

ISSUE:
Whether the merger between the parent company of Unocal PH, Unocal Corporation, and Blue
Merger resulted in the termination of the employment of the employees of Unocal PH.
Whether, if Unocal PH were a party to the merger, this would mean that its employees would
have been terminated.
HELD: NO.
1) The merger of Unocal Corporation with Blue Merger and Chevron does not affect Unocal
PH or any of its employees as respondent has a separate and distinct personality from its
parent corporation.

2) Nonetheless, if Unocal PH is indeed a party to the merger, the merger still does not result in
the dismissal of its employees. The effects of a merger are stated in S80 of Corporation Code,
which provides that the surviving corporation shall acquire all the rights, privileges, properties
etc. of the absorbed corporatioin, that all interests of the absorbed corporation is deemed
transferred to the surviving or consolidated corporation without further act or deed, and that the
surviving corporation likewise acquires all the liabilities and obligations of the absorbed
corporation. This acquisition of all assets, interests, and liabilities necessarily includes the
rights and obligations of the absorbed corporation under its employment contracts.
Although S80 does not explicitly state the merger’s effect on the employees of the absorbed
corporation, BPI v. BPI Employees Union-Davao Chapter has ruled that the surviving
corporation automatically assumes the employment contracts of the absorbed corporation,
such that the absorbed corporation’s employees become part of the manpower complement
of the surviving corporation. This is more in keeping with the dictates of social justice and
the state policy of according full protection to labor.

3) Contention: Petitoiner claims that this is contrary to its freedom to contract since its members
did not enter into employment contracts with the surviving corporation.
Held:
However, petitioner is not precluded from leaving the surviving corporation. Although the
absorbed employees are retained as employees of the merged corporation, the employer retains
the right to terminate their employment for a just or authorized cause. Likewise, the employees
are not precluded from severing their employment through resignation or retirement. The
freedom to contract and the prohibition against involuntary servitude is still, thus, preserved in
this sense.

Thus, SC ruled that petitioner is not entitled to the separation benefits it claims.

50. Sumifru (Philippines) Corporation v. Baya, GR 188269, April 17, 2017, Perlas-Bernabe,
J., First Division.
FACTS:
Respondent Bernabe Baya was employed by AMS Farming Corporation (AMSFC) since 1985
and, from then on, he worked his way to a supervisory rank in 1997. As supervisor, Baya joined
the union of supervisors and eventually formed the AMS Kapalong Agrarian Reform
Beneficiaries Multipurpose Cooperative (AMSKARBEMCO), the agrarian reform organization
of the regular employees of AMSFC. In 1999, Baya was assigned to supervisory positions in
AMSFC’s sister company, Davao Fruits Corporation (DFC). Later, upon petition to DAR by
AMSKARBEMCO, 220ha of AMSFC’s 513ha banana plantation were covered by the CARL.
Eventually, the 220ha portion was transferred to AMSFC’s regular employees as Agrarian
Reform Beneficiaries (ARBs), including Baya.

Thereafter, the ARBs explored a possible agribusiness venture agreement with AMSFC, but the
talks broke down. The ARBs then held a referendum in order to choose as to which group
between AMSKARBEMCO or SAFFPAI, a pro-company benefiary association, they wanted to
belong to. 280 went to AMSKARBEMCO while 85 joined SAFFPAI.

Thereafter, when AMSFC learned that AMSKARBEMCO entered into an export agreement with
another company, it summoned AMSKARBEMCO officers, including Baya, to lash out at them.
Later, Baya was again summoned, this time by a DFC manager, who told Baya that he would be
putting himself in a “difficult situation” if he did not shift loyalty to SAFFPAI. Baya refused to
betray his cooperative. Thus, Baya received a letter stating that his secondment with DFC has
ended, thus ordering his return to AMSFC. When Baya returned to AMSFC on Aug. 30, 2002,
he was informed that there were no supervisory positions available. Thus, he was assigned to
rank and file positions instead. On September 20, 2002, Baya’s request to be restored to a
supervisory position was denied.

Baya thus filed this complaint for illegal/constructive dismissal. LA ruled for Baya. NLRC
reversed. CA reinstated LA. Hence this petition.

Sumifru had merged with DFC.

ISSUE:
Contention: Sumifru claims that it should be held liable only for the period when Baya stayed
with DFC as it only merged with DFC and not with AMSFC.
HELD: Untenable.
S80 of Corporation Code clearly states that one of the effects of a merger is that the surviving
company shall inherit not only the assets, but also the liabilities of the corporation it
merged with. In this case, it is worthy to stress that both AMSFC and DFC are guilty of acts
constitutive of constructive dismissal performed against Baya. As such, they should be deemed
as solidarily liable for the monetary awards in favor of Baya. Meanwhile, Sumifru, as the
surviving entity in its merger with DFC, must be held answerable for the latter's liabilities,
including its solidary liability with AMSFC arising herein. Verily, jurisprudence states 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," as in this case.

SC thus ruled that Sumifru is liable for DFC’s liability for constructively dismissing Baya, that
is, payment of separation pay in lieu of reinstatement due to strained relations.

51. Bank of Commerce v. Heirs of Dela Cruz, GR 211519, August 14, 2017, Bersamin, J.,
Third Division. (Fact of merger and the terms thereof must be proven)
FACTS:
Plaintiff Dela Cruz is the sole proprietor of Mamertha General Merchandising, an entity engaged
in sugar trading. He had a bank account with defendant Panasia. In 1998, Panasia allowed Dela
Cruz’s son, Allan, to withdraw money from the account without his consent and authority. Dela
Cruz thus instructed Panasia and even sent a letter to Panasia not to allow Allan to make
withdrawals from his bank account unless with his authority. The letter was personally received
by Panasia’s branch manager. Despite said instruction, Panasia still allowed and continued to
allow Allan to make withdrawals without his knowledge and consent. These unauthorized
withdrawals amounted to P56M.

Dela Cruz demanded from Panasia the restoration of said amount. But Panasia failed to do so.
Dela Cruz filed a suit against Panasia for collection of sum of money.

Sometime in September 2000, Bank of Commerce (BOC) demanded payment from Dela Cruz of
P27M. not having knowledge of having obtained any loan from BOC, Dela Cruz verified from
BOC. He discovered that the loan payment demanded refers to a loan he obtained from
Panasia and pursuant to a Purchase and Sale Agreement between Panasia and BOC, Panasia
has been acquired by BOC transferring to BOC Panasia’s assets and liabilities.
Thus, Dela Cruz offered to compensate his loan obligation of P27M with the P56M. BOC
claimed that it purchased from Panasia only selected accounts and liabilities. Thus, BOC
foreclosed on the loans which were secured by REMs.

A complaint for collection of sum of money and damages was filed by the late Rodolfo dela
Cruz against Panasia, amended to include BOC.

RTC ruled that BOC and Panasia is solidarily liable to the late Rodolfo dela Cruz, finding
negligence by Panasia. CA affirmed. Hence this petition.

ISSUE:
Whether the merger of BOC and Panasia was proven such that BOC is also liable for the claim
of Dela Cruz against Panasia arising from Panasia’s negligence.
HELD: NO.
1) SC ruled that BOC’s failure to formally offer the Purchase and Sale Agreement and Deed of
Assignment was fatal under R132, S34 of the RoC, “the court shall consider no evidence which
has not been formally offered.” The formal offer would enable the opposing parties to examine
the evidence and object to their admissibility. BOC did not also identify it during trial. Thus,
R132, S34 applies.

2) Nonetheless, SC held that without the Purchase and Sale Agreement, there is a void in the
link between BOC and Panasia. Thus, there is no showing of BOC having merged with
Panasia and assuming Panasia’s liabilities.

Dela Cruz did not establish that BOC assumed Panasia’s liabilities. With the petitioner having
specifically denied having merged with Panasia, averring instead that its purchase had concerned
only selected assets and liabilities of Panasia, it became the burden of dela Cruz to prove the
merger with Panasia, and the petitioner's becoming the surviving corporation. His failure in this
respect left his cause of action against the petitioner unproved.

2.1) RTC held thus:

Common sense dictates that when Bank of Commerce took over Panasia, it likewise took
over its assets but also its liabilities. It cannot say that only selected assets and liabilities
were the subject matter of the purchase agreement.
RTC’s assumption of the merger between BOC and Panasia has neither factual nor legal support
in the records. Judicial notice of the terms of merger and its consequences is not justified. The
merger between BOC and Panasia was not of common knowledge. The element of notoriety for
judicial notice is lacking.

3) There were several specific facts whose existence must be shown (not assumed) before the
merger of two or more corporations can be declared established:
1) the plan of merger that includes the terms and mode of carrying out the merger and the
statement of the changes, if any, of the present articles of the surviving corporation;
2) the approval of the plan of merger by majority vote of each of the boards of directors of the
concerned corporations at separate meetings;
3) the submission of the plan of merger for the approval of the stockholders or members of
each of the corporations at separate corporate meetings duly called for the purpose;
4) the affirmative vote of 2/3 of the outstanding capital in case of stock corporations, or 2/3 of
the members in case of non-stock corporations;
5) the submission of the approved articles of merger executed by each of the constituent
corporations to the SEC; and
6) the issuance of the certificate by the SEC on the approval of the merger.

SC affirmed CA but dismissed insofar as BOC is concerned for lack of cause of action.

52. Sps. Ong v. BPI Family Savings Bank, Inc., GR 208638, January 24, 2018, Reyes, Jr., J.,
Second Division.
FACTS:
Sps. Ong and Sps. Ong Chuan, petitioners, are engaged in the business of printing under the
name and style “Melbros Printing Center.” In 1996, Bank of Southeast Asia’s (BSA) managers
visited petitioners’ office and discussed the loan and credit facilities offered by BSA. Due to
petitioners’ business expansion plans, they applied for the credit facilities offered by BSA.
Petitioners executed a REM over their property in Paco, Manila as security for a P15M term loan
and P5M credit line, totaling P20M.

But as to the credit line, only P3M was released, BSA promising to release the remaining P2M
upon payment of the P3M initially released. Petitioners paid the P3M in full. But BSA still
refused to release the P2M. Thus, petitioners refused to pay the amortizations due on their term
loan.

Later, BPI Family and Savings Bank (BPI) merged with BSA, thus, acquiring all of BSA’s
rights and assumed its obligations. BPI filed a petition for extrajudicial foreclosure of the REM
for petitioners’ default.

Petitioners then filed an action for damages with TRO and preliminary injunction against BPI.
RTC ruled for petitioners. CA reversed. Hence this petition.

ISSUE:
Whether BPI is liable for the acts of BSA.
HELD: YES.
1) BSA violated the terms of the credit line agreement when it deliberately failed to release the
P2M after petitioners paid the first P3M. Due to BSA’s acts, the machinery and equipment that
were essential to petitioners’ business had to be procured so late in time and had crippled the
printing of school supplies. Thus, petitioners were constrained to cancel purchase orders of their
clients.

2) Contention: BPI insists that it acted in good faith when it sought extrajudicial foreclosure of
the mortgage and that it was not responsible for acts committed by its predecessor, BSA.
Held:
Good faith is not an excuse to exempt BPI from the effects of a merger or consolidation:
 Section 80. Effects of merger or consolidation. — The merger or consolidation shall have
the following effects:
5. The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations in the same manner
as if such surviving or consolidated corporation had itself incurred such liabilities or
obligations;
Thus, BPI did not only acquire all the rights and privileges and assets of BSA but also the
liabilities and obligaitons of BSA as if BPI itself incurred it.

2.1) Also, Section 1 (e) of the Articles of Merger dated November 21, 2001 provides that all
liabilities and obligations of BSA shall be transferred to and become the liabilities and
obligations of BPI in the same manner as if it had itself incurred such liabilities or obligations.
Thus, BPI’s right to foreclose on petitioner’s property depends on the contract of the parties
originally involved- between BSA and petitioner. Since BSA incurred in delay in the
performance of its obligations and later cancelled the omnibus line without petitioners; consent,
its successor BPI cannot foreclose the loan since the predecessor BSA violated the terms of the
contract.

There being no release of the full loan amount, no default could be attributed to petitioners.
Thus, foreclosure was premature.

SC awarded P2.7M damages to petitioner, P100k exemplary, and P300k attorney’s fees.

53. SEC v. College Assurance Plan Philippines, Inc., GR 202052, March 07, 2018,
Bersamin, J., Third Division. (Trust fund of pre-need company can be used exclusively for
the benefit of the planholders)
FACTS:
Respondent CAP is a domestic corporation with the primary purpose of selling pre-need
education plans. To guarantee payment of benefits under its plans, CAP set up a trust fund
contributing therein a certain percentage of the amount collected from each planholder. The trust
fund is invested in assets and securities with yields higher than the projected increase in tuition
fees. But with the adoption of the policy of deregulation of private educational institutions by
DEPED in 1993 and the economic crisis and peso devaluation in 1997, CAP and its trust fund
were adversely affected.

In 2000, RA 8799, SRC, was passed. SEC promulgated on Aug. 16, 2001 the New Rules on the
Registration and Sale of Pre-Need Plans under S16 of SRC. CAP incurred a trust fund
deficiency of P3.179B. In compliance with a SEC directive to submit a funding scheme to
correct the deficiency, CAP proposed to purchase MRT III Bonds and assign the same to the
trust fund. Thus, CAP purchased MRT III Bonds for US$14M from Smart and FEMI, and
assigned the same to the trust fund. The $14M was to be paid in 60 monthly installments. In
2003, having paid $6.5M, CAP was ordered by SEC to stop paying Smart/FEMI due to
inadequacy of CAP’s funds.
In 2005, CAP filed a petition for rehabilitation. RTC issued a stay order. Marcelo was appointed
as interim rehabilitation receiver. RTC approved a rehabilitation plan where CAP intended to sell
in 2009 the MRT Bonds.

In 2009, the Receiver filed a manifestation seeking RTC’s approval of the sale of MRT III Bonds
to the DBP and Land Bank. RTC approved. The MRT Bonds were sold at US$21M to DBP and
Land Bank. Thus, the receiver moved for payment of CAP’s obligations to Smart and FEMI
from the proceeds. RTC denied the motion. Later, CAP received summons from the CFI of Hong
Kong Special Administrative Region, directing it to either satisfy the claim of Smart and FEMI
or to state whether it intended to contest the proceedings. thus, CAP filed a motion in RTC
seeking authorization to pay the claims of Smart and FEMI, explaining that the action in HK was
a real threat that the buyers would rescind their contract with CAP and demand refund of the
US$21M price.

RTC denied again. CA reversed, saying that the payment to Smart and FEMI constituted
“benefits” that could be validly withdrawn from the trust fund under Rule 16.4 of the “New
Rules on the Registration and Sale of Pre-Need Plans under Section 16 of the SEC” (New
Rules). Hence this petition.

ISSUE:
Whether the payment of CAP’s obligation to Smart and FEMI constituting the unpaid balance of
the purchase price of the MRT Bonds, which were assigned to the trust fund of CAP as a pre-
need company, can be paid out of the proceeds of the sale of the MRT Bonds to DBP and Land
Bank.
HELD: NO, claims of pre-need company’s creditors cannot be paid out of trust fund.
Contentions: Petitioners SEC and Insurance Commission claim that the trust fund is exclusively
for the benefit of the planholders and should be treated as separate from the paid-up capital of
CAP. Thus, it cannot be used to satisfy the claims of the creditors of the pre-need company. The
proceeds of the sale of the MRT Bonds formed part of the trust fund’s assets.
CA ruled that the payment to Smart and FEMI is a valid withdrawal from the trust fund as it was
upon a “benefit” in the nature of “cost for services rendered or property delivered.”
Held: Cannot use trust funds to pay Smart and FEMI obligations.
1) The trust fund is to be treated as separate and distinct from the paid-up capital of the pre-
need company, and is established with a trustee under a trust agreement approved by the SEC to
pay the benefits as provided in the pre-need plans.

S16.4, Rule 16 of the New Rules, governing utilization of the trust fund, states:
16.4. No withdrawal shall be made from the Trust Fund except for paying the Benefits
such as the monetary consideration, the cost of services rendered or property delivered,
xxx.
“Benefits” is defined as the “money or services which the Pre-Need Company undertakes to
deliver in the future to the planholder or his beneficiary." Thus, benefits refer to the payments
made to the planholders by virtue of the pre-need contracts.
RA 9829, S30 also provides that the trust fund is to be used at all times for the sole benefit of
the planholders and cannot ever be applied to satisfy the claims of the creditors of the
company:
Section 30. Trust Fund. — To ensure the delivery of the guaranteed benefits and services
provided under a pre-need plan contract, a trust fund per pre-need plan category shall be
established. A portion of the installment payment collected shall be deposited by the pre-
need company in the trust fund, xxx.
Assets in the trust fund shall at all times remain for the sole benefit of the planholders.
At no time shall any part of the trust fund be used for or diverted to any purpose other
than for the exclusive benefit of the planholders. In no case shall the trust fund
assets be used to satisfy claims of other creditors of the pre-need company. The
provision of any law to the contrary notwithstanding, in case of insolvency of the pre-
need company, the general creditors shall not be entitled to the trust fund.
Except for the payment of the cost of benefits or services, xxx, and other costs necessary
to ensure the delivery of benefits or services to planholders, no withdrawal shall be made
from the trust fund unless approved by the Commission.
Thus, the allowed withdrawals from the trust fund refer to payments that the pre-need company
had undertaken to be made based on the contracts.

1.1) Thus, CA erred in authorizing payment out of the trust fund of the obligations due to Smart
and FEMI. Even if the obligations were incurred in order to infuse sufficient money in the trust
fund to correct its deficiencies, such obligations should be paid for by its assets, not by the
trust fund.

A person is considered as a beneficiary of a trust if there is a manifest intention to give such a

person the beneficial interest over the trust properties. Under the New Rules, the beneficial
interest over the trust properties is with the planholders since no withdrawals are allowed from
the trust fund except for paying the benefits to planholders.

2) Contention: CA ruled that only the paid value of the MRTIII Bonds is part of the trust funds
and that the Bonds are subject to the unpaid seller’s lien of Smart and FEMI, and thus they are
considered as contributors to the trust fund and thus they are not treated as ordinary creditors of
CAP.
Held:
There is no indication by CAP to the trustee bank that only the paid value of the MRT Bonds
should accrue to the trust fund. CAP assigned the bonds to the trust fund without any conditions
imposed thereon. Thus, the MRTIII Bonds already formed part of the trust fund upon infusion.

54. Lee v. CA, GR 93695, February 04, 1992, Gutierrez, Jr., J., Third Division.
(Corporation Code requires a director to be a legal owner of at least one share of stock;
VTA makes the shareholder merely an equitable owner, vesting in the trustee the legal
title)
FACTS:
A complaint for sum of money was filed by International Corporate Bank against private
respondents who, in turn, filed a third party complaint against Alfa Integrated Textile Mills and
petitioners. RTC issued an alias summons upon Alfa, ordering private respondents to take the
appropriate steps to serve the summons to Alfa. Private respondents moved for declaration of
proper service of summons which RTC granted.

Contentions: Petitioners moved for reconsideration, claiming that service of summons on Alfa
should be by publication since they are no longer officers of Alfa due to the voting trust
agreement executed by all stockholders of Alfa in favor of DBP, whereby management and
control of Alfa became vested upon DBP. In respondents’ comment to the MR, they argued that
the voting trust agreement did not divest petitioners of their positions as president and
executive vice president of Alfa, thus service of summons upon Alfa thru petitioners as
corporate officers was proper.

RTC declared that service of summons to petitioners who were no longer corporate officers of
Alfa cannot be considered proper service of summons on Alfa. CA reversed. Hence this petition.

ISSUE:
Whether a director of a corporation may remain as such despite entering into a VTA.
HELD: NO.
1) S59 of the corporation Code defines voting trust agreements:
"Section 59. Voting Trusts. — One or more stockholders of a stock corporation may
create a voting trust for the purpose of conferring upon a trustee or trustees the right to
vote and other rights pertaining to the shares for a period not exceeding five (5) years at
any one time: xxx.”
A voting trust agreement results in the separation of the voting rights of a stockholder from his
other rights such as the right to receive dividends, the right to inspect the books of the
corporation, the right to sell certain interests in the assets of the corporation and other rights to
which a stockholder may be entitled until the liquidation of the corporation. However, in order to
distinguish a voting trust agreement from proxies and other voting pools and agreements, it
must pass three criteria or tests, namely: (1) that the voting rights of the stock are separated
from the other attributes of ownership; (2) that the voting rights granted are intended to be
irrevocable for a definite period of time; and (3) that the principal purpose of the grant of
voting rights is to acquire voting control of the corporation.

Under S59, a voting trust agreement may confer on a trustee not only the stockholder’s voting
rights but also other rights pertaining to his shares as long as the voting trust agreement is not
entered "for the purpose of circumventing the law against monopolies and illegal combinations
in restraint of trade or used for purposes of fraud."

1.1) The execution of a voting trust agreement, therefore, may create a dichotomy between the
equitable or beneficial ownership of the corporate shares of a stockholder, on the one hand,
and the legal title thereto on the other hand.

2) Contention: Petitioners argue that due to the voting trust agreement, they can no longer be
considered directors of Alfa, invoking S23 of the Corporation Code:
"Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
 capital stock of the corporation of which he is a director shall thereby cease to be
director.
Held:
The most immediate effect of a voting trust agreement on the status of a stockholder who is a
party to its execution is to make the stockholder from legal title-holder or owner of the shares
subject to the voting trust agreement to the equitable or beneficial owner. Does this change in
status deprive the stockholder of the right to qualify as a director under S23, which deleted the
phrase “in his own right” from S30 of the Old Code:
"Every director must own in his own right at least one share of the capital stock of the
stock corporation of which he is a director
Under the Old Code, the eligibility of a director cannot be adversely affected by his being a party
to a VTA since he remains the owner, although beneficial or equitable only, of the shares. With
the omission of the phrase "in his own right" the election of trustees and other persons who in
fact are not the beneficial owners of the shares registered in their names on the books of the
corporation becomes formally legalized. Hence, this is a clear indication that in order to be
eligible as a director, what is material is the legal title to, not beneficial ownership of, the
stock as appearing on the books of the corporation.

Here, petitioners, thru the VTA, disposed of all their shares thru assignment and delivery to DBP
as trustee. Thus, petitioners ceased to own at least one share standing in their names on the
books of Alfa as required under S23 of the Corporation Code. Since the VTA between Alfa and
DBP transferred legal ownership of the stocks to DBP as trustee, DBP became the stockholder
of record.

3) SC also held that the VTA had not lapsed by 1986 at the end of its 5y period since the VTA
states that the agreement shall “last for a period of 5 years and is renewable for as long as the
obligations of Alfa with DBP xxx remains outstanding.” Thus, the duration of the VTA is
contingent upon the fulfillment of certain obligations of Alfa with DBP.

Thus, SC held that there was no proper service of summons on Alfa.

55. Republic v. Sandiganbayan, GR 107789, April 30, 2003, Carpio-Morales, J., En Banc.
FACTS:
1) The PCGG conducted an Eastern Telecommunications PH, Inc. (ETPI) stockholders meeting
during which a PCGG controlled board of directors was elected. A special stockholders meeting
was later convened by the registered ETPI stockholders wherein another set of BoDs was
elected. Thus, there were 2 sets of such board and officers elected. Africa, stockholder of ETPI,
alleging that PCGG is illegally exercising the rights of stockholders of ETPI especially in the
election of BoD members, filed a motion in the Sandiganbayan, Civil Case 0130, praying for the
holding of an ETPI annual stockholders meeting under court supervision.

PCGG did not object, provided that Sandiganbayan uphold PCGG’s right to vote all Class”A”
shares of ETPI or, in the alternative, disregard the stock and transfer book in determining who
can vote the shares in an annual stockholders meeting due to alterations therin.
Sandiganbayan ordered that an annual stockholders meeting be conducted under the supervision
of the Sandiiganbayan thru Justice De Leon. Hence this first petition by PCGG for certiorari.

2) PCGG in 1995 filed a “Very urgent petition for authority to hold special stockholders’
meeting to increase ETPI’s authorized capital stock, claiming that this was necessary due to RA
7975. SC referred the petition to Sandiganbayan. SB granted the petition. Thus, the PCGG-
controlled ETPI BoD authorized ETPI chair to call the special stockholders meeting. The
meeting was held and ETPI’s authorized capital stock was increased from P250M to P2.6B.

Africa’s MR of the SB order allowing the annual stockholders’ meeting was denied. Hence this
second petition, challenging SB’s allowing such meeting. He prayed that SC set aside the SB
orders permitting the PCGG to vote the non-sequestered ETPI Class “A” shares and nullify the
votes PCGG had cast in the meeting.

ISSUE:
Whether PCGG can vote the sequestered ETPI class “A” shares in the stockholders meeting
for election of the board of directors.
HELD: Issue of fact remanded to SB.
1) Only acts of administration over sequestered properties- PCGG cannot exercise acts of
dominion over property sequestered, frozen, or provisionally taken over. The act of
sequestration, freezing, or provisional takeover of property does not bring about a divestment
of title over said property. It does not make PCGG the owner thereof. PCGG is a conservator,
not an owner. Thus, PCGG may exercise only powers of administration over the property or
business sequestered, much like a court appointed receiver, like to bring and defend actions in
its own name, receive rents, collect debts due, pay outstanding debts, etc.

The PCGG cannot vote sequestered shares, except when there are “demonstrably weighty
and defensible grounds” or “when essential to prevent disappearance or wastage of
corporate property.

1.1) In PCGG v. Cojuangco, SC developed a 2-tiered test in determining whether PCGG may
vote sequestered shares:
1. whether there is prima facie evidence showing that the said shares are ill-gotten and
thus belong to the state; and
2. whether there is an immediate danger of dissipation thus necessitating their continued
sequestration and voting by the PCGG while the main issue pends with the
Sandiganbayan.

1.2) But the 2-tiered test does not apply in cases involving funds of “public character.” In such
cases, the government is granted the authority to vote said shares, namely:
(1) Where government shares are taken over by private persons or entities who/which
registered them in their own names, and
(2) Where the capitalization or shares that were acquired with public funds somehow
landed in private hands.
The public character exceptions are based on the common-sense principle that legal fiction must
yield to truth; that public property registered in the names of non-owners is affected with trust
relations; and that the prima facie beneficial owner should be given the privilege of enjoying the
rights Rowing from the prima facie fact of ownership.

1.3) Summing up the rules, SC said:

In short, when sequestered shares registered in the names of private individuals or entities
are alleged to have been acquired with ill-gotten wealth, then the two-tiered test is
applied. However, when the sequestered shares in the name of private individuals or
entities are shown, prima facie, to have been (1) originally government shares, or (2)
purchased with public funds or those affected with public interest, then the two-tiered test
does not apply. Rather, the public character exception in Baseco v. PCGG and
Cojuangco Jr. v. Roxas prevail; that is, the government shall vote the shares.
SC remanded the issue of fact of whether the shares are ill-gotten and if there is immediate
danger of dissipation to the SB since SC is not a trier of facts.

2) Stock and transfer book alteration- Contention: PCGG claims that the stock and transfer book
should not be used as basis to determine the voting rights of shareholders as some entries therein
were altered “by substitution.”
Held:
If there be any substitution or alterations, the anomaly, if at all, may be explained by the
corporate secretary who made the entries therein. At any rate, the accuracy of the Stock and
Transfer Book may be checked by comparing the entries therein with the issued stock
certificates. The fact is that any transfer of stock or issuance thereof would necessitate an
alteration of the record by substitution. Any anomaly in any entry which may deprive a person or
entity of its right to vote may generate a controversy personal to the corporation and the
stockholder and should not affect the issue as to whether it is the PCGG or the shareholder who
has the right to vote. In other words, should there be a stockholder who feels aggrieved by any
alteration by substitution in the Stock and Transfer Book, said stockholder may object thereto at
the proper time and before the stockholders meeting.

3) Registration as requisite for voting- SC upheld SB’s requirement that before PCGG can vote
the shares transferred to it from the Benedicto compromise, such shares must first be recorded in
ETPI’s stock and transfer book. S63 of Corporation Code provides:
Sec. 63. Certificate of stock and transfer of shares. – xxx. No transfer, however, shall be
valid, except as 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.
Until registration is accomplished, the transfer, though valid between the parties, cannot be
effective as against the corporation. Thus, the unrecorded transferee cannot vote nor be voted
for. The purpose of registration, therefore, is two-fold: 1) to enable the transferee to exercise all
the rights of a stockholder, including the right to vote and to be voted for, and 2) to inform the
corporation of any change in share ownership so that it can ascertain the persons entitled to the
rights and subject to the liabilities of a stockholder.

4) Not negotiable- Contention: PCGG claims that it now owns and thus has the right to vote
those shares which it found in Malacañang endorsed in blank, citing Section 34 of Negotiable
Instruments Law.
Held:
But stock certificates, although sometimes regarded as quasi-negotiable in the sense that it may
be transferred by delivery, the instrument is non-negotiable, because the holder thereof takes it
without prejudice to such rights or defenses as the registered owner or creditor may have under
the law, except insofar as such rights or defenses are subject to the limitations imposed by the
principles governing estoppel.

56. Republic v. COCOFED et al., GR 147062-64, December 14, 2001, Panganiban, J., En
Banc. (Shares purchased with public funds [Coconut levy funds] which are sequestered
belong prima facie to the government and thus PCGG can vote them)
FACTS:
After the 1986 EDSA Revolution, President Cory issued Eos 1, 2, and 14. Pursuant to these laws,
PCGG issued and implemented numerous sequestrations of allegedly ill-gotten companies and
assets. Among the properties sequestered were shares of stock in the United Coconut Planters
Bank (UCPB) registered in the names of alleged “one million coconut farmers”, the so called
Coconut Industry Investment Fund (CIIF) companies, and respondent Eduardo Cojuangco. Thus,
PCGG filed an action for reconveyance and damages in Sandiganbayan.

In 2001, the BoD of UCPB received from ACCRA Law Office a letter written on behalf of the
COCOFED and the alleged nameless one million coconut farmers, demanding the holding of a
stockholders’ meeting to elect the BoD. Thus, the BoD approved a resolution calling for a
stockholders’ meeting. COCOFED filed a motion in SB, asking SB to enjoin PCGG from
voting the UCPB shares registered in the names of the more than one million coconut
farmers. SB authorized COCOFED, CIIF, and Eduardo Cojuangco, registered stockholders of
UCP, to exercise their rights to vote their shares of stock and themselves to be voted upon in the
stockholders’ meeting. Hence this petition by Republic represented by PCGG.

ISSUE:
Who may vote the sequestered UCPB shares while the main case for their reversion to the state
is pending in the SB?
HELD:
1) General rule- The general rule is that the REGISTERED OWNER of the shares of a
corporation exercises the right to vote, even if the shares are sequestered by the government.
PCGG, as mere conservator, cannot exercise acts of dominion.

1.1) Two-tiered test- On the other hand, PCGG is authorized to vote these sequestered shares
registered in the name of private persons and acquired with allegedly ill-gotten wealth if it is able
to satisfy the two-tiered test devised by SC in Cojuangcoo v. Calpo and PCGG v. Cojuangco:
(1) Is there prima facie evidence showing that the said shares are ill-gotten and thus
belong to the State?
(2) Is there an imminent danger of dissipation, thus necessitating their continued
sequestration and voting by the PCGG, while the main issue is pending with the
Sandiganbayan?
2) Public character exception- SC in Baseco v. PCGG and Cojuangco v. Roxas has provided two
clear “public character exceptions” under which the government is granted authority to
vote the shares:
(1) Where government shares are taken over by private persons or entities who/which
registered them in their own names, and
(2) Where the capitalization or shares that were acquired with public funds somehow
landed in private hands.
The exceptions are based on the common-sense principle that legal fiction must yield to truth;
that public property registered in the names of non-owners is affected with trust relations; and
that the prima facie beneficial owner should be given the privilege of enjoying the rights flowing
from the prima facie fact of ownership.

In Baseco, BASECO was owned and controlled by Marcos. We held that PCGG has the power to
provisionally take it over in the public interest or to prevent its dissipation; and since the term is
employed in reference to going concerns or business enterprises in operation, something more
than physical custody is connoted. The PCGG may exercise some measure of control in the
operation, running, or management of the business itself. SC granted PCGG the right to vote
the sequestered shares as they appeared to be “assets belonging to the government itself” or
whose capitalization comes from public funds but which, somehow, landed in the hands of
private persons.

In short, when sequestered shares registered in the names of private individuals or entities are
alleged to have been acquired with ill-gotten wealth, then the two-tiered test is applied.
However, when the sequestered shares in the name of private individuals or entities are shown,
prima facie, to have been (1) originally government shares, or (2) purchased with public
funds or those affected with public interest, then the two-tiered test does not apply. Rather, the
public character exceptions prevail; that is, the government shall vote the shares.

3) Coconut levy funds used to purchase UCPB shares- Here, the money used to purchase the
sequestered UCPB shares came from the coconut consumer stabilization fund (CCSF) or
the coconut levy funds. The sequestered UCPB shares are confirmed to have been acquired with
coco levies, not with alleged ill-gotten wealth. Hence, by parity of reasoning, the right to vote
them is not subject to the “two-tiered test but to the public character of their acquisition.

To avoid misunderstanding and confusion, this Court will even be more categorical and positive
than its earlier pronouncements: the coconut levy funds are not only affected with public
interest; they are, in fact, prima facie public funds

Public funds are moneys belonging to the state, more specifically taxes etc. raised by operation
of law for the support of the government. Coconut levy funds satisfy this general definition of
public funds. They are levies imposed by the state for the benefit of the coconut industry and its
farmers- to advance the government’s policy of protecting the coconut industry. Coconut levy
funds are raised with the use of the police and taxing powers of the state.

Thus, having been acquired with public funds, UCPB shares belong, prima facie, to the
government. Ownership includes the right to enjoy, dispose of, exclude and recover a thing
without limitations other than those established by law or by the owner. And the right to vote
shares is a mere incident of ownership. In the present case, the government has been shown to
be the prima facie owner of the funds used to purchase the shares. Hence, it should be
allowed the rights and privileges flowing from such fact.

57. Evangelista et al. v. Santos, GR L-1721, May 19, 1950, Reyes, J., First Division.
FACTS:
This is an action by the minority stockholders of a corporation against its principal officer for
damages resulting from his mismanagement of its affairs and misuse of its assets. The complaint
alleges that plaintiffs are minority stockholders of the Vitali Lumber Company, Inc.; that
defendant holds more than 50 per cent of the stocks of said corporation and also is and
always has been the president, manager, and treasurer thereof; and that defendant, in such
triple capacity, through fault, neglect, and abandonment allowed its lumber concession to lapse
and its properties and assets, among them machineries, buildings, warehouses, trucks, etc., to
disappear, thus causing the complete ruin of the corporation and total depreciation of its stocks.
The complaint therefore prays for judgment requiring defendant: (1) to render an account of his
administration of the corporate affairs and assets: (2) to pay plaintiffs the value of their
respective participation in said assets on the basis of the value of the stocks held by each of them;
and (3) to pay the costs of suit. Plaintiffs also ask for such other remedy as may be just and
equitable.

Santos moved to dismiss on the ground that the complaint did not state a cause of action. Trial
court granted the motion to dismiss. Hence this petition.

ISSUE:
Whether the minority stockholders of a corporation may file a suit in behalf of the corporation
against Santos, their president/manager/treasurer, who holds more than 50% of the corporation’s
stocks.
HELD: YES.
The action is for damages resulting from mismanagement of corporate affairs by its principal
officer. The injury complained of is thus primarily to the corporation so that the suit for the
damages claimed should be by the corporation rather than by the stockholders. 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.

But while it is to the corporation that the action should pertain in cases of this nature, if the
officers of the corporation, who are the ones called upon to protect their rights, refuse to
sue, or where a demand upon them to file the necessary suit would be futile because they
are the very ones to be sued or because they hold the controlling interest in the corporation,
then in that case any one of the stockholders is allowed to bring suit. But in that case it is the
corporation itself and not the plaintiff stockholder that is the real party in interest, so that
such damages as may be recovered shall pertain to the corporation. In other words, it is a
derivative suit brought by a stockholder as the nominal party plaintiff for the benefit of the
corporation, which is the real party in interest.
Here, plaintiffs brought the action not for the benefit of the corporation, but for their own
benefit, since they ask Santos to make good the losses occasioned by his mismanagement and
pay them the value of their respective participation in the corporate assets based on their
respective holdings. Clearly, this cannot be done until all corporate debts, if there be any, are
paid and the existence of the corporation terminated by the limitation of its charter or by lawful
dissolution in view of the provisions of section 16 of the Corporation Law. It results that
plaintiffs' complaint shows no cause of action in their favor so that the lower court did not err
in dismissing the complaint on that ground.

Plaintiffs’ complaint can be converted into a derivative suit for the benefit of the corporation by a
mere change in prayer.

58. Chua v. CA, GR 150793, November 19, 2004, Quisumbing, J., First Division. (In a
derivative suit, corporation must be impleaded, and it must be alleged that the suit is
derivative)
FACTS:
Respondent Lydia Hao, treasurer of Siena Realty Corporation, filed a complaint-affidavit
charging Francis Chua of 4 counts of falsification of public documents under Arts. 172 in
relation to Art. 171 of RPC. Thereafter, the prosecutor filed the information in MeTC against
Chua. During trial, private prosecutors Attys. Kho and Rivera appeared and presented Hao as
first witness. Chua moved to exclude Hao’s counsels as private prosecutors. MeTC granted.

On certiorari with RTC (SCA 99, entitled Hao, in her own behalf and for the benefit of Siena
Realty Corporation v. Francis Chua, and Honorable Vega, judge, Branch 22, MeTC), RTC
reversed MeTC. On certiorari with CA, CA affirmed RTC.

Chua had argued in CA that Hao had no authority to bring a suit in behalf of the corporation
since there was no board resolution authorizing her to file the suit. CA held that the action was a
derivative suit, for it alleged that Chua falsified documents pertaining to projects of the
corporation and made it appear that Chua was a stockholder and director of the corporation. CA
held that the corporation was a necessary party. Hence this petition.

Contention: Chua claims that CA erred when it sustained RTC in giving due course to the
petition for certiorari in SCA 99 despite the fact that the corporation was not the private
complainant in the criminal case. Also, a derivative suit is peculiar only to intra-corporate
proceedings and cannot be made part of a criminal action.

ISSUE:
Whether Hao’s criminal complaint, including its civil aspect, is a derivative suit.
HELD: NO.
1) Under S36 of the Corporation Code, read in relation to S23, where a corporation is an injured
party, its power to sue is lodged with its board of directors or trustees. An individual stockholder
is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in
order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions,
the suing stockholder is regarded as a nominal party, with the corporation as the real party
in interest.

The corporation is a necessary party to the derivative suit. And the relief which is granted is a
judgment against a third person in favor of the corporation. Similarly, if a corporation has a
defense to an action against it and is not asserting it, a stockholder may intervene and defend
on behalf of the corporation.

2) When a criminal action is instituted, the civil action arising from the offense is deemed
instituted with the criminal action. Here, the complaint was instituted by Hao for falsifying
corporate documents concerning corporate projects of Siena Realty Corporation. Thus, Siena
Realty has a cause of action.

2.1) But the BoD of Siena did not institute the action, but it was Hao who instituted it. Hao
claims that she filed a derivative suit in behalf of the corporation. This is inaccurate.

Not every suit filed in behalf of the corporation is a derivative suit. 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.

In the criminal complaint Hao filed, nowhere is it stated that she is filing the same in behalf
and for the benefit of the corporation. Thus, the criminal complaint, including the civil aspect
thereof, could not be deemed a derivative suit.

3) In a string of cases, we ruled that only a party-in-interest or those aggrieved may file certiorari
cases. In Pastor v. CA, we held that if aggrieved, even a non-party may institute a petition for
certiorari. Here, although the corporation was not a complainant in the criminal action, the
subject of the falsification was the corporation’s project and the falsified documents were
corporate documents. Thus, the corporation is a proper party in the R65 petition for certiorari
since the proceedings in the criminal case adversely affected it.

59. Expertravel & Tours, Inc. v. CA, GR 152392, May 26, 2005, Callejo, Sr., J., Second
Division. (Teleconferencing as a means for BoD meeting is a reality in PH)
FACTS:
Korean Airlines (KAL) is a corporation established in South Korea and licensed to do business
in PH. Its general manager in PH is Suk Kyoo Kimi while its appointed counsel was Atty.
Aguinaldo and his law firm. In 1999, KAL, thru Atty. Aguinaldo, filed a complaint against
Expertravel and Tours, Inc. (ETI) in RTC for collection of P260k and damages. The verification
and certification against forum shopping was signed by Aguinaldo, who indicated therein that he
was the resident agent and legal counsel of KAL and had caused the preparation of the
complaint. ETI moved to dismiss on the ground that Aguinaldo was not authorized to execute the
verification and certificate of non-forum shopping.

During the hearing, Aguinaldo claimed that he had been authorized to file the complaint thru a
resolution of the KAL BoD approved during a special meeting held on June 25, 1999. On March
6, 2000, KAL submitted the affidavit of Suk Kyoo Kimi alleging that the BoD conducted a
special teleconference on June 25, 1999 which he and Aguinaldo attended. In the
teleconference, the BoD approved a resolution authorizing Aguinaldo to execute the certificate
of non-forum shopping and to file the complaint. But Suk also alleged that the corporation had
no written copy of said resolution.

RTC denied ETI’s motion to dismiss, giving credence to the claim that the KAL BoD conducted
said teleconference and taking judicial notice thereof. CA affirmed. Hence this petition.

ISSUE:
Whether the conduct of a teleconference meeting of KAL’s BoD where a board resolution was
issued authorizing Aguinaldo to file a complaint and execute a certificate of NFS was proven.
HELD: NO.
Contention: Aguinaldo, as the resident agent and corporate secretary, is authorized to sign and
execute the certificate of non-forum shopping, on top of the board resolution approved during the
teleconference. The courts may take judicial notice that PLDT has provided a record of corporate
conferences thru FiberNet and that such technology facilitates voice and image transmission with
ease.
Held:
1) The Certificate of NFS may be incorporated in the complaint or appended thereto.
Compliance after filing of the complaint is impermissible. But in exceptional circumstances, the
court may allow subsequent compliance with the rule.

2) Resident agent- While Aguinaldo is the resident agent of KAL in PH, this does not mean that
he is authorized to execute the requisite certification against forum shopping. Under Section 127,
in relation to Section 128 of the Corporation Code, the authority of the resident agent of a foreign
corporation with license to do business in the Philippines is to receive, for and in behalf of the
foreign corporation, services and other legal processes in all actions and other legal proceedings
against such corporation. Under the law, Aguinaldo was not specifically authorized to execute a
certificate of NFS. This is because while a resident agent may be aware of actions filed against
his principal (foreign corporation doing business in PH), such resident may not be aware of
actions initiated by its principal, whether in PH against a domestic corporation or private
individual, or in the country where such corporation was organized, against a PH registered
corporation or PH Citizen.

3) Judicial notice- Things of "common knowledge," of which courts take judicial matters coming
to the knowledge of men generally in the course of the ordinary experiences of life, or they may
be matters which are generally accepted by mankind as true and are capable of ready and
unquestioned demonstration. But a court cannot take judicial notice of any fact which, in part,
is dependent on the existence or non-existence of a fact of which the court has no
constructive knowledge.

3.1) Teleconferencing- In this age of modern technology, the courts may take judicial notice that
business transactions may be made by individuals through teleconferencing. Teleconferencing is
interactive group communication (three or more people in two or more locations) through an
electronic medium. In general terms, teleconferencing can bring people together under one roof
even though they are separated by hundreds of miles. This type of group communication may be
used in a number of ways, and have three basic types: (1) video conferencing — television-like
communication augmented with sound; (2) computer conferencing — printed communication
through keyboard terminals, and (3) audio conferencing-verbal communication via the telephone
with optional capacity for telewriting or telecopying.

In PH, teleconferencing and videoconferencing of members of board of directors of private

corporations is a reality, in light of Republic Act No. 8792. The SEC issued SEC Memorandum
Circular No. 15, on November 30, 2001, providing the guidelines to be complied with related to
such conferences. Thus, the Court agrees with the RTC that persons in the Philippines may have
a teleconference with a group of persons in South Korea relating to business transactions or
corporate governance.

4) But SC was not convinced that a teleconferencing was conducted in this case. Aguinaldo
announced the holding of a teleconferencing on January 28, 2000 and prayed for 10d to submit
the board resolution purportedly authorizing him to file the complaint and execute the required
certificate of NFS. He again asked for 15 more days, contending that the board resolution was in
its main office in Korea. On March 6, 2000, KAL submitted the affidavit of Suk Kyoo Kim,
stating that he and Aguinaldo attended the teleconference where a board resolution was
approved. But the affidavit also stated that KAL “does not keep a written copy of the aforesaid
resolution” because no records of board resolutions approved during teleconferences were kept.
This thus belied KAL’s earlier claim in its motion for extension that the resolution was in the
custody of its main office in Korea.

The claim that the teleconference was conducted is incredible, given the additional fact that no
such allegation was made in the complaint. Worse, it appears that as early as January 10, 1999,
Aguinaldo had already signed a Secretary/Resident Agent’s Certificate alleging that the BoD
held a teleconference on June 25, 1999. No such certificate was appended to the complaint filed
on September 06, 1999. There was also no explanation why the certificate was signed as early as
January 9, 1999 and yet was notarized 1 year later on Jan. 10, 2000.

60. Gonzales v. PNB, GR L-33320, May 30, 1983, Vasquez, J., First Division.
FACTS:
Gonzales filed in CFI a SCA for mandamus against PNB praying that PNB be ordered to allow
him to look into the books and records of PNB.

Previous to the action, Gonzales had filed several cases in SC questioning different transactions
entered into by PNB with other parties. In Civil Case 69345, in the course of a hearing, the
personality of Gonzales to sue PNB was questioned. Thus, Gonzales made known his
intention to acquire one share of stock from Congressman Montano which, on the next day on
Aug. 30, 1967, was transferred in his name in the books of PNB. Thereafter, Gonzales filed, in
his dual capacity as taxpayer and stockholder, 3 more cases against PNB.

But on Jan. 11, 1969, Gonzales addressed a letter to the president of PNB requesting to look
into the records of PNB’s transactions covering the purchase of a sugar central by Southern
Negros Development Corp. to be financed by Japanese suppliers and financiers etc. PNB’s AVP
and Legal Counsel denied the request for not being germane to his interest as a one share
stockholder and for the cloud of doubt as to his real intention in acquiring said share. Thus,
Gonzales filed this Mandamus suit. CFI dismissed the complaint. Hence this appeal to review the
dismissal.

ISSUE:
Whether Gonzales, who had previously filed cases against PNB, may be allowed to inspect
corporate records of PNB where he acquired one share of stock of PNB for such purpose and the
purpose of the inspection is to gain materials to use against PNB in the cases.
HELD: NO.
1) Contention: S51 of Act 1459 (Old Corporation Law) provides:
"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."
S51 does not justify the qualification of CFI that the inspection of corporate records be denied on
the ground that it is intended for an improper motive or purpose. S51 grants such right to a
stockholder unconditionally.
Held:
But Act 1459 has been replaced by BP68, Corporation Code. The right of inspection was
retained but with some modifications. SC cites S74 of BP 68:
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."
Thus, among the changes introduced by BP 68 are: 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. But it
now requires as a condition for examination that the one requesting it must not have been guilty
of using improperly any information secured thru a prior examination, and that the person
asking for such examination must be acting in GF and for a legitimate purpose in making his
demand.

The unqualified provision on inspection of S51, Act 1459 no longer holds true under BP 68.

1.1) The circumstances under which Gonzales acquired one stock in PNB purposely to exercise
the right of inspection do not argue in favor of his GF. Admittedly, he sought to be a stockholder
to pry into transactions entered into by PNB even before he became a stockholder. His obvious
purpose was to arm himself with materials which he can use against PNB.

2) Also, S4 of Corporation 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."
Here, PNB’s charter is RA 1300. The inspection sought by Gonzales would violate S15, 16, and
30 of RA 1300:
'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.'

61. Ching v. Subic Bay Golf and Country Club, Inc., GR 174353, September 10, 2014,
Leonardo-de Castro, J., First Division.
FACTS:
Petitioners Nestor Ching and Andrew Wellington filed a complaint in RTC on behalf of the
members of Subic Bay Golf and Country Club, Inc. (SBGCCI) against SBGCCI and its BoD and
officers. The Subic Bay Golfers and Shareholders Incorporated (SBGSI) was also named as
plaintiff. The officers impleaded were SBGCCI’s president, treasurer, corporate secretary, and 2
directors.

The complaint alleged that SBGCCI sold to petitioners shares at US$22k per share, presenting to
them the AoI which stated that the shareholders shall not be entitled to dividends but only to pro-
rata share of the club assets upon dissolution or liquidation. But on June 27, 1996, an amendment
to the AoI was approved by SEC, which stated that the shareholders shall also have no
proprietary rights over club properties, thus, petitioners claim, this took away the shareholders’
rights to participate in the pro-rata distribution of the club assets after dissolution. This is alleged
to be in fraud of shareholders. Also, petitioners allege that the BoD did not call any stockholders’
meeting since its incorporation, violating S50 of CorpCode.

The complaint also enumerated other instances of fraud in the management of the corporation,
such as: 1) The BoD and officers did not indicate in its 1999 financial report the amount of
P235M collected from the subscription of 409 shareholders who paid US$22K; 2) the green fees
collected from patrons of the golf course is not reported as income in the yearly reports; 3) The
shares of SBGCCI has drastically reduced from its issued value of US$22k to only P200k, etc.
Thus, petitioners pray for a TRO to enjoin defendants from acting as officers and BoDs of the
Corporation.

RTC dismissed the complaint, holding that the action is a derivative suit. It held that petitioners
failed to exhaust their remedies within the corporation itself. Also, petitioners held only 2 of the
409 outstanding shares, or 0.24%, indicating that the action is a nuisance or harassment suit
which may be dismissed under S1(b) of the Interim Rules of Procedure for Intra-Corporate
Controversies (Interim Rules). CA affirmed RTC. Hence this petition for review.

ISSUE:
Whether petitioners’ suit complies with the requirements of a derivative suit.
HELD: NO.
1) The complaint is deemed filed only by the 2 petitioners Ching and Wellington since they did
not attach any authorization from SBGSI.

2) Derivative, individual, representative/class suits- "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. 1) 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. 2) 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. 3) 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.

But 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. Thus, common law gradually recognized the right
of a stockholder to sue on behalf of a corporation, known as derivative suit.

2.1) 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.' 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. The two actions are mutually exclusive: i.e., the right of action
and recovery belongs to either the shareholders (direct action) or the corporation (derivative
action)."

The reliefs sought in the complaint, namely that of enjoining defendants from acting as BoD and
officers, appointment of receiver, and damages, show that the complaint was filed to curb the
alleged mismanagement of SBGCCI. The cause of action of petitioners do not accrue to a
single stockholder or a class of shareholders but to the corporation itself.

2.2) However, as minority stockholders, petitioners do not have statutory right to override the
business judgments of SBGCCI’s officers and BoDs on the ground of the latter’s alleged lack
of qualification to manage a golf course. PD902-A does not grant minority stockholders a cause
of action against waste and diversion by the BoD but merely identifies the jurisdiction of SEC
over actions already authorized by law or jurisprudence. A stockholder’s right to institute a
derivative suit is not based on any express provision of the CorpCode or even the SRC, 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.

3) R8, S1 of the Interim Rules imposes the following requirements for derivative suits:
(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.
RTC should not have dismissed the case on the ground that it is a nuisance or harassment suit.
Although petitioners’ only hold 0.24% or 2 of 409 of the shares, it is enough that a member or
a minority of stockholders file a derivative suit for and in behalf of a corporation.

3.1) As to the second requisite, petitioners failed to state in the complaint that they had exerted
all reasonable efforts to exhaust all remedies available under the AoI, by-laws, and laws or rules
governing the corporation to obtain the relief they desire. Even if petitioners thought it was futile
to exhaust intra-corporate remedies, they should have stated the same in the complaint and
specified the reasons for such opinion. Failure to do so allows RTC to dismiss the complaint.

62. Lim v. Moldex Land, Inc., GR 206038, January 25, 2017, Mendoza, J., Second Division.
FACTS:
Lim is a registered unit owner of 1322 Golden Empire Tower, a condominium project of Moldex
Land, Inc., a real estate company engaged in the construction and development of high-end
condominium projects and in the marketing and sale of the units thereof to the public. Condocor,
a non-stock non-profit corporation, is the registered condominium corporation for the Golden
Empire Tower. Lim, as unit owner of Golden Empire Tower, is a member of Condocor.

Lim claims that the individual respondents (Jaminola, Macalintal, Milanes, and Roman) are non-
unit buyers but are members of Condocor’s BoD, having been elected in the July 21, 2012
general membership meeting.

Moldex is a member of Condocor based on its ownership of the 220 unsold units in the Golden
Empire Tower. The individual respondents acted as its representatives.

On July 21, 2012, Condocor held its annual general membership meeting. The existence of
quorum was declared even though only 29 of the 108 unit buyers were present. The
declaration of quorum was based on the presence of majority of the voting rights, including
those pertaining to the 220 unsold units held by Moldex. Lim objected to the validity of the
meeting, which was denied. Thus, Lim and all the other unit owners, except one, walked out and
left the meeting. Despite the walkout, the individual respondents elected the new members of the
BoD. All 4 individual respondents were voted as members of the Board. Thereafter, the newly
elected board elected its officers. Individual respondents were elected as follows:
1) Atty. Jeffrey Jaminola - Chairman of the Board and President 2) Ms. Joji Milanes -
Vice-President 3) Ms. Clothilda Ann Roman - Treasurer 4) Mr. Edgardo Macalintal -
Corporate Secretary

Lim filed an election protest in RTC. RTC dismissed, holding that there was quorum; that
Moldex is a member of Condocor and respondents, as Moldex’ representatives can exercise all
membership rights, including the right to vote and to be voted. Quorum is based on the presence
or absence of the voting rights and the voting rights of unit owners was 73,376. 83.33% were
present in the meeting, including 58,504 voting rights of Moldex. Hence this petition.

ISSUE:
Whether quorum in a meeting is based on the number of voting rights present in the absence of
provision to that effect in the bylaws of a corporation.
HELD: NO.
1) Contention: Lim had no cause of action to file this action as she was no longer the owner of a
condominium unit by virtue of a deed of assignment she executed in favor of Reynaldo and
Dianna Lim, her nephew and niece.
Held:
S90 of CorpCode states that membership in a non-stock corporation and all rights arising
therefrom are personal and non-transferable, unless the articles of incorporation or the by-laws
otherwise provide. Condocor’s by-laws states that any member who sells his condominium units
automatically cease to be a member. The Master Deed of Condocor states that transfers of
ownership of any unit shall be reported to Condocor within 5 days after the effectivity of the
transactions. Nothing in the records show that the alleged transfer by Lim was registered with the
Register of Deeds of Manila or was reported to the corporation. Until such registration, Lim
remains to be the registered owner of the condominium units.

2) Quorum in non-stock corporations determined by majority of actual members- Under

Philippine corporate laws, meetings may either be regular or special. A stockholders' or
members' meeting must comply with the following requisites to be valid:
1) The meeting must be held on the date fixed in the By-Laws or in accordance with law;
2) Prior written notice of such meeting must be sent to all stockholders/members of
record; 3) It must be called by the proper party;
4) It must be held at the proper place; and
5) Quorum and voting requirements must be met.
S52 of CorpCode provides:
Section 52. Quorum in meetings. — Unless otherwise provided for in this Code or in the
by-laws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporations.
Thus, for stock corporations, the quorum is based on the number of outstanding voting stocks
while for non-stock corporations, only those who are actual, living members with voting rights
shall be counted in determining the existence of a quorum. Quorum in non-stock corporations is
determined based on the numerical equivalent of all members entitled to vote, unless some
other basis is provided in the by-laws of the corporation. Also, to include members without
voting rights in the total members for purposes of quorum would be superfluous for although
they may attend a particular meeting, they cannot cast their vote on any matter discussed therein.

2.1) S6 of Condocor’s by-laws reads: "The attendance of a simple majority of the members who
are in good standing shall constitute a quorum.” There are 2 kinds of members in the by-laws:
members in good standing and delinquent members. S6 merely stresses that delinquent members
are not considered in determining quorum. Thus, Condocor’s bylaws has no rule different from
that provided in the CorpCode as to determining existence of quorum.

2.2) Quorum vs Voting rights- Insofar as Condocor is concerned, quorum is different from
voting rights. Applying the law and Condocor's By-Laws, if there are 100 members in a non-
stock corporation, 60 of which are members in good standing, then the presence of 50% plus 1 of
those members in good standing will constitute a quorum. Thus, 31 members in good standing
will suffice in order to consider a meeting valid as regards the presence of quorum. The 31
members will naturally have to exercise their voting rights.

It is in this instance when the number of voting rights each member is entitled to become
significant. If 29 out of the 31 members are entitled to 1 vote each, another member (known as
A) is entitled to 20 votes and the remaining member (known as B) is entitled to 15 votes, then the
total number of voting rights of all 31 members is 64. Thus, majority of the 64 total voting rights,
which is 33 (50% plus 1), is necessary to pass a valid act. Assuming that only A and B concurred
in approving a specific undertaking, then their 35 combined votes are more than sufficient to
authorize such act.

Thus, SC held that there was no quorum in the July 21, 2012 annual membership meeting and
thus, the meeting was void and not binding on the corporation or its members.

3) S10 of RA 4726, Condominium Act, limits membership in a condominium corporation to the

unit owners of the condominium project:
Membership in a condominium corporation, regardless of whether it is a stock or non-
stock corporation, shall not be transferable separately from the condominium unit of
which it is an appurtenance. When a member or stockholder ceases to own a unit in the
project in which the condominium corporation owns or holds the common areas, he shall
automatically cease to be a member or stockholder of the condominium corporation.
Contention: Lim argues that Moldex cannot be a member of Condocor. The ownership
contemplated by law must result from a sale transaction between the owner-developer and the
purchaser. Moldex’ ownership was only as an owner-developer and only for the purpose of
selling the units. Lim relies on PD 957, S30 and 25.
Held:
There is no provision in PD 957 stating that an owner-developer of a condominium project
cannot be a member of a condominium corporation. PD 957 governs homeowners associations,
which is different from a condominium corporation. The purpose of a homeowners association is
to promote and protect the mutual interest of the buyers and residents and to assist in their
community development. But a condominium corporation is not just a management body of the
condominium project; it also holds title to the common areas, including the land or the
appurtenant interests in such areas. PD 957 does not regulate condominium corporations and thus
cannot be applied in this case.

3.1) S2 of the Condominium Act states:

Title to the common areas, including the land, or the appurtenant interests in such areas,
may be held by a corporation specially formed for the purpose (hereinafter known as the
"condominium corporation") in which the holders of separate interest shall
automatically be members or shareholders, to the exclusion of others, in proportion to
the appurtenant interest of their respective units in the common areas.
“Separate interest” in a condominium entitling the holder to become automatically a shareholder
in the condominium corporation is no other than ownership of a unit. Thus, the law dictates
that ownership of a unit entitles one to become a member of a condominium corporation.
Condominium Act does not provide a specific mode of acquiring ownership. Thus, whether one
becomes an owner of a condominium unit by sale or donation is of no moment.

4) Moldex can appoint representatives to exercise its membership rights, specifically the right to
be voted as corporate directors. A corporation can act only thru natural persons authorized by its
BoD. Thus, Moldex, to exercise its membership rights, necessarily has to appoint its
representatives. S58 of CorpCode states:
Section 58. Proxies. — Stockholders and members may vote in person or by proxy in
all meetings of stockholders or members.
Condocor’s by-laws also grants registered owners the right to designate any person or entity to
represent them in Condocor. Thus, Moldex could send the 4 individual respondents as its
representatives in the July 21, 2012 meeting.

5) Individual respondents, who are non-members, cannot be elected as directors and officers
of the condominium corporation. S23 provides:
Section 23. The Board of Directors or Trustees. — Unless 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 to be elected from among the holders of stocks, or where
there is no stock, from among the members of the corporation, who shall hold office for
one (1) year until their successors are elected and qualified.
xxx. Trustees of non-stock corporations must be members thereof. Xxx.
This is reiterated in S92:
Section 92. Election and term of trustees. — x x x No person shall be elected as trustee
unless he is a member of the corporation. x x x
While Moldex can designate proxies, the latter cannot be elected as directors or trustees of
Condocor. Only a member of record of the corporatioin can by a director or trustee. Further, the
power of the proxy is merely to vote.

5.1) S25 of CorpCode states that the president shall also be a director. Jaminola cannot be elected
as director. Thus, his election as president is void. Milanes and Macalintal could not be leected
as VP and secretary as the bylaws of Condocor states that said officers must be elected from its
member-directors. Roman’s election as treasurer would have been valid as a corporate treasurer
may or may not be a director, but the July 21, 2012 meeting is void. Thus, Roman’s election is
also void.

63. Roque v. People, GR 211108, June 07, 2017, Tijam, J., Third Division.
FACTS:
In 1993, Barangay Mulawin Tricycle Operators and Drivers Association, Inc. (BMTODA)
became a corporation duly registered with SEC. In 2003, Ongjoco, a member of BMTODA,
learned that BMTODA’s funds were missing. Ongjoco, in a letter, requested copies of
BMTODA’s documents pursuant to his right to examine records under S74 of CoprCode. But
Singson, secretary of BMTODA, denied his request.

Ongjoco also learned that the incumbent officers were holding office for 3 years already in
violation of the 1y period provided in BMTODA’s bylaws. He requested from Roque, president
of BMTODA, a copy of the list of its members with franchise numbers and tricycle fees and
franchise fees paid by each member, but Roque denied Ongjoco’s request.

Ongjoco filed an affidavit-complaint against Roque and Singson for violation of S74 in relation
to S144 of CorpCode for their refusal to furnish him copies of BMTODA records. An
information was filed against Roque and Singson. After the prosecution rested its case, Roque
and Singson filed a motion for leave to file demurrer to evidence with motion to dismiss by
demurrer. RTC granted and dismissed the case. CA reversed. Hence this petition.

ISSUE:
Whether Roque and Singson may be prosecuted for violation of S74 in relation to S144.
HELD: YES.
1) S74 of CorpCode provides for the liability for damages of any officer or agent of the
corporation for refusing to allow any director, trustee, stockholder or member of the corporation
to examine and copy excerpts from its records or minutes. S144 further provides for other
applicable penalties in case of violation of any provision of the Corporation Code.

Hence, to prove any violation under the aforementioned provisions, it is necessary that: (1) a
director, trustee, stockholder or member has made a prior demand in writing for a copy of
excerpts from the corporation’s records or minutes; (2) any officer or agent of the concerned
corporation shall refuse to allow the said director, trustee, stockholder or member of the
corporation to examine and copy said excerpts; (3) 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 (4) where
the officer or agent of the corporation sets up the defense that the person demanding to examine
and copy excerpts from the corporation's records and minutes has improperly used 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, the contrary must be shown or proved.

Here, Ongjoco, as member of BMTODA, had a right to examine documents and records
pertaining to BMTODA. Ongjoco made a prior demand in writing for such records from Roque
and Sinigson. Both Roque and Singson refused to furnish Ongjoco copies of such records.
2) The letters were received by Roque and Singson when the revocation of BMTODA’s
registration was already lifted.

In any case, the revocation of a corporation’s certificate of registration does not automatically
warrant the extinction of the corporation such that its rights and liabilities are likewise altogether
extinguished. The termination of the life of a juridical entity does not, by itself, cause the
extinction or diminution of the rights and liabilities of such entity nor those of its owners
and creditors. Thus, the revocation of BMTODA’s registration does not automatically strip
off Ongjoco of his right to examine pertinent records of BMTODA.

Thus, SC affirmed the CA ruling remanding the case to the trial court for presentation of the
defense’s evidence.

64. Belo Medical Group, Inc. v. Santos, GR 185894, August 30, 2017, Leonen, J., Third
Division.
FACTS:
On May 5, 2008, Belo Medical Group (BMG) received a request from Santos for inspection of
corporate records. Santos claims that he was a registered shareholder and co-owner of Belo’s
shares as these were acquired while they cohabited as husband and wife. He inquired on the
election of Henares as corporate secretary in 2007 when Santos was not notified of the meeting
for such election. He also sought explanation on BMG’s failure to inform him of the 2007 and
2008 annual meeting. Santos’ concern over the corporate operations arose from the alleged death
of a patient in one of its clinics. Santos was unsuccessful since Henares, OIC of corporate
records, was travelling.

Belo wrote BMG repudiating Santos’ co-ownership, claiming that Santos held the 25 shares in
his name merely in trust for Belo as she, not Santos, paid for these shares. Belo also informed
BMG that Santos had a business in direct competition with BMG, Obagi Skin Health, Inc., the
operator of House of Obagi.

A second inspection was attempted by Santos by written demand. He was unsuccessful again.
Belo wrote BMG again to object. Belo further manifested that she was exercising her right as
shareholder to inspect the books herself to establish that the 25 shares were not owned by Santos.

Thus, BMG filed a complaint for interpleader in RTC “to compel Belo and Santos to interplead
and litigate their conflicting claims of ownership as well as right of inspection arising from the
25 BMG shares.”

Santos for a third time wrote a letter to BMG to schedule an inspection, warning of criminal
liability in case of refusal. He was unsuccessful.

BMG filed a supplemental complaint for declaratory relief to deny Santos’ right for inspection.

The complaints were raffled to RTC Makati Br. 149, special commercial court, thus classifying
them as intra-corporate. Santos moved to dismiss.
RTC ruled that BMG failed to sufficiently allege conflicting claims of ownership over the shares.
Though a motion to dismiss is a prohibited pleading under the Interim Rules of Procedure
Governing Intra-Corporate Controversies (Interim Rules), R1, S2 of the Interim Rules allowed
RoC to apply suppletorily; thus RTC ruled that MtDs are allowed in interpleader cases. It also
struck down the complaint for declaratory relief.

Hence this petition for review.

ISSUE:
Whether the controversy is intracorporate where the dispute is between 2 persons who claim to
be the real owners of the same shares of stock in a corporation.
HELD: YES.
1) BMG filed a case for interpleader, the proceedings of which are covered by RoC. But at its
core, it is an intra-corporate controversy. The types of intra-corporate relationships are:
[a] between the corporation, partnership or association and the public; [b] between the
corporation, partnership or association and its stockholders, partners, members, or
officers; [c] between the corporation, partnership or association and the state in so far as
its franchise, permit or license to operate is concerned; and [d] among the stockholders,
partners or associates themselves.
1.1) Relationship test; nature of controversy test- Applying relationship test, both Belo and
Santos are shareholders in BMG, although the ownership of stocks of one stockholder is
questioned. Unless Santos is adjudged a stranger to the corporation as he holds his shares only in
trust for Belo, then both he and Belo, based on official records, are stockholders of the
corporation.

Contention: BMG argues that the case is not intra-corporate as it is not between 2 shareholders as
only Santos OR Belo can be the rightful stockholder of the 25 shares. To include inspection of
corporate books to the controversy is premature.
Held:
This may be true. But this finding can be made only after trial where ownership of the shares is
decided. RTC cannot classify the case based on potentialities. They continue to be stockholders
until a decision is rendered on the true ownership of the 25 shares of stock in Santos’ name.

BMG wants the trial court not to prematurely characterize the dispute as intra-corporate when, in
the same breath, it prospectively seeks Santos' perpetual disqualification from inspecting its
books. This case was never about putting into light the ownership of the shares of stock in
Santos' name. If that was a concern at all, it was merely secondary. The primary aim of Belo
and Belo Medical Group was to defeat his right to inspect the corporate books, as can be
seen by the filing of a Supplemental Complaint for declaratory relief.

1.1.1) Applying nature of controversy test, this is still intracorporate. The interpleader seeks a
determination of the true owner of the shares registered in Santos’ name. But ultimately, the goal
is to stop Santos from inspecting corporate books. Even if Santos is declared the owner of the
shares, BMG still seeks to disqualify him from inspecting based on bad faith. Thus, the
controversy shifts from a mere question of ownership over movable property to the exercise of a
registered stockholder’s proprietary right to inspect corporate books.

1.2) Thus, as an intracorporate dispute, Santos should not have been allowed to file a motion to
dismiss (prohibited pleading under Interim Rules). RTC should have continued on with the case
as an intracorporate dispute.

SC also held that there can be no joinder of cause of action for special civil actions under R2, S5.
Both interpleader and declaratory relief are special civil actions.

65. Villongco v. Yabut, GR 225022, February 05, 2018, Tijam, J., First Division.
FACTS:
Philville Development and Housing Corporation is a family corporation founded by Geronima
Que that is engaged in the real estate business. Its authorized capital stock is P20M divided into
200,000 shares with P100 par value each. Geronima owned 3,140 shares while the remaining
196,860 shares were equally distributed among Geronima’s 6 children: Carolina, Ana, Angelica,
Cecilia, Corazon, and Maria (32,810 shares each).

Geronima died in 2007. By virtue of the sale of shares of stocks dated June 11, 2005 executed by
Cecilia as attorney-in-fact of Geronima, Cecilia allegedly effected an inequitable distribution of
the 3,140 shares of Geronima to the other children. The distribution in accordance with the sale
was reflected in the General Information Sheets (GIS) of Philville.

On Jan. 18, 2013, Cecilia, Eumir (child of Maria, Maria has died), and Corazon (Cecilia et al.)
wrote Ana, corporate secretary of Philville, to send out notices for the holding of the annual
stockholders’ meeting. Several letters were sent to Philville’s stockholders, “Notice of Annual
Stockholders’ Meeting” signed by Cecilia and Corazon as directors. Thereafter, Carolina, Ana,
and Angelica, majority of Philville’s BoD, held an emergency meeting and decided to postpone
the meeting until the issue of distribution of the 3,140 shares is settled. All stockholders were
apprised of the decision to postpone.

But despite the postponement, Cecilia et al. proceeded with the scheduled annual stockholders’
meeting participated only by a few stockholders. They elected new members of the BoD and
Philville officers- Cecilia, Corazon, and Eumir, chairman/VP/treasurer, President/GM, and
Secretary, respectively.

2 days prior to the stockholders’ meeting, Carolina, Ana, Angelica, and others, had filed a
complaint for annulment of sale/distribution or settlement of shares against Cecilia, Eumir,
and Corazon.

2014 Annual meeting- On Jan. 15, 2014, Eumir sent a notice of annual stockholder’s meeting to
all stockholders, notifying them of the setting of the annual stockholders’ meeting on January 25,
2014, 5PM, at Max’s Restaurant, MH Del Pilar St., Tugatog, Malabon City. During the meeting,
Cecilia, Corazon, and Eumir were elected as directors and later elected themselves as
chairman/VP/treasurer, President/GM, and secretary again.
On Feb. 10, 2014, Carolina, Ana, Angelica, Elaine (Child of Ana), and Edison Williams (child of
Ana) (petitioners) filed this election case against Cecilia et al. in RTC, praying that the election
of Cecilia, Corazon, and Eumir (Respondents) as directors and officers be declared void due to
invalidity of the meeting at Max’s restaurant for lack of quorum therein, including the invalid
inclusion in the voting of the shares of the late Geronima.

RTC declared the election of Cecilia et al. as void for lack of quorum. CA also ruled that the
annual stockholders meeting is void for lack of quorum. Hence this petition.

ISSUE:
Whether for the purpose of determining quorum, the 3,140 disputed shares should be excluded.
HELD: NO.
1) Contention: The basis for determining quorum should have been the total number of
undisputed shares of stocks of Philville since the 3,140 shares and the fractional .67, .67, and .
66 shares of Eumir, Paolo, and Abimar are the subject of another dispute filed in RTC. Thus,
200,000-3,142=196,858 shares is the basis of the quorum.
Held:
But S52 and S137 of CorpCode provides:
Section 52. Quorum in meetings. — Unless otherwise provided for in this Code or in the
by-laws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporations.
Section 137. Outstanding capital stock defined. — The term "outstanding capital stock,"
as used in this Code, means the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares.
The right to vote is inherent to the ownership of corporate stocks. Unissued stocks may not be
voted or considered in determining whether a quorum is present. Only stocks actually issued
and outstanding may be voted. Thus, for stock corporations, the quorum is based on the
number of outstanding voting stocks. The distinction of undisputed or disputed shares of
stocks is not provided for in the law or the jurisprudence. Ubi lex non distinguit nec nos
distinguere debemus — when the law does not distinguish we should not distinguish. Thus, the
200,000 outstanding capital stocks of Phil-Ville should be the basis for determining the
presence of a quorum, without any distinction.

Thus, to constitute a quorum, the presence of 100,001 shares in Philville is necessary. Thus,
since only 98,430 shares were present during the Jan. 25, 2014 meeting at Max’s restaurant,
there is no quorum.

2) There is no evidence that the 3,140 shares allegedly transferred to the 6 children and their
children were recorded in the stocks and transfer book of Philville. S63 of CorpCode states
that "No transfer, however, shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation xxx.” A transfer of shares not recorded in the stock and
transfer book is non-existent as far as the corporation is concerned. The corporation only
looks to its books to determine who its shareholders are.
VII. SUBSCRIPTION CONTRACT
66. Lim Tay v. CA, GR 126891, August 05, 1998, Panganiban, J., First Division.
FACTS:
In 1980, Sy Guiok loaned from Lim Tay P40k payable within 6 months, with 10% interest per
annum. As security, Guiok executed a contract of pledge in Lim’s favor, pledged his 300 shares
in Go Fay & Company, Inc. (GFC). On the same date, Alfonso Sy Lim loaned from Lim Tay
P40k payable within 6months at 10% interest per annum. As security, he also executed a contract
of pledge on his 300 shares in GFC. Both Guiok and Sy covenanted that “In the event of failure
of the PLEDGOR to pay the amount within 6 months, the PLEDGEE is hereby authorized to
foreclose the pledge xxx.”

Guiok and Sy endorsed their shares in blank and delivered the same to Lim Tay. But both
respondents Guiok and Sy failed to pay their loans. Thus, Lim Tay filed a petition for mandamus
against GFC with SEC, praying that GFC be ordered to register the transfer of the stocks in his
name and to issue new certificates in his favor. Lim Tay claims that the controversy was intra-
corporate in view of the obstinate refusal of the corporate secretary of GFC to record the transfer
of the shares of Guiok and Sy to him.

SEC dismissed Lim’s complaint. CA affirmed. Hence this petition.

ISSUE:
Whether SEC has jurisdiction over an alleged intra-corporate controversy where the ownership
over the shares of one stockholder is still disputed.
HELD: NO.
1) Contention: Lim Tay claims that the case is intra-corporate and thus SEC has jurisdiction.
Held:
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.

Under PD 902-A, S5, a controversy “among stockholders, partners or associates themselves” is

intracorporate.

1.1) Generally, jurisdiction over the subject matter is determined by the allegations in the
complaint. But here, Lim’s claim that he was the owner of the shares in question has no prima
facie basis. He claims that pursuant to the pledges, he became the owner of the shares when the
term for the loans expired. However, the contracts of pledge merely authorized Lim to foreclose
the pledge upon maturity of the loans, not to own them. Such foreclosure is not automatic and
must be done in a public or private sale. 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

2) Contention: Lim claims that he acquired ownership over the shares by prescription.
Held:
The period of prescription of any cause of action is reckoned only from the date the cause of
action accrued. A cause of action on a written contract accrues when a breach or violation
thereof occurs. Under the contracts of pledge, respondents would have a right to ask for
redelivery of their certificates of stock upon payment of their debts to Lim Tay pursuant to Art.
2105 of NCC. Thus, the right to recover the shares based on the written contract of pledge
between Lim Tay 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 begins
to run only after 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.

67. Rural Bank of Lipa City, Inc. v. CA, GR 124535, September 28, 2001, Ynares-Santiago,
J., First Division.
FACTS:
Respondent Reynaldo Villanueva, Sr., stockholder of petitioner Rural Bank, executed a deed of
assignment, wherein he assigned his shares and of 8 other shareholders under his control with a
total of 10,467 shares in favor of the stockholders of the Bank. Thereafter, Villanueva with his
wife executed an agreement, acknowledging their debt to the Bank of P4M. When Sps.
Villanueva failed to settle their obligation to the Bank, the Board sent them a letter demanding
the surrender of all the stock certificates issued to them and delivery of sufficient collateral. The
Villanuevas ignored the Bank’s demands, whereupon the shares were converted into Treasury
stocks.

On Jan. 15, 1994, the Bank stockholders met to elect new directors and officers. The Villanuevas
were not notified of said meeting. In a letter dated Jan. 19, 1994, Atty. Ignacio, counsel of the
Villanuevas, questioned the legality of the meeting. In reply, the new officers informed Atty.
Ignacio that the Villanuevas were no longer entitled to notice of the meeting since they had
relinquished their rights as stockholders in favor of the bank.

Thus, Sps. Villanueva filed with SEC a petition for annulment of stockholders’ meeting and
election of directors and officers on Jan. 15, 1994, claiming that the meeting is void as they were
not given due notice even if they had not waived their right to said notice. They were also
deprived of their right to vote despite being holders of common stock with voting rights. SEC
issued a Writ of Preliminary Injunction.

With the impending 1995 annual stockholders’ meeting just 9days away, Sps. Villanuevas filed
an omnibus motion, praying that said meeting and election scheduled on Jan. 14, 1995 be
suspended. SEC hearing officer granted and issued a TRO, preventing the meeting. SEC en banc,
on certiorari, affirmed. Ca, on petition for review, affirmed. Hence this petition.

ISSUE:
Whether the deed of assignment sufficed to effect the transfer of shares owned by respondents to
petitioner.
HELD: NO.
S63 of CorpCode provides:
 SECTION 63. Certificate of stock and transfer of shares. — xxx. 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.
1) Contention: Petitioners argue that by virtue of the deed of assignment, respondents had
relinquished to them all their rights as stockholders of the bank.
Held:
But the assignment was not sufficient to effect the transfer of shares since there was no
endorsement of the certificates of stock by the owners etc. Petitioners also 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.

For a valid transfer of stocks, the requirements are: : (a) There must be delivery of the stock
certificate; (b) 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 the corporation. Compliance with any of these
has not been shown.

2) Contention: It may be argued that despite non-compliance with the requisite endorsement and
delivery, the assignment was valid between the parties respondents assignors and petitioners as
assignees.
Held:
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
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, as yet, be deprived of their rights as stockholders, until and unless the issue
of ownership and transfer of the shares in question is resolved with finality.

Thus, SC found that SEC hearing officer did not abuse his discretion in granting issuance of the
preliminary injunction.

68. Ponce v. Alsons Cement Corporation, GR 139802, December 10, 2002, Quisumbing, J.,
Second Division. (Mere endorsement of the registered stockholder not enough to compel
corporate secretary to record transferee as new owner; must have SPA from registered
owner [in Andaya v. Rural Bank of Cabadbaran, it was clarified that the SC required an
SPA here because of the ambiguity of the deed of undertaking as to Ponce’s right to
register the transfer in his name])
FACTS:
In 1996, Ponce filed a complaint in SEC for mandamus against respondents Alsons and its
corporate secretary Francisco Giron, alleging as follows:
 In 1968, Ponce and Fausto Gaid, an incorporator of Alsons, executed a “deed of
undertaking” and “indorsement” where Fausto assigned/endorsed 239,500 shares in
Alsons, subscribed and fully paid by Fausto, to Ponce. From incorporation “up to the
present,” no certificates of stock corresponding to the 239,500 shares of Fausto were
issued in the name of Fausto or Ponce. Despite demands, Alsons refused to issue to
Ponce the certificates of stocks for the 239,500 shares.

The deed of undertaking stated that “Ponce is the owner of the total subscription of Fausto Gaid
xxx in the total amount of P239,500 xxx.” “I, Fausto Gaid, is indorsing the total amount of
239,500 stocks of [Alsons] to Ponce.”

Ponce prayed that respondents be ordered to issue in his name certificates of stocks covering the
239,500 shares. Respondents moved to dismiss. SEC hearing officer granted the motion to
dismiss. SEC en banc reversed. CA, on appeal, affirmed, stating that in the absence of any
allegation that the transfer of shares between Fausto and Ponce was registered in the stock and
transfer book of Alsons, Ponce failed to state a cause of action. Hence this petition for review.

ISSUE:
Whether Ponce may be issued a certificate of stock without the transfer of such shares to his
name being recorded in the corporate books.
HELD: NO.
1) S63 of CorpCode states xxx. Thus, a transfer of shares not recorded in the stock and
transfer book of the corporation is non-existent as far as the corporation is concerned. 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.
Thus, without such recording, the corporation may legally refuse the issuance of stock
certificates in the name of the transferee even when there has been compliance with S64 (fully
paid subscription). The situation would be different if Ponce 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.

2) Contention: 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 and to issue stock certificates in the name of the transferee.
Held:
In Rural Bank of Salinas, Inc. v. CA, we held that there was a 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.

Here, the deed of undertaking with indorsement does not establish on its face Ponce’s right to
demand for registration of the transfer and issuance of certificates of stocks. In Hager v.
Bryan, SC 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:
 A mandamus should not issue to compel the secretary of a corporation to make a transfer
of the 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. The mere indorsement of stock certificates
does NOT in itself give to the indorsee the right to have a transfer of the shares of
stock on the corporate books as to entitle him to a writ of mandamus to compel the
company to make such transfer at his demand, since in such circumstances, the duty is
not so clear and indisputable as to justify issuance of the writ.
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 the rights of the
parties have to be threshed out in an ordinary action.

Thus, before a transferee may ask for issuance of stock certificates, he must first cause the
registration of the transfer and enjoy the status of a stockholder insofar as the corporation is
concerned.

3) That Ponce 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.

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. It is not essential to the existence of a share in stock or the
creation of the relation of shareholder to the corporation. 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. Here,
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.

Thus, SC held that Ponce’s complaint for mandamus did not allege a cause of action as it did not
allege that the stock is recorded in his name, thus there is no duty on the part of the corporate
secretary to issue stock certificates in his name.

69. Yong v. Tiu, GR 144476, April 08, 2003, Corona, J., Special Second Division.
(Subscription contract is one entered into with the corporation, not its directors or officers;
rescission due to breach of subscription contract is the wrong remedy)
FACTS:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage
and incompletion when its owner, First Landlink Asia Development Corporation (FLADC),
owned by the Tius, encountered financial difficulties. It was indebted to PNB for P190M. To
stave off foreclosure of the mortgage on the two lots where the mall was being built, Tius invited
Ong Yong, Juanita Ong, Wilson Ong, Anna Ong, William Ong, and Julia Ong to invest in
FLADC. Under the pre-subscription agreement they entered into, the Ongs and Tius would
have equal shareholdings, the Ongs were to subscribe to 1M shares at par value of P100 each
while the Tius were to subscribe to an additional 549,800 shares at P100 each in addition to their
already existing subscription of 450,200 shares. They also agreed that Tius were entitled to
nominate the VP and treasurer and 5 directors, while the Ongs can nominate the president,
secretary, and 6 directors of FLADC. Ongs were given the right to manage and operate the mall.

Thus, Ongs paid P100M in cash while Tius committed to contribute to FLADC a 4-storey
building and 2 lands valued at P20M (for 200k shares), P30M (for 300k shares) and P49.8M (for
490,800 shares) to cover their 549,800 subscription. The Ongs later paid another P70M to
FLADC and P20M to Tius over and above their P100M investment, totaling P190M, to settle the
P190M mortgage indebtedness of FLADC to PNB.

But on Feb. 23, 1996, Tius rescinded the presubscription agreement. Tius accused Ongs of
refusing to credit to them the FLADC shares covering their real property contributions,
preventing David and Cely Tiu from assuming the positions and performing their duties as VP
and treasurer, and refusing to give them the office spaces agreed upon.

On Feb. 27, 1996, Tius filed this case in SEC seeking confirmation of their rescission of the
presubscription agreement. After hearing, SEC hearing officer confirmed the rescission. SEC en
banc, on appeal, affirmed. CA affirmed the rescission. SC, in its Feb. 01, 2002 decision, affirmed
CA and the rescission. Hence this motion for reconsideration.

SC had found that both Ongs and Tius violated their respective obligations under the pre-
subscription agreement. Ongs prevented the Tius from assuming the positions of VP and
treasurer. Tius failed to turn over FLADC funds to the Ongs and the Tius diverted rentals due to
FLADC to their MATTERCO account. SC found that rescission was not possible due to the
parties being in pari delicto, but it ordered rescission for practical considerations since specific
performance was not practical and would lead to further squabbles and numerous litigations.

Ongs claim that specific performance is proper and not rescission under Art. 1191 since their
alleged breach of the presubscription agreement was at most casual.

ISSUE:
Whether Tius have legal personality to file a case for rescission of the presubscription
agreement.
Whether the rescission of the presubscription agreement may be granted.
HELD: NO.
SC reversed itself and ruled that Tius could not legally rescind the presubscription agreement.

1) FLADC originally was incorporated with an authorized capital stock of 500,000, with Tius
owning 450,200 shares. When Tius invited Ongs to invest, an increase in the authorized capital
stock was necessary to give each group equal (50-50) shareholdings as agreed upon. Thus, from
500,000, the authorized capital stock was increased to 2,000,000 shares with par value of P100
each, with Ongs subscribing to 1M and Tius to 549,800 more shares to complete the 1M shares.
Thus, the subject matter of the contract was the 1M unissued shares of FLADC stock
allocated to Ongs. Since these were unissued shares, the presubscription agreement was in fact
a subscription contract under S60 of CorpCode:
 Any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription within the meaning of this
Title, notwithstanding the fact that the parties refer to it as a purchase or some other
contract.

1.1) Corporation a party- A subscription contract necessarily involves the corporation as one of
the contracting parties since the subject matter is property owned by the corporation- its shares of
stock. Thus, the subscription contract here was, from the viewpoint of the law, one between
Ongs and FLADC, not between Ongs and Tius. Tius did not contract in their personal
capacities with Ongs since they were not selling any of their own shares to them. It was
FLADC that did.

Thus, a case for rescission on the ground of breach of contract filed by Tius in their personal
capacities will not prosper. Assuming it had valid reasons, only FLADC, not Tius, had legal
personality to file suit rescinding the subscription agreement with Ongs as it was the real party in
interest therein. Art. 1311 provides xxx.

2) Rescission of subscription contract a wrong remedy- There is evidence that Ongs did prevent
the rightfully elected treasurer, Cely Tiu, from exercising her function as such. Wilson Ong,
president, supervised the collection and receipt of rentals in the Masagana Citimall and held on
to the cash and properties of the corporation. S25 of CorpCode prohibits the president from
acting concurrently as treasurer of the corporation to ensure effective monitoring of each
officer’s separate functions.

However, rescission due to breach of contract is the wrong remedy. The Corporation Code, SEC
rules and even the Rules of Court provide for appropriate and adequate intra-corporate
remedies, other than rescission, in situations like this. Rescission is certainly not one of them,
specially if the party asking for it has no legal personality to do so and the requirements of the
law therefor have not been met. A contrary doctrine will tread on extremely dangerous ground
because it will allow just any stockholder, for just about any real or imagined offense, to demand
rescission of his subscription and call for the distribution of some part of the corporate assets to
him without complying with the requirements of the Corporation Code.

3) Rescission will result in premature liquidation in violation of trust fund doctrine- Assuming
that Tius had legal standing to sue for rescission based on breach of contract, said action will still
not prosper since rescission will violate the trust fund doctrine and the procedures for valid
distribution of assets and property under CorpCode.

The trust fund doctrine provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims. This doctrine is the underlying principle in the procedure for the distribution of capital
assets, embodied in the Corporation Code, which allows the distribution of corporate capital only
in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized
capital stock, (2) purchase of redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings, and (3) dissolution and eventual liquidation of the
corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation
to acquire its own shares and in Section 122 on the prohibition against the distribution of
corporate assets and property unless the stringent requirements therefor are complied with.

The distribution of corporate assets and property cannot be made to depend on the whims and
caprices of the stockholders, officers, or directors of the corporation, or even on the earnest
desire of the CA “to prevent further squabbles and future litigations.” Otherwise, it will be the
creditors’ turn to engage in “squabbles and litigations” should the court order an unlawful
distribution in disregard of the trust fund doctrine.

Here, rescission of the pre-subscription agreement will result in the unauthorized distribution of
the capital assets and property of the corporation, violating the trust fund doctrine and CorpCode,
since rescission of a subscription agreement is not one of the instances when distribution of
capital assets and property of the corporation is allowed. Rescission will result in premature
liquidation of the corporation without the benefit of prior dissolution under S117-120 of
CorpCode.

3.1) Contention: Tius claim that their petition is one to decrease capital stock and thus does not
violate liquidation procedures.
Held:
But the case for rescission cannot be deemed a petition to decrease capital stock as the action
never complied with the formal requirements for decrease of capital stock under S33 (No
approval of majority of BoD, 2/3 of SH, etc.). The Court cannot interfere in the internal affairs of
the corporation and compel FLADC to file with SEC a petition for issuance of a certificate of
decrease of stock. It is a decision that only the stockholders and directors can make.

A judicial order to decrease capital stock without the assent of FLADC’s directors and
stockholders is a violation of the “business judgment rule.”

70. F&S Velasco Company, Inc. v. Madrid, GR 208844, November 10, 2015, Perlas-
Bernabe, J., First Division. (As between GIS and the corporate books, the latter is
controlling)
FACTS:
Petitioner FSVCI was registered as a corporation with Francisco, Simona, Angela, respondent
Madrid, and petitioner Saturnino as incorporators. When Simona and Francisco died, their
daughter Angela inherited their shares, giving her control of 70.82% of FSVCI’s shares. When
Angela died intestate, Madrid executed an affidavit of self-adjudication, covering Angela’s estate
including her 70.82% ownership of FSVCI’s shares.

Madrid group- Believing that he is already the controlling stockholder of FSVCI by virtue of the
self-adjudication, Madrid called for a special stockholders’ and reorganizational meeting to be
held on Nov. 18, 2009. In preparation for said meeting, Madrid assigned one share each to
Ricafort and to respondents Danao, Labalan, and Arimado (Madrid Group).

Saturnino group- Meanwhile, Seva, as corporate secretary, sent a notice of emergency meeting
to FSVCI’s remaining stockholders for the purpose of electing a new president and VP. Such
meeting was held on Nov. 06, 2009 which was attended by Saturnino, Seva, and Sunico.
Saturnino was recognized as member of the FSVCI BoD and president, while Scribner was
elected VP (Saturnino group).

Despite the election by Saturnino group, Madrid Group proceeded with the Nov. 18, 2009
meeting where the current members of FSVCI BoD were ousted and replaced by members of
Madrid Group. Madrid, Danao, Arimado, and Labalan were also elected president, VP, corporate
secretary, and treasurer, respectively, of FSVCI.

Saturnino Group filed a petition for declaration of nullity of corporate election against Madrid
Group in RTC. RTC declared both the Nov. 6 and 18, 2009 meetings as void. CA, on appeal,
declared the Nov. 18, 2009 meeting of Madrid Group valid, holding that Madrid had already
complied with the registration requirement of such transfer in the corporate books thru the
Nov. 18, 2009 General Information Sheet duly filed with SEC. Hence this petition for review
on certiorari.

ISSUE:
Whether Madrid, who owns 74% of FSVCI stocks and where the transfer of 70% thereof to him
is not recorded in the stock and transfer book of the corporation but registered in the GIS of said
corporation, can call for a special stockholder’s meeting.
HELD: NO.
1) S63 of CorpCode governs the rule on transfers of shares of stock. Verily, all transfers of
shares of stock must be registered in the corporate books in order to be binding on the
corporation. Specifically, this refers to the stock and transfer book which is described in S74.
An owner of shares of stock cannot be accorded the rights pertaining to a stockholder- like
the right to call for a meeting and the right to vote, or be voted for- if his ownership of such
shares is not recorded in the stock and transfer book.

Here, when Madrid called for the Nov. 18, 2009 meeting, he was already the owner of 74.98%
shares of FSVCI. But records are bereft of any showing that the transfer of Angela’s shares to
Madrid had been registered in FSVCI’s stock and transfer book when he made such call and
when the Nov. 18 meeting was held.

2) Stock and transfer book controls as to who are stockholders over GIS- The submission of a
General Information Sheet (GIS) of a corporation before SEC is pursuant to the objective
sought by S26 of CorpCode which is to give the public information of the nature of business,
financial condition, and operational status of the company, as well as its key officers or
managers, so that those dealing and who intend to do business with it may know or have the
means of knowing facts concerning the corporation's financial resources and business
responsibility.

But the contents of the GIS should NOT be deemed conclusive as to the identities of the
registered stockholders of the corporation and their respective ownership of shares, as the
controlling document should be the corporate books, specifically the stock and transfer book.

Mere inclusion in the GIS as stockholders and officers does not make one a stockholder of a
corporation, for this may have come to pass by mistake, expediency, or negligence.
Thus, Madrid could not have made a valid call of the Nov. 18, 2009 meeting as his stock
ownership of FSVCI as registered in the stock and transfer book is only 4.16% in view of the
non-registration of Angela’s shares. Thus, the Nov. 18 meeting was void.

3) Thus, due to the nullity of both Nov. 6, (as ruled by RTC, due to lack of quorum) and Nov. 18,
2009 meeting, the FSVCI BoD at the time of Angela’s death should be reconstituted and
thereafter, fill the vacant seat left by Angela in accordance with S29 of CorpCode. Such BoD
shall act only in a hold-over capacity until their successors are elected and qualified pursuant to
S23 of CorpCode.

71. Teng v. SEC, GR 184332, February 17, 2016, Reyes, J., Third Division. (Register
transfer in STB, then surrender old certificate of stock for issuance of new certificate; no
need to surrender old certificate to register the transfer)
FACTS:
Respondent Ting Ping purchased 480 TCL Sales Corporation shares from Chiu, 1400 shares
from Teng Ching Lay (president of TCL), and 1440 shares from Maluto. Upon Teng Ching’s
death, his son Henry took over the management of TCL. To protect his shareholdings, Ting Ping
requested TCL’s corporate secretary, petitioner Anna Teng, to enter the transfer in the Stock and
Transfer Book (STB) of TCL for recording of his acquisition. He also demanded issuance of new
certificates of stock in his favor. But TCL and Teng refused despite demands. Thus, Ting Ping
filed a petition for mandamus with SEC against TCL and Teng. SEC granted and ordered TCL
and Teng to record the transfer. SEC en banc affirmed on June 11, 1996. This was eventually
affirmed by SC in GR 129777.

SEC issued a writ of execution addressed to the RTC sheriff. But Teng filed a complaint for
interpleader in RTC seeking to compel Henry and Ting Ping to interplead and settle the issue of
ownership over the 1,400 shares previously owned by Teng Ching. The sheriff held in abeyance
the implementation of the writ of execution. RTC ruled that Henry has a better right to the shares
except as to 262.5 shares covered by Stock Certificate 011.

Thereafter, Ting Ping moved for execution, seeking partial satisfaction of the SEC en banc order
of June 11, 1996 ordering TCL and Teng to record the 480 shares he acquired from Chiu and
1,440 shares from Maluto. SEC granted partial satisfaction and issued a writ of execution. Teng
and TCL moved to quash. Ting Ping opposed, expressing willingness to surrender the original
stock certificates of Chiu and Maluto to facilitate the transfer of shares in his favor. SEC denied
the motions to quash.

CA, on R65, affirmed and dismissed the petition for certiorari. Hence this petition.

ISSUE:
Whether the surrender of the certificate of stock is a requisite before registration of the transfer
may be made in the corporate books and for issuance of new certificates in its stead.
HELD: Not for registration, but for issuance of new certificates.
1) Contention: Teng claims that Ting Ping must first surrender Chiu and Maluto’s certificates of
stock before the transfer to Ting Ping may be registered in the books of the corporation.
Held:
A certificate of stock is a written instrument signed by the proper officer of a corporation stating
or acknowledging that the person named in the document is the owner of a designated number of
shares of its stock. It is prima facie evidence that the holder is a shareholder of a corporation. A
certificate, however, is merely a tangible evidence of ownership of shares of stock. It is not a
stock in the corporation and merely expresses the contract between the corporation and the
stockholder. The shares of stock evidenced by said certificates, meanwhile, are regarded as
property and the owner of such shares may, as a general rule, dispose of them as he sees fit,
unless the corporation has been dissolved, or unless the right to do so is properly restricted, or
the owner's privilege of disposing of his shares has been hampered by his own action.

As owner of personal property, a shareholder is at liberty to dispose of them in favor of

whomsoever he pleases:
Sec. 63. Certificate of stock and transfer of shares. — xxx. 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 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.
Thus, certain requisites must be complied with for a valid transfer of stocks:
(a) there must be delivery of the stock certificate; (b) 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 the
corporation.
The delivery contemplated in S63 pertains to the delivery of the certificate of shares by the
transferor to the transferee, that is, from the original stockholder named in the certificate to the
person or entity the stockholder was transferring the shares to.

Thus, Teng’s contention does not have legal basis. The delivery or surrender adverted to by
Teng, i.e., from Ting Ping to TCL, is not a requisite before the conveyance may be recorded in
its books. To compel Ting Ping to deliver to the corporation the certificates as a condition for the
registration of the transfer would amount to a restriction on the right of Ting Ping to have the
stocks transferred to his name, which is not sanctioned by law. The only limitation imposed by
S63 is when the corporation holds any unpaid claim against the shares intended to be transferred.
A corporation cannot create restrictions in stock transfers. In transferring stock, the secretary
of a corporation acts in purely ministerial capacity, and does not try to decide the question of
ownership. If a corporation refuses to make such transfer without good cause, it may even be
compelled to do so by mandamus. With more reason here where SC, in GR 129777, already
upheld Ting Ping’s titles to the subject shares.

2) To be valid against third parties and the corporation, the transfer must be recorded or
registered in the books of corporation. There are several reasons why registration of the transfer
is necessary: one, to enable the transferee to exercise all the rights of a stockholder; two, to
inform the corporation of any change in share ownership so that it can ascertain the persons
entitled to the rights and subject to the liabilities of a stockholder; and three, to avoid fictitious
or fraudulent transfers, among others. Upon registration of the transfer in the corporate books,
the transferee may now exercise all the rights of a stockholder, including the right to have
stocks transferred to his name.

3) The manner of issuance of certificates of stock is generally regulated by the corporation’s

bylaws. S47 of CorpCode states: "a private corporation may provide in its by-laws for . . . the
manner of issuing stock certificates." In Bitong v. CA, SC outlined the procedure for issuance of
new certificates of stock in the name of a transferee:
First, the certificates must be signed by the president or vice-president, countersigned by
the secretary or assistant secretary, and sealed with the seal of the corporation. Second,
delivery of the certificate is an essential element of its issuance. Third, the par value, as to
par value shares, or the full subscription as to no par value shares, must first be fully paid.
Fourth, the original certificate must be surrendered where the person requesting the
issuance of a certificate is a transferee from a stockholder .

Surrender and cancellation of the old certificates serve to protect not only the corporation but the
legitimate shareholder and the public as well, as it ensures that there is only one document
covering a particular share of stock.

Here, Ting Ping manifested his intention to surrender the subject certificates of stock to facilitate
registration of the transfer and for issuance of new certificates in his name. Thus, SC ordered
Ting Ping to surrender the certificates of stock transferred to him by Maluto and Chiu. Teng was
ordered to cancel Maluto and Chiu’s certificates and to issue new ones in Ting Ping’s name.

72. Andaya v. Rural Bank of Cabadbaran, Inc., GR 188769, August 03, 2016, Sereno, CJ.,
First Division.
FACTS:
Andaya bought from Chute 2200 shares in respondent RBC for P220k. Chute duly endorsed and
delivered the certificates of stock to Andaya and later requested RBC to register the transfer and
issue new stock certificates in Andaya’s favor. Andaya also separately communicated with
respondent Oraiz, corporate secretary of RBC, reiterating Chute’s request for issuance of new
stock certificates in Andaya’s favor. Oraiz wrote Chute to inform her that he could not register
the transfer, explaining that under a previous stockholders’ resolution, existing stockholders were
given a right of first refusal in case shareholders offer their shares for sale. Oraiz then asked
Chute if she wished to have her shares offered to existing stockholders and, if no other
stockholder would buy, she could sell the shares to outsiders.

RBC’s legal counsel, respondent Gonzales, informed Andaya that his request was referred to
RBC’s BoD for evaluation. Andaya responded by reiterating his earlier request for registration of
the transfer and issuance of new certificate of stock. Citing S98, he claims that the restriction on
the transfer of shares did not appear in RBC’s AoI, bylaws, or certificates of stock.

RBC denied Andaya’s request, saying that he had a conflict of interest as Andaya was president
and CEO of Green Bank of Caraga, a competitor bank. RBC also maintained that Chute should
have first offered her shares to other stockholders.
Thus, Andaya filed an action for mandamus against RBC, Oraiz, and Gonzales, seeking to
compel them to record the transfer in the bank’s stock and transfer book (STB) and to issue new
certificates in his name.

RTC dismissed, citing Ponce v. Alsons Cement, ruling that Ponce requires that a person seeking
to transfer shares must have express instruction and specific authority from the registered
stockholder, like a SPA. It also held that without the sale first registered or an authority from
the transferor, Andaya had no cause of action for mandamus against RBC.

Hence this R45 petition for review on certiorari.

ISSUE:
Whether Andaya has legal standing to file the petition for mandamus to compel registration of
the transfer of shares to him and issuance of a stock certificate in his name even if the transfer of
shares to him has not yet been registered.
HELD: YES.
1) Andaya has established that he is a bona fide transferee of the shares of stock of Chute. He
presented in RTC these documents evidencing the sale: 1) a notarized “Sale of Shares of
Stocks” showing Chute’s sale of 2,200 shares to Andaya; 2) a DST return; 3) a CGT Return; 4)
Stock certificates covering the subject shares endorsed by Chute. Thus, Andaya had standing
to initiate an action for mandamus to compel RBC to record the transfer and issue new stock
certificates in his name.

2) RTC’s reliance on Ponce was misplaced. In Ponce, the issue resolved by SC was whether
Ponce had a cause of action for mandamus to compel the issuance of stock certificates, not
registration of the transfer. SC held therein that without any record of the transfer of shares in
the STB, there is no basis to compel the corporation to issue a stock certificate. In contrast, the
crux of this petition are the registration of the transfer and issuance of the stock certificates.

Thus, requiring Andaya to register the transaction before he could institute a mandamus suit in
supposed abidance by the ruling in Ponce was an error. It led to an absurd situation where
Andaya was prevented from causing registration of the transfer, ironically because the shares had
not been registered. With this logic of RTC, transferees would never be able to compel
registration of the transfer and issuance of new stock certificates in their favor. Ponce is pertinent
only to issuance of new stock certificates, and not to registration of a transfer of shares.
These two are entirely different events.

2.1) As to the requisite authorization from the transferor, the concern in Ponce was whether the
right of petitioner therein to compel issuance of new stock certificates was clearly established.
SC held that a mere endorsement of stock certificates by the supposed owners could not be the
basis of a mandamus in the absence of express instructions from them. The ambiguity of the
alleged transferee’s deed of undertaking with endorsement led SC in Ponce to rule that
mandamus would have issued had the registered owner himself requested the registration
of the transfer, or the person requesting registration secured a SPA from the registered
owner.
Here, the submitted documents did not consist merely of an endorsement. Andaya presented
several undisputed documents, among which was Oraiz’s letter to Chute denying her request to
transfer the stock standing in her name in Andaya’s favor. This clearly indicated that the
registered owner herself had requested the registration of the transfer.

3) As to the alleged violation of the stockholders’ right of first refusal, both parties refer to S98,
stating that:
SECTION 98. Validity of restrictions on transfer of shares. — Restrictions on the right to
transfer shares must appear in the articles of incorporation and in the by-laws as well as
in the certificate of stock; otherwise, the same shall not be binding on any purchaser
thereof in good faith.
But this applies only to close corporations. From the records or the RTC decision, there is no
determination to assist SC in ruling on whether RBC is a close corporation and as to its
AoI/bylaws.

Thus, SC reinstated the mandamus petition and remanded the case to RTC for further
proceedings.

73. Tee Ling Kiat v. Ayala Corporation, GR 192530, March 07, 2018, Caguioa, J., Second
Division.
FACTS:
On May 21, 1980, Ayala Investment and Development Corporation (AIDC) granted in favor of
Continental Manufacturing Corporation (CMC) a money market line in the maximum amount of
P2M. With Dewey Dee as president of CMC then, Sps. Dee executed a surety agreement as
guarantee. One of CMC’s availments under the money market line was evinced by a promissory
note for P800k. AIDC endorsed the PN to Ayala Corporation. CMC defaulted on its obligation
under the PN, leading Ayala Corporation to institute a claim for sum of money against CMC and
Sps. Dee in RTC.

RTC ruled in favor of Ayala Corporation. This became final. RTC issued a writ of execution
against Sps. Dee. A notice of levy on execution was issued by the sheriff and addressed to the
register of deeds of Antipolo City to levy upon the rights, title, etc. that Sps. Dee may have in
parcels of land covered by TCTs 24038, 24039, and 24040, and improvements thereon. The
lands were registered in the name of Vonnel Industrial Park, Inc. (VIP), of which Dewey Dee
was an incorporator.

Before the scheduled sale of execution, Tee Ling Kiat filed a third party claim, alleging that
Dewey Dee is no longer a stockholder of VIP because, as early as 1980, Dewey Dee has already
sold to him (Tee) all of Dewey Dee’s stocks in VIP.

RTC issued a notice of third party claim. Amora, who had substituted Ayala Corporation, posted
a bond of P2.6M. VIP and Tee opposed the posting of the bond. RTC approved the bond. Thus,
Tee and VIP filed an omnibus motion to declare void the notice of levy on execution.

RTC disallowed the third party claim, saying that the alleged sale of shares from Dewey to Tee
was not proven. CA affirmed. Hence this petition.
ISSUE:
Whether Tee has proven that Dewey Dee really sold to him Dewey’s shares in VIP.
HELD: NO.
1) Contention: Tee claims that he does not have to prove the sale of shares of stock between
Dewey and him as the duty to record the sale in the corporate books lies with VIP.
Held:
Such argument fails to recognize that the very right of Tee as third-party claimant to institute
terceria is founded on his claimed title over the levied property. Thus, the third party claimant
must unmistakable establish his ownership or right of possession over the subject property.

Here, the only evidence adduced by Tee to support his claim that Dewey’s shares in VIP have
been sold to him are: 1) a cancelled check issued by Tee in favor of Dewey and 2) a photocopy
of the deed of sale of shares of stock dated Dec. 29, 1980. A photocopy is inadmissible. There
is also no explanation as to why the original deed of sale could not be produced. Instead, Tee
alleges that…

Contention:… because of the disputable presumption “that the ordinary course of business has
been followed,” under R131, S3(q), the burden is not on him to prove that he is a stockholder,
but on Amora to prove that he is not a stockholder.
Held:
This argument is off-tangent. Even if it could be assumed that the sale of shares in the
photocopies had indeed transpired, such transfer is valid only as to the parties thereto and
not binding on the corporation if the same is not recorded in the books of the corporation.
S63 of CorpCode provides that: “No transfer xxx shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation xxx.”

Here, the transaction between Tee and Dewey has never been recorded in VIP’s corporate books.
Thus, the transfer, not having been recorded in the corporate books, is not valid or binding as to
the corporation or as to third persons.

2) SC observed that the judgment of sum of money obtained by Ayala Corporation was against
Sps. Dewey and Lily Dee in their personal capacities as sureties. But in execution of the
judgment, the properties levied upon were registered in the name of VIP, a juridical entity with
personality separate from Dewey. A person other than the judgment debtor who claims
ownership over the levied properties is not precluded from challenging the levy thru any of the
remedies under RoC. But in pursuing such remedies, the third party must unmistakable
establish ownership over the levied property, which Tee failed to do.

SC thus affirmed CA.

VIII. NON-STOCK CORPORATIONS

74. Long v. Basa, GR 134963-64, September 27, 2001, Sandoval-Gutierrez, J., Third
Division.
FACTS:
In 1973, a religious group known as “The Church In Quezon City (Church Assembly Hall),
Incorporated” (Church) was organized. It was registered with SEC as a non-stock, non-profit
corporation. Its AoI and bylaws state that its affairs shall be managed by a BoD of 6 members.
As a “brotherhood in Christ,” the Church embraced the “Principles of Faith” that “every member
or officer” thereof “shall, without mental reservation, adhere strictly to the doctrine xxx being
observed by the (Church) in proclaiming the Gospel of Christ, xxx.” The Church members
vested upon the BoD, in the bylaws, the absolute power to admit and expel a member of the
church.
The procedure for expulsion of an erring member is under Art. VII, par. 4 of the Church bylaws:
"If it is brought to the notice of the Board of Directors that any member has failed to
observe any regulations and By-laws of the Institution (CHURCH) or the conduct of any
member has been dishonorable or improper or otherwise injurious to the character and
interest of the Institution, the Board of Directors may b(y) resolution without assigning
any reason therefor expel such member from such Institution.
As early as 1988, the BoD observed that certain members of the Church, including petitioners,
exhibited conduct which was dishonorable and injurious to the interest of the Church.
Respondents, as members of the BoD, advised petitioners to correct their ways and reminded
them that the Church is only for “worshipping the true God, not to worship Buddha or men.” But
petitioners ignored these admonitions.

Thus, during its Aug. 30, 1993 regular meeting, the Church removed from the membership list
the names of petitioners Joseph Lim, Liu, Alfredo Long, and Felix Almeria. The updated
membership list approved by the BoD were duly filed with SEC.

Petitioners questioned their expulsion by filing with SEC a petition against respondents to annul
the Aug. 30, 1993 membership list and reinstate the original list on the ground that the expulsion
was made without prior notice and hearing. The petition also prayed for a TRO and WPI.
SEC hearing officer Perea ruled that the expulsion was valid. SEC en banc, on certiorari,
affirmed. This ruling of SEC en banc became final (SEC EB Case 389).

SEC conducted further proceedings to hear and decide the permissive counterclaim and third-
party complaint incorporated in respondents’ supplemental answer. SEC hearing panel refused to
act on respondents’ third-party complaint’s prayer for injunctive relief. Respondents thus filed in
SEC en banc a petition for review on certiorari (SEC EB Case 484).

SEC en banc in SEC EB Case 484 set aside the expulsion of petitioners as members of the
Church. CA, on petition for review of respondents, reversed SEC EB Case 484. Hence this
petition for review on certiorari.

ISSUE:
Whether the expulsion of petitioners from the membership of the Church by its BoD thru a
resolution without prior notice would be in accordance with law.
HELD: YES.
Contention: Petitioners insist that the expulsion is void for want of prior notice to them or
without due process.
Held:
1) The issue of validity of expulsion has been declared valid by SEC EB Case 389 which became
finial and can no longer be modified. The issuance by SEC in SEC EB Case 484 which reopened
the same issue of validity of the expulsion proceedings, reversing its final and executory en banc
decision in SEC EB Case 389, is in gross disregard of the basic legal precept that accords finality
to quasi-judicial determinations.

2) The bylaws of the Church in Art. VIII, par. 4 does not require the BoD to give prior notice to
the erring or dissident members in case of expulsion. The only requirements before a member
can be expelled are: 1) the BoD is notified that a member failed to observe any regulations and
bylaws of the church etc., and 2) a resolution passed by the BoD expelling the member.

Thus, a member who commits any cause for expulsion may be expelled by the BoD thru a
resolution without notice. The resolution need not even state the reason for such action.

The basis of the relationship between a religious corporation and its members is the latter’s
absolute adherence to a common religious or spiritual belief. Once this basis ceases,
membership in the religious corporation must also cease. Thus, generally, there is no room for
dissension in a religious corporation. And where, as here, any member of a religious corporation
is expelled from the membership for espousing doctrines and teachings contrary to that of his
church, the established doctrine in this jurisdiction is that such action from the church authorities
is conclusive upon the civil courts.

2.1) Recognizing the peculiarity of religious corporations, CorpCode leaves the matter of
ecclesiastical discipline to the religious group concerned. S91, made explicitly applicable to
religious corporations by S109, par.2, states:
"SECTION 91. Termination of membership. — Membership shall be terminated in the
manner and for the causes provided in the articles of incorporation or the by-laws.

2.2) Also, petitioners have waived prior notice by adhering to the bylaws. They became
members of the Church voluntarily. They entered into its covenant and subscribed to its rules. By
doing so, they are bound by their consent.

3) SC also held that due process was observed since petitioners were given sufficient notice.
From 1988 to 1993, respondents have exhorted and warned the dissident members.

75. Sta. Clara Homeowners’ Association v. Sps. Gaston, GR 141961, January 23, 2002,
Panganiban, J., Third Division. (No lien annotated in TCT)
FACTS:
Sps. Victor Ma. and Lydia Gaston, respondents, filed a complaint for damages with preliminary
injunction and TRO before RTC against petitioners SCHA thru its BoD and security guard
Capillo. The complaint alleged:
Respondents were residents of San Jose Avenue, Sta. Clara Subdivision, Bacolod City.
They purchased their lots in 1974 and at that time, there was no requirement of
membership in any homeowners’ association. From that time, they have remained non-
members of SCHA and were issued “non-member” gatepass stickers for their vehicles for
identification by security guards manning the subdivision’s entraces and exits. But in
 March, 1998, SCHA disseminated a board resolution that only members would be issued
stickers for their vehicles. Thereafter, on 3 separate incidents, Victor M. Gaston (son)
was required by guards employed by SCHA to show his driver’s license as prerequisite to
his entrance to the subdivision despite knowing him personally. On March 29, 1998,
respondent Victor Ma. Gaston was also prevented from entering by petitioner security
guard Capillo, who demanded from him his driver’s license in the presence of other
subdivision owners. This caused respondents to suffer moral damage.

Petitioners moved to dismiss, arguing that RTC had no jurisdiction as the case involved an intra-
corporate dispute between SCHA and its members which is under the jurisdiction of Home
Insurance and Guaranty Corporation (HIGC). Petitioners also cite SCHA’s AoI, approved by
SEC, stating:
the association shall be a non-stock corporation with all homeowners of Sta. Clara
constituting its membership.'
Its bylaws also state:
'all real estate owners in Sta. Clara Subdivision automatically become members of the
association'.
Thus, petitioners claim that respondents, being lot owners of Sta. Clara Subdivision in 1974 after
SEC’s approval of SCHA’s AoI and by-laws, became members automatically of SCHA.

RTC denied the motion to dismiss, finding that there is no intra-corporate controversy since
respondents did not join the association. Thus, HIGC has no jurisdiction. Petitioners filed a MR,
adding lack of cause of action as ground for dismissal. RTC denied the MR. CA, on petition for
certiorari, ruled that RTC had jurisdiction also. Hence this petition for review.

ISSUE:
Whether respondents Sps. Gaston became members of SCHA by virtue of the provision in the
AoI and bylaws of SCHA that all real estate owners in the Sta. Clara Subdivision, which includes
Sps. Gaston, are automatically members of SCHA, even without Sps. Gaston consenting to be
members.
HELD: NO.
HIGC was created by RA 580. By virtue of EO 535, it assumed SEC’s adjudicative functions
over homeowners’ associations. It also assumed SEC’s jurisdiction over controversies arising
from intracorporate relations. RA 8763 transferred to the HLURB these powers.

1) Sps. Gaston are not members- Sps. Gaston cannot be compelled to become members of the
SCHA by the simple expedient of including them in its Articles of Incorporation and Bylaws
without their express or implied consent. True, it may be to the mutual advantage of lot owners
in a subdivision to band themselves together to promote their common welfare. But that is
possible only if the owners voluntarily agree, directly or indirectly, to become members of the
association. True also, memberships in homeowners' associations may be acquired in various
ways — often through deeds of sale, Torrens certificates, or other forms of evidence of property
ownership. In the present case, however, other than the said Articles of Incorporation and By-
laws, there is no showing that private respondents have agreed to be SCHA members.
1.1) There is no privity of contract between petitioners and Sps. Gaston. A contract is a
meeting of minds between two persons. There are cases in which a party who enters into a
contract of sale is also bound by a lien annotated on a certificate of title. Act 496 (Land
Registration Act), S39 states:
"Sec. 39. Every person receiving a certificate of title in pursuance of a decree of
registration, and every subsequent purchaser of registered land who takes a certificate of
title for value in good faith shall hold the same free of all encumbrances except those
noted on said certificate.
But the above does not apply here. When Sps. Gaston purchased their property in 1974 and
obtained TCTs for Lots 11 and 12, Block 37 along San Jose Avenue in Sta. Clara Subdivision,
there was no annotation showing their automatic membership in SCHA. Thus, no privity of
contract arising from the title certificate exists between petitioners and Sps. Gaston.

2) SC also held that the complaint is for damages. It does not assert membership in SCHA as its
basis. It is based on an alleged violation of their alleged right of access through the subdivision
and on the alleged embarrassment and humiliation suffered by the plaintiffs.

Thus, SC ruled that RTC has jurisdiction.

76. Padcom Condominium Corporation v. Ortigas Center Association, Inc., GR 146807,

May 09, 2002, Davide, Jr., CJ., First Division. (Liens annotated in TCT)
FACTS:
Petitioner Padcom owns and manages the Padilla Office Condominium Buildings (Padcom
Building) in Ortigas, Pasig City. The land on which the building stands was originally acquired
from Ortigas & Company (OCLP) by Tierra Development Company (TDC) under a deed of sale.
Among the terms of the deed of sale was the requirement that the transferee and its
successor-in-interest must become members of an association for realty owners and long-
term lessees in the area, later known as Ortigas Center. Later, the lot with improvements was
conveyed by TDC in favor of Padcom in a deed of transfer.

In 1982, Ortigas Center Association, Inc. was organized to advance the interests of the real estate
owners and long-term lessees of lots in the Ortigas Center. It sought collection of membership
dues of P2,724.40 per month from Padcom. Padcom owed P639,961, representing membership
dues, interests, and penalty from April 1983 to June 1993. In view of Padcom’s failure and
refusal to pay its arrears, the Association filed a complaint for collection of sum of money in
RTC.

Contention: Padcom contended that for it to become a member of the Association, it should first
apply for and be accepted for membership by the Association’s BoD. No automatic membership
is contemplated in the Association’s bylaws. Padcom claims it cannot be compelled to be a
member without violating its right to freedom of association.

RTC dismissed the complaint. CA, on appeal, reversed. Hence this petition.

ISSUE:
Whether Padcom is bound to be a member of the Association.
HELD: YES.
PD 1529, S44 provides:
SEC. 44. Statutory liens affecting title. — Every registered owner receiving a certificate
of title in pursuance of a decree of registration, and every subsequent purchaser of
registered land taking a certificate of title for value and in good faith, shall hold the same
free from all encumbrances except those noted on said certificate and any of the
following encumbrances which may be subsisting, namely: xxx.
1) When the land was bought by Padcom’s predecessor in interest, TDC, from OCLP, the sale
bound TDC to comply with par. (G) of the covenants, conditions, and restrictions of the deed of
sale:
G. AUTOMATIC MEMBERSHIP WITH THE ASSOCIATION:
The owner of this lot, its successor-in-interest hereby binds himself to become a member
of the ASSOCIATION which will be formed by and among purchasers, fully paid up Lot
BUYERS, Building Owners and the COMPANY in respect to COMPANY OWNED
LOTS.
This stipulation was likewise annotated at the back of Transfer Certificate of Title 457308
issued to TDC. And when TDC sold the lot to Padcom, the deed of transfer stated:
NOW, THEREFORE, for and in consideration of the foregoing premises, the
DEVELOPER, xxx transfers and conveys unto the CORPORATION the above-described
parcel of land evidenced by Transfer Certificate of Title No. 457308, xxx, free from all
liens and encumbrances, except those already annotated at the back of said Transfer
Certificate of Title No. 457308.
This is so because any lien annotated on previous certificates of title should be incorporated in or
carried over to the new transfer certificates of title. Such lien is inseparable from the property
as it is a right in rem, a burden on the property whoever its owner may be. It subsists
notwithstanding a change in ownership; in short, the personality of the owner is
disregarded. As emphasized earlier, the provision on automatic membership was annotated in
the Certificate of Title and made a condition in the Deed of Transfer in favor of PADCOM.
Consequently, it is bound by and must comply with the covenant.

2) Also, Art. 1311 of NCC provides that contracts take effect between the parties, their assigns
and heirs. Since PADCOM is the successor-in-interest of TDC, it follows that the stipulation on
automatic membership with the Association is also binding on the former.

3) The freedom of association of Padcom is not violated. Padcom was never forced to join the
association. It could have avoided such membership by not buying the land from TDC. Nobody
forced it to buy the land when it bought the building with the annotation of the condition or lien
on the Certificate of Title thereof and accepted the Deed.

Thus, since Padcom is a member of the Association, it is obligated to pay its dues incidental
thereto. Art. 1159 of NCC states that obligations from contracts have the force of law between
the contracting parties.

4) Quasi-contract- Assuming Padcom is not a member of the Association, it cannot evade

payment without violating the equitable principles underlying quasi-contracts. Art. 2142 of NCC
states xxx. Generally, it may be said that a quasi-contract is based on the presumed will or intent
of the obligor dictated by equity and by the principles of absolute justice. Examples of these
principles are: (1) it is presumed that a person agrees to that which will benefit him; (2) nobody
wants to enrich himself unjustly at the expense of another; or (3) one must do unto others what
he would want others to do unto him under the same circumstances.

As resident and lot owner in the Ortigas area, PADCOM was definitely benefited by the
Association's acts and activities to promote the interests and welfare of those who acquire
property therein or benefit from the acts or activities of the Association.

77. Tan v. Sycip, GR 153468, August 17, 2006, Panganiban, CJ., First Division.
FACTS:
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational
corporation with fifteen (15) regular members, who also constitute the board of trustees. During
the annual members' meeting held on April 6, 1998, there were only eleven (11) living member-
trustees, as four (4) had already died. Out of the eleven, seven (7) attended the meeting through
their respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over
the objection of Atty. Antonio C. Pacis, who argued that there was no quorum. In the meeting,
Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the
four deceased member-trustees.

When the controversy reached SEC, petitioners maintained that the deceased member-trustees
should not be counted in the computation of quorum since upon their death, members
automatically lost all their rights and interests in the corporation.

SEC Hearing Officer declared the April 6 meeting void for lack of quorum. SEC En Banc
affirmed. CA dismissed the appeal of petitioners due to a fault in the verification and
certification of non forum shopping. Hence this petition.

ISSUE:
Whether quorum should be based on the number of trustees as stated in the AoI (15) or based on
the actual living trustees at the time of the meeting.
HELD: Actual living trustees.
1) The right to be present and to vote in a meeting is determined by the time in which the
meeting is held. S52 of the Corporation Code states:
"Section 52. Quorum in Meetings. — Unless otherwise provided for in this Code or in the
by-laws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporations."
“Outstanding capital stock” is defined in S137 as the “total shares of stock issued under binding
subscription agreements to subscribers or stockholders, whether or not fully or partially paid,
except treasury shares."

Unissued stocks may not be voted or considered in determining whether a quorum is present in a
stockholders’ meeting. Only stock actually issued and outstanding may be voted. Neither the
stockholders nor the corporation can vote or represent shares that have never passed to the
ownership of the stockholders or, having so passed, have again been purchased by the
corporation.

The last paragraph of S6:

"Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer only
to stocks with voting rights."
Taken in conjunction with S137, shows that the intention of the lawmakers was to base the
quorum mentioned in S52 on the number of outstanding voting stocks.

1.1) In nonstock corporations, the voting rights attach to membership. Each member is entitled to
one vote unless so limited, broadened, or denied in the AoI or bylaws. When the principle for
determining quorum for stock corporations is applied by analogy to nonstock corporations, only
those who are actual members with voting rights should be counted.

Under S52, the majority of the members representing the actual number of voting rights, NOT
the number or numerical constant that may originally be specified in the articles of
incorporation, constitutes the quorum. The best evidence of who are the present members of
the corporation is the membership book; for stock corporations, it is the stock and transfer
book.

2) Effect of death of a member/shareholder- In stock corporations, shareholders may generally

transfer their shares. Thus, on the death of a shareholder, the executor or administrator duly
appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a
settlement and division of the estate is effected, the stocks of the decedent are held by the
administrator or executor.

For nonstock corporations, membership is personal and non-transferable, unless the AoI or
bylaws of the corporation provide otherwise (S90). Thus, the determination of whether “dead
members” are entitled to exercise their voting rights (thru their executor/administrator) depends
on those articles of incorporation or bylaws.

Under the bylaws of GCHS, membership in the corporation shall be terminated by the death of a
member. S91 of CorpCode provides that termination extinguishes all the rights of a member of
the corporation, unless otherwise provided in the articles of incorporation or the bylaws.
Applying S91, we hold that dead members who are dropped from the membership roster for the
cause provided in GCHS’ bylaws are not to be counted in determining the requisite vote in
corporate matters or quorum.

Thus, with 11 remaining members, the quorum should be 6. The meeting here is thus valid.

3) Vacancy- As to the vacancy, S29 provides that the trustees may fill vacancies in the board,
provided that those remaining still constitute a quorum:
"SECTION 29. Vacancies in the office of director or trustee. — Any vacancy occurring
in the board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority of the
 remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies
must be filled by the stockholders in a regular or special meeting called for that purpose.
A director or trustee so elected to fill a vacancy shall be elected only for the unexpired
term of his predecessor in office."
The phrase "may be filled" in Section 29 shows that the filling of vacancies in the board by the
remaining directors or trustees constituting a quorum is merely permissive, not mandatory.
Corporations, therefore, may choose how vacancies in their respective boards may be filled
up — either by the remaining directors constituting a quorum, or by the stockholders or
members in a regular or special meeting called for the purpose.

GCHS’ bylaws provided for the specific mode of filling up vacancies in its board- majority vote
of the remaining board members.

3.1) Wrong meeting- However, while majority of the members were present here, the “election”
of the 4 replacement trustees cannot be upheld since it was held in an annual meeting of the
members, not of the board of trustees. We are not unmindful of the fact that the members of
GCHS themselves also constitute the trustees, but we cannot ignore the GCHS bylaw provision,
which specifically prescribes that vacancies in the board must be filled up by the remaining
trustees. In other words, these remaining member-trustees must sit as a board in order to validly
elect the new ones. Indeed, there is a well-defined distinction between a corporate act to be
done by the board and that by the constituent members of the corporation. The board of
trustees must act, not individually or separately, but as a body in a lawful meeting. On the other
hand, in their annual meeting, the members may be represented by their respective proxies, as in
the contested annual members' meeting of GCHS.

Thus, SC held that the remaining members may convene and fill up the vacancies.

IX. CLOSE CORPORATIOINS

78. Manuel Dulay Enterprises, Inc. v. CA, GR 91889, August 27, 1993, Nocon, J., Second
Division. (Sale by president/treasurer/GM of a close corporation)
FACTS:
Petitioner Manuel Dulay Enterprises, Inc., a domestic corporation, has the following members of
its BoD: Manuel Dulay, Virgilio Dulay, Linda Dulay, Celia Dulay, Plaridel Jose. It owns a land
covered by TCT 17880 known as Dulay Apartment with 16 apartment units on a 689m2 lot
located at FB Harrison St., Pasay City.

In 1976, Manuel Dulay (President, treasurer, and general manager of petitioner), by virtue
of Board Resolution 18 of petitioner corporation, sold the subject property to respondents Sps.
Maria and Castrense Veloso for P300k. Manuel and Sps. Veloso later executed a memorandum
to the deed of absolute sale, giving Manuel until Dec. 09, 1979 to repurchase the property for
P200k. But Maria, without Manuel’s knowledge, mortgaged the property to respondent Torres
for a P250k loan. Torres foreclosed the mortgage and was highest bidder. Maria then assigned
her right to redeem the property from Torres to Manuel Dulay. But as neither Maria nor Manuel
redeemed the property, Torres consolidated ownership in his name and new title was issued.
In June 1980, Torres and Edgardo Pabalan (real estate administrator of Torres) filed an action
against petitioner, Virgilio Nepomuneco (tenant of Dulay apartment) for recovery of possession
and sum of money in CFI. In July 1980, Petitioner also filed in CFI an action against respondents
Sps. Veloso and Torres to cancel sheriff’s sale and the title in Torres’ name.

In 1981, respondents Pabalan and Torres filed an action against Sps. Manalastas, tenant of Dulay
apartment, with petitioner as intervenor for ejectment with MTC. MTC ruled for respondents.
Petitioner sought annulment of the MTC decision with RTC.

The three cases (June 1980, July 1980, and annulment of judgment) were jointly tried. RTC ruled
in favor of respondents. CA on appeal, affirmed RTC in full. Hence this petition for review on
certiorari.

ISSUE:
Whether the sale of the property by Manuel, president/treasurer/general manager of petitioner
corporation, is valid even if the board resolution authorizing the sale was not approved by all
BoD members.
HELD: YES.
1) Contention: Petitioner claims that Board Resolution 18 is without the approval of all members
of the BoD and prepared by a person not designated by the corporation to be its secretary.
Held:
S101 of CorpCode (**S100, RCC) states:
Sec. 101. When board meeting is unnecessary or improperly held. Unless the by-laws
provide otherwise, any action by the directors of a close corporation without a meeting
shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all the
directors; or "2. All the stockholders have actual or implied knowledge of the action and
make no prompt objection thereto in writing; or "3. The directors are accustomed to
take informal action with the express or implied acquiesce of all the stockholders; or "4.
All the directors have express or implied knowledge of the action in question and none of
them makes prompt objection thereto in writing.
"If a directors' meeting is held without proper call or notice, an action taken therein
within the corporate powers is deemed ratified by a director who failed to attend, unless
he promptly files his written objection with the secretary of the corporation after having
knowledge thereof."
Here, petitioner is a close corporation. Thus, a board resolution authorizing the sale or mortgage
of the property is not necessary to bind the corporation for the action of its president. At any
rate, a corporate action taken at a board meeting without proper call or notice in a close
corporation is deemed ratified by the absent director unless the latter promptly files his
written objection with the secretary of the corporation after having knowledge of the
meeting which, in this case, petitioner Virgilio Dulay failed to do.

2) Contention: The sale by its petitioner’s president, Manual, to Sps. Veloso is void as Board
Resolution 18 was passed without the knowledge and consent of the other members of the BoD.
Held:
But Virgilio is an incorporator and one of the BoDs. Petitioner is, in ordinary parlance, a “family
corporation.” 4/5 of petitioner’s incorporators are close relatives. Thus, Virgilio’s claim that he
was not aware of any meeting or resolution authorizing the sale is difficult to believe.

79. San Juan Structural and Steel Fabricators, Inc. v. CA, GR 129459, September 29, 1998,
Panganiban, J., First Division. (Not a close corporation by mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a
corporation)
FACTS:
Petitioner SJSSF filed a complaint with RTC, alleging that it entered into an agreement with
respondent Motorich Sales Corporation for the transfer to SJSSF of a land in QC. SJSSF paid
P100k downpayment as stipulated. In 1989, SJSSF was ready to pay the balance covered by a
Metrobank Cashier’s Check payable to Motorich. SJSSF and Motorich were supposed to meet in
the office of SJSSF but Motorich’s treasurer, Nenita Lee Gruenberg, did not appear.
Motorich, despite demand, refused to execute the transfer of rights/deed of assignment which is
necessary to transfer the certificate of title. SJSSF claims that due to such refusal, it suffered
damages and lost the opportunity to construct a residential building.

Motorich claims that its president did not sign the agreement. Its treasurer’s (Gruenberg’s)
signature is inadequate to bind Motorich. The Agreement was signed by Nenita Lee
Gruenberg, treasurer of Motorich, for Motorich and Andres Co, president of SJSSF, for
SJSSF.

ISSUE:
Whether Motorich is a close corporation by the fact that 99.866% of its shares is owned by Sps.
Gruenberg.
HELD: NO.
1) The contract cannot bind Motorich as it never authorized or ratified the sale. Under S23 of
CorpCode, a corporation may act only thru its BoD or, when authorized by its bylaws or by its
board resolution, thru its officers or agents in the normal course of business. The general
principles of agency govern the relation between the corporation and its officers or agents,
subject to the AoI, bylaws, or relevant laws.

Persons dealing with an assumed agent are bound at their peril, if they would hold the principal
liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in
case either is controverted, the burden of proof is upon them to establish it. Unless duly
authorized, a treasurer, whose powers are limited, cannot bind the corporation in a sale of
its assets.

Here, Motorich denies that it authorized Gruenberg to sell the land. Thus, SJSSF had the burden
of proving that Gruenberg was authorized. It failed to discharge this burden. That Gruenberg is
the treasurer of Motorich does not free SJSSF from the responsibility of ascertaining the extent
of her authority to represent the corporation.

Neither was the sale shown to be a normal business activity of Motorich. The primary purpose of
Motorich is marketing, distribution, export and import in relation to a general merchandising
business. Unmistakably, its treasurer is not cloaked with actual or apparent authority to buy or
sell real property, an activity which falls way beyond the scope of her general authority. Thus,
SC held that the sale is void under Art. 1874 of NCC and 1318 of NCC (lack of consent by
Motorich).

2) Contention: The veil of corporate fiction of Motorich should be pierced as Motorich is a close
corporation. Sps. Reynaldo and Nenita Gruenberg owned all or almost all or 99.866% of the
subscribed capital stock. Thus, being solely owned by Sps. Gruenberg, Motorich can be treated
as a close corporation which are bound by the acts of its principal stockholder who needs no
specific authority.
Held:
The corporate veil can be disregarded when it is utilized as a shield to commit fraud, illegality, or
inequity. But here, SJSSF failed to show that Motorich was formed or is operated for the purpose
of shielding any alleged fraudulent or illegal activities of its officers/stockholders.

Motorich is not a close corporation. S96 of CorpCode states:

"SEC. 96. Definition and Applicability of Title. — A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that: (1) All of the
corporation's issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not exceeding twenty (20); (2)
All of the issued stock of all classes shall be subject to one or more specified restrictions
on transfer permitted by this Title; and (3) The corporation shall not list in any stock
exchange or make any public offering of any of its stock of any class. Notwithstanding
the foregoing, a corporation shall be deemed not a close corporation when at least two-
thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code .
The articles of incorporation of Motorich Sales Corporation does not contain any provision
stating that (1) the number of stockholders shall not exceed, or (2) a preemption of shares is
restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in any stock
exchange or making a public offering of such stocks is prohibited. From its articles, it is clear
that Respondent Motorich is not a close corporation. Motorich does not become one either,
just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed
capital stock. The mere ownership by a single stockholder or by another corporation of all
or nearly all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personalities. So, too, a narrow distribution of ownership
does not, by itself, make a close corporation.

2.1) Contention: SJSSF cites Manuel Dulay Enterprises v. CA.

Held:
But in Dulay, the sale was contracted by the president of a close corporation with the knowledge
and acquiescence of its BoD. Here, Motorich is not a close corporation and the agreement was
entered into by its treasurer without the knowledge of the BoD.

80. Bustos v. Millians Shoe, Inc., GR 185024, April 24, 2017, Sereno, CJ., First Division.
FACTS:
Sps. Cruz owned a land covered by TCT 126668. City Government of Marikina levied the
property for nonpayment of RPT. It was auctioned off with petitioner Bustos as the winning
bidder. Bustos applied for cancellation of TCT 126668. RTC rendered a final and executory
decision ordering the cancellation of the title and issuance of a new one in Bustos’ name.

Meanwhile, notices of lis pendens were annotated on TCT 126668, indicating that SEC Case 36,
filed in RTC, which involved the rehabilitation proceedings for respondent MSI, covered the
subject property and included it in the Stay Order issued by RTC. Bustos moved for exclusion of
the property from the stay order. He claims that the lot belonged to Sps. Cruz who were mere
stockholders and officers of MSI. RTC denied. On certiorari to CA, CA affirmed. Hence this
R45 petition.

ISSUE:
Whether MSI is a close corporation.
Whether stockholders of a close corporation who act as directors thereof are personally liable for
corporate debts.
HELD: NO.
1) Check AoI- Contention: Bustos claims that Sps. Cruz are not liable for the debts of MSI. CA
held that Sps. Cruz are stockholders of a close corporation who are liable for its debts.
Held: Not a close corporation.
To be a close corporation, an entity must abide by the requirements in S96. In San Juan
Structural and Steel Fabricators, Inc. v. CA, SC held that narrow distribution of ownership
does not, by itself, make a close corporation. Courts must look into the articles of
incorporation to find provisions expressly stating that (1) the number of stockholders shall not
exceed 20; or (2) a preemption of shares is restricted in favor of any stockholder or of the
corporation; or (3) the listing of the corporate stocks in any stock exchange or making a public
offering of those stocks is prohibited.

Here, CA and RTC did not show its basis for finding that MSI is a close corporation. They did
not at all refer to the AoI of MSI.

2) No personal liability of stockholders of close corporations- CA also erred in portraying the

import of S97 of CorpCode and concluding that "in a close corporation, the stockholders and/or
officers usually manage the business of the corporation and are subject to all liabilities of
directors, i.e., personally liable for corporate debts and obligations." S97 only specifies that the
stockholders of the corporation shall be subject to all liabilities of directors.” Nowhere is an
inference that stockholders of a close corporation are automatically liable for corporate
debts and obligations.

2.1) Only S100, par.5 explicitly provides for personal liability of stockholders of a close
corporation:
Sec. 100. Agreements by stockholders. — xxx xxx xxx 5. To the extent that the
stockholders are actively engaged in the management or operation of the business and
affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be personally liable for
 corporate torts unless the corporation has obtained reasonably adequate liability
insurance.
None of the requisites in S100 were alleged.

Thus, SC held that a corporation has a separate juridical personality. The claims of creditors are
limited to demands against a debtor or its property. Since the owner of the property here is not
the corporation, Bustos cannot be considered a creditor of MSI but a holder of a claim against
Sps. Cruz.

X. RELIGIOUS/EDUCATIONAL CORPORATIIONS
81. Iglesia Evangelica Metodista En Las Islas Filipinas, Inc. v. Bishop Lazaro, GR 184088,
July 06, 2010, Abad, J., Second Division.
FACTS:
In 1909, Bishop Nicolas Zamora established petitioner IEMELIF as a corporation sole with
Bishop Zamora acting as its “General Superintendent.” In 1948, IMEMELIF registered a bylaws
that established a Supreme Consistory of Elders made up of church ministers to serve for 4 years.
The bylaws empowered the Consistory to elect a General Superintendent, General Secretary, a
General Evangelist, and a Treasurer General who would manage the affairs of the organization.
For all intents and purposes, the Consistory served as IEMELIF’s BoD. Although IEMELIF
remained a corporation sole on paper, it had always acted like a corporation aggregate. The
Consistory exercised IEMELIF’s decision-making powers without ever being challenged. Thus,
during its 1973 General Conference, the general membership voted to put things right by
changing IEMELIF’s organizational structure from a corporation sole to a corporation aggregate.
SEC approved. But for some reason, the corporate papers of IEMELIF remained unaltered as a
corporation sole.

Only in 2001 did the issue reemerge. In answer to a query from IEMELIF, SEC replied that the
conversion of IEMELIF to a corporation aggregated needs an amendment of IEMELIF’s articles
of incorporation. Thus, the Consistory resolved to convert IEMELIF to a corporation aggregate.
Respondent Bishop Nathanael Lazaro, its General Superintendent, instructed all congregations to
take up the matter with their members. Later, the general membership approved the conversion.
IEMELIF thus filed amended AoIs with SEC. Lazaro filed an affidavit-certification in support of
the conversion.

Petitioners reverend Nestor Pineda et al., which belonged to a faction that did not support the
conversion, filed a civil case for declaration of nullity of amended AoI from corporation sole to
corporation aggregate.

Contention: A complete shift from IEMELIF’s status as corporation sole to a corporation

aggregate required not just an amendment of IEMELIF’s AoI, but a complete dissolution of the
corporation sole followed by reincorporation.

RTC dismissed. CA, on appeal, affirmed. Hence this petition.

ISSUE:
Whether the conversion of a corporation sole to a corporation aggregate needs dissolution and
reincorporation.
HELD: NO.
Religious corporations are governed by S109 to 116 of CorpCode. A corporation sole is "one
formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of a
religious denomination, sect, or church, for the purpose of administering or managing, as trustee,
the affairs, properties and temporalities of such religious denomination, sect or church." A
corporation aggregate formed for the same purpose, on the other hand, consists of two or more
persons.

S109 allows the application to religious corporations of the general provisions governing
nonstock corporations. For nonstock corporations, the code requires 2/3 vote of the members to
amend its AoI. How will this requirement apply to a corporation sole that has technically but one
member (the head of the religious organization) who holds in his hands its broad corporate
powers over the properties, rights, and interests of his religious organization? If such 2/3
approval mechanism is made to operate in a corporation sole, its one member in whom all the
powers of the corporation technically belongs needs to get the concurrence of 2/3 of its
membership. The one member, here the General Superintendent, is but a TRUSTEE,
according to S110 of the CorpCode, of its membership.

The one member, with the concurrence of two-thirds of the membership of the organization for
whom he acts as trustee, can self-will the amendment. He can, with membership concurrence,
increase the technical number of the members of the corporation from "sole" or one to the greater
number authorized by its amended articles.

Here, IEMELIF’s General Superintendent, respondent Bishop Lazaro, who embodied the
corporation, obtained not only the approval of the Consistory, but also that of the required 2/3
vote of its membership. The amendment of the articles of incorporation, as correctly put by the
CA, requires merely that a) the amendment is not contrary to any provision or requirement under
the Corporation Code, and that b) it is for a legitimate purpose. S17 provides that amendment
shall be disapproved if, among others, the prescribed form of the articles of incorporation or
amendment to it is not observed, or if the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and regulations, or if the
required percentage of ownership is not complied with. These impediments do not appear in the
case of IEMELIF.

XI. ONE PERSON CORPORATION

XII. CORPORATE DISSOLUTIION/LIQUIDATION

82. Gelano v. CA, GR L-39050, February 24, 1981, De Castro, J., First Division.
FACTS:
Respondent Insular Sawmill, Inc. is a corporation organized on September 17, 1945 with a
corporate life of 50 years or up to September 17, 1995, with the primary purpose of carrying on a
general lumber and sawmill business. To carry on this business, Insular leased the paraphernal
property of petitioner-wife Guillermina Gelano in Paco Manila for P1,200 per month.
Between 1947 to 1950, petitioner Carlos Gelano, husband of Guillermina, obtained from Insular
cash advances of P25,950 on the agreement that Insular could deduct the same from the monthly
rentals until the cash advances are fully paid. Carlos paid only P5,950, leaving a P20k balance
which he refused to pay. Guillermina refused to pay on the ground that the amount was for the
personal account of her husband and did not benefit the family.

Petitioners husband and wife, on various occasions from 1948-1949, also made credit purchases
of lumber materials from Insular for a total of P1,120 in connection with the repair and
improvement of petitioners’ residence. They failed to pay P946.

In 1952, to accommodate and help petitioners renew previous loans they obtained from China
Banking Corporation, Insular executed a joint and several promissory note with Carlos Gelano in
favor of CBC for P8k. Carlos failed to pay. CBC collected P9,106 from Insular. Carlos paid
Insular only P5k. Guillermina also refused to pay.

On May 29, 1959, Insular filed a complaint for collection against petitioners before CFI.
Meanwhile, Insular amended its AoI to shorten its term of existence up to Dec. 31, 1960
only. SEC approved the amendment. CFI was not notified of the amendment and no substitution
of party was ever made. On Nov. 20, 1964, almost 4 years after dissolution of the corporation,
CFI ruled in Insular’s favor, ordering Carlos to pay various sums to Insular.

On appeal, CA affirmed. Petitioners filed a motion to dismiss or reconsideration on the ground

that a defunct corporation cannot maintain any suit for or against it without first complying with
the requirements of the winding up of the affairs of the corporation. CA denied. Hence this
petition for review.

ISSUE:
Whether a corporation, whose corporate life had ceased by the expiration of its terms of
existence, could still continue prosecuting and defending suits after its dissolution and beyond
the period of three (3) years provided for under Act No. 1459, otherwise known as the
Corporation Law, to wind up its affairs, without having undertaken any step to transfer its assets
to a trustee or assignee.
HELD: YES.
1) Counsel prosecuting case may be considered the trustee - Section 77 of the Corporation Law
provides that the corporation shall "be continued as a body corporate for three (3) years after the
time when it would have been . . . dissolved, for the purpose of prosecuting and defending suits
by or against it . . .," so that, thereafter, it shall no longer enjoy corporate existence for such
purpose. For this reason, Section 78 of the same law authorizes the corporation, "at any time
during said three years . . . to convey all of its property to trustees for the benefit of members,
stockholders, creditors and other interested," evidently for the purpose of enabling said trustees
to prosecute and defend suits by or against the corporation begun before the expiration of
said period.
When Insular dissolved on Dec. 31, 1960, it had until Dec. 31, 1963 to prosecute in its name the
present case. after the expiration of said period, the corporation ceased to exist for all purposes
and it can no longer sue or be sued.

However, a corporation that has a pending action and which cannot be terminated within the
3y period after its dissolution is authorized to convey all its property to trustees to enable it
to prosecute and defend suits by or against the corporation beyond the 3y period. Although
Insular did not appoint any trustee, yet the counsel who prosecuted and defended the interest
of the corporation in the instant case and who appeared in behalf of the corporation may be
considered a trustee of the corporation at least with respect to the matter in litigation only.
We thus hold that there was a substantial compliance with Section 78 of the Corporation Law
and as such, private respondent Insular Sawmill, Inc. could still continue prosecuting the present
case even beyond the period of three (3) years from the time of its dissolution.

1.1) The trustee may commence a suit which can proceed to final judgment even beyond the
three-year period. No reason can be conceived why a suit already commenced by the corporation
itself during its existence, not by a mere trustee who, by fiction, merely continues the legal
personality of the dissolved corporation should not be accorded similar treatment allowed — to
proceed to final judgment and execution thereof.

The word “trustee” as used in the corporation statute must be understood in its general concept
which could include the counsel to whom was entrusted to prosecute this case filed by the
corporation. The purpose in the transfer of the assets of the corporation to a trustee upon its
dissolution is more for the protection of its creditor and stockholders. Debtors like the petitioners
herein may not take advantage of the failure of the corporation to transfer its assets to a trustee,
else petitioner would enrich themselves at the expense of another.

Thus, SC upheld CA’s ruling that:

Any litigation filed by or against (the corporation) instituted within the 3y period, but
which could not be terminated, must necessarily prolong that period until the final
termination of said litigation as otherwise corporations in liquidation would lose what
should justly belong to them.

83. Clarion Printing House, Inc. v. NLRC, GR 148372, June 27, 2005, Carpio-Morales, J.,
Third Division.
FACTS:
Respondent Michelle Miclat was employed in April, 1997 on a probationary basis as marketing
assistant with a monthly salary of P6,500 by petitioner Clarion owned by co-petitioner Yutingco.
In September 1997, the EYCO Group of Companies of which Clarion formed part filed with
SEC a petition for declaration of suspension of payment, formation, and appointment of
rehabilitation receiver/committee, approval of rehabilitation plan with alternative prayer for
liquidation, alleging that certain “factors beyond the control and anticipation of management”
caught it flat-footed, such as the glut in the real estate market, inflation and erratic changes in the
peso-dollar exchange rate, labor problems, etc. On September 30, 1997, SEC issued an order
approving the creation of an interim receiver for the EYCO Group of Companies.
On Oct. 22, 1997, Clarion informed Miclat by telephone that her employment contract had been
terminated effective Oct. 23, 1997 as part of Clarion’s cost-cutting measures. Thus, on Nov. 17,
1997, Miclat filed a complaint for illegal dismissal against Clarion and Yutingco in NLRC.

Petitioners claim that they could not be faulted for retrenching some employees, including
Miclat, drawing attention to the EYCO Group of companies being placed under receivership.

NLRC ruled that Miclat was illegally dismissed and directed her reinstatement. It also ordered
payment of backwages & 13th month pay. NLRC affirmed. CA, on certiorari, affirmed. Hence
this petition for review on certiorari.

ISSUE:
Whether it was proper for LA, NLRC, and CA to entertain Miclat’s petition for illegal dismissal
against Clarion despite appointment of a receiver for Clarion.
HELD: NO.
PD 902-A, S5 and 6 provide:
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 xxx, it shall have original and exclusive jurisdiction to hear
and decide cases involving:
(d) Petitions of corporations, partnerships or associations declared in the state of
suspension of payments in cases where the corporation, partnership or association
possesses sufficient property to cover all debts but foresees the impossibility of meeting
them when they respectively fall due or in cases where the corporation, partnership,
association has no sufficient assets to cover its liabilities, but is under the management of
a Rehabilitation Receiver or Management Committee created pursuant to this Decree.

SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess
the following powers: xxx xxx xxx
(c) To appoint one or more receivers of the property, xxx whenever necessary in order to
preserve the rights of the parties-litigants and/or protect the interest of the investing
public and creditors: Provided, however, That the Commission may in appropriate
cases, appoint a rehabilitation receiver of corporations, partnerships or other
associations not supervised or regulated by other government agencies who shall have, in
addition to powers of the regular receiver under the provisions of the Rules of Court,
such functions and powers as are provided for in the succeeding paragraph (d)
hereof:

(d) To create and appoint a management committee, board or body upon petition or motu
propio to undertake the management of corporations, partnership or other associations not
supervised or regulated by other government agencies in appropriate cases when there is
imminent danger of dissipation, loss, wastage or destruction of assets or other
properties or paralization of business operations of such corporations or entities
which may be prejudicial to the interest of minority stockholders, parties-litigants of the
general public:
That the SEC appointed an interim receiver for the EYCO Group of Companies in light of the
“factors beyond the control and anticipation of management” rendering it unable to meet its
obligation as they fall due and thus resulting to problems that would affect its operations show
that Clarion and the other member-companies in EYCO Group was suffering business
reverses justifying retrenchment of its employees.

2) SC took judicial notice of Nikon Industrial Corp. (including Clarion), EYCO Group of
Companies v. PNB, elevated to SC as GR 145977 where SC affirmed the disapproval of the
petition of EYCO Group, including Clarion, for suspension of payments and the SEC order
dated September 14, 1999 ordering liquidation and dissolution of the corporations.

Thus, Clarion’s claim when it terminated Miclat it was experiencing reverses gains more light
due to SEC’s disapproval of EYCO Group’s petition to be declared in suspension of payments
filed before Miclat’s termination and SEC’s order for the group’s liquidation and dissolution.

Thus, SC found Miclat’s termination justified.

3) But since there were no standards made known to Miclat, she was deemed hired as a regular
employee from day 1. Clarion failed to comply with the notice requirement in Art. 283 of Labor
Code. Thus, SC awarded P6,500 nominal damages. SC also awarded P3,250 13th month pay and
P6,500 separation pay.

4) But with the appointment of management receiver in September 1997, all claims and
proceedings against Clarion, including labor claims, were deemed suspended during the
existence of the receivership. LA, NLRC, and CA should not have resolved Miclat’s
complaint and instead directed her to lodge her claim before the then appointed receiver of
Clarion. But to still require Miclat at this point to refile her labor claim against Clarion- 8 years
have lapsed since her termination and all arguments were already ventilated in LA, NLRC, and
CA, and Clarion is already in the course of liquidation- this Court deems it most expedient for
both parties that Clarion’s liability be determined with finality.

SC instead thus ordered that a copy of its decision in this case be furnished to the SEC Hearing
Panel charged with the liquidation and dissolution of Clarion for inclusion in the list of claims
of its creditors (Miclat’s claims) to be satisfied in accordance with Art. 110 of Labor Code in
relation to NCC provisions on concurrence and preference of credits.

84. Aguirre v. FQB+7, GR 170770, January 09, 2013, Del Castillo, J., Second Division.
FACTS:
In 2004, Vitaliano Aguirre filed a complaint in RTC for injunction, inspection of corporate
books, and damages against respondents Nathaniel, Priscila, and Antonio. The complaint
alleged:
FQB+7 was established in 1985 with the following directors as reflected in its AoI:
1) Francisco Bocobo, 2) Fidel Aguirre, 3) Alfredo Torres, 4) Victoriano Santos, 5)
Victorino Santos. Vitaliano Aguirre is listed as one of the subscribers.
Except for the death of Francisco and Alfredo, there are no other changes in this listing.
But sometime in April 2004, Vitaliano discovered a GIS of FQB+7 dated September 06,
 2002 in the SEC records filed by Francisco’s heirs, Nathaniel (as president) and Priscila
(as secretary/treasurer). It also stated FQB+7’s directors as:
1) Nathaniel Bocobo, 2) Priscila Bocobo, 3) Fidel Aguirre, 4) Victoriano Santos, 5)
Victorino Santos, 6) Consolacion Santos. In the list of subscribers, Vitaliano Aguirre’s
name was not in the list of subscribers. The GIS also reported that FQB’s stockholders
held their annual meeting on September 03, 2002.
On September 27, 2004, Nathaniel, as FQB’s president, appointed Antonio as FQB’s attorney-in-
fact with power of administration over the corporation’s farm in Quezon Province.

Characterizing Nathaniel’s, Priscila’s, and Antonio’s continuous representation of the

corporation as a usurpation of the management powers and prerogatives of the “real” BoD,
Vitaliano’s complaint asked for an injunction against them and for nullification of all their
previous actions as such directors, including the GIS they filed with SEC.

Respondents failed to attend the hearing on Vitaliano’s application for preliminary injunction
despite notice. Thus, RTC granted the application. Respondents filed a motion for extension.
RTC denied the motion for being a prohibited pleading under the Interim Rules of Procedure
Governing Intra-Corporate Controversies under RA 8799.

Respondents filed a petition for certiorari with CA. They also informed CA that SEC had
already revoked FQB’s certificate of registration on September 29, 2003 for failure to
comply with SEC reportorial requirements. CA ruled that RTC committed gadalej in issuing the
WPI to remove respondents from their positions in the BoD based only on Vitaliano’s self-
serving assertions, which CA said cannot outweigh the entries in the GIS. CA also ruled that a
dissolved corporation cannot continue its business. Thus, Vitaliano’s complaint, being geared
towards the continuation of FQB’s business, should be dismissed. Hence this petition.

ISSUE:
Whether the complaint of Vitaliano seeks to continue the business of the corporation. -NO
Whether intracorporate disputes cannot proceed anymore upon dissolution of the corporation.
-NO
HELD:
1) Complaint not a continuation of business- S122 (S139, RCC) of CorpCode prohibits a
dissolved corporation from continuing its business but allows it limited personality (3y) to settle
and close its affairs, including complete liquidation. Whether the complaint seeks continuation of
business or is a settlement of corporate affairs lies in its prayers. The complaint does not seek to
enter into contracts, issue new stocks, acquire properties, execute business transactions, etc.
Its aim is not to continue the corporate business, but to determine and vindicate an alleged
stockholder's right to the return of his stockholdings and to participate in the election of
directors, and a corporation's right to remove usurpers and strangers from its affairs. The Court
fails to see how resolution of these issues can be said to continue the business of FQB+7.

2) BoD not functus officio during dissolution- Neither are these issues mooted by the dissolution
of the corporation. A corporation's board of directors is not rendered functus officio by its
dissolution. Since S122 allows a corporation to continue its existence for a limited purpose,
necessarily there must be a board that will continue acting for and on behalf of the
dissolved corporation for that purpose. In fact, S122 authorizes the dissolved corporation's
board of directors to conduct its liquidation within three years from its dissolution. Jurisprudence
has even recognized the board's authority to act as trustee for persons in interest beyond the said
three-year period. Thus, the determination of which group is the bona fide or rightful board of
the dissolved corporation will still provide practical relief to the parties involved.

2.1) The same is true as to Vitaliano’s shareholdings in the dissolved corporation. A party's
stockholdings in a corporation, whether existing or dissolved, is a property right which he may
vindicate against another party who has deprived him thereof. The corporation's dissolution
does not extinguish such property right. Section 145 (**S184, RCC) of the Corporation Code
ensures the protection of this right, thus:
Sec. 145. Amendment or repeal. — No right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the subsequent dissolution of said corporation or
by any subsequent amendment or repeal of this Code or of any part thereof.

3) Intracorporate dispute remains despite dissolution- Contention: The CA held that the trial
court does not have jurisdiction over an intra-corporate dispute involving a dissolved
corporation. It further held that due to the corporation's dissolution, the qualifications of the
respondents can no longer be questioned and that the dissolved corporation must now commence
liquidation proceedings with the respondents as its directors and officers.
Held:
CA’s ruling assumes that intrtacorporate controversies continue only in existing corporations and
that when a corporation is dissolved, these cease to be intracorporate and need no longer be
resolved.

But intracorporate disputes remain even when the corporation is dissolved. RA 8799 conferred
jurisdiction over intracorporate controversies on RTCs. RA 8799 refers to S5 of PD 902-A for a
description of such controversies. These are reiterated in R1 of the Interim Rules of Procedure
Governing Intra-corporate Controversies under RA 8799:
SECTION 1. (a) Cases Covered. — These Rules shall govern the procedure to be
observed in civil cases involving the following: (DREDI)
(1) Devices or schemes employed by, or any act of, the board of directors, business
associates, officers or partners, amounting to fraud or misrepresentation which may be
detrimental to the interest of the public and/or of the stockholders, partners, or members
of any corporation, partnership, or association;
(2) Controversies arising out of intra-corporate, partnership, or association relations,
between and among stockholders, members, or associates; and between, any or all of
them and the corporation, partnership, or association of which they are stockholders,
members, or associates, respectively;
(3) Controversies in the election or appointment of directors, trustees, officers, or
managers of corporations, partnerships, or associations;
(4) Derivative suits; and
(5) Inspection of corporate books
Jurisprudence has provided tests in determining whether a controversy is intracorporate. For the
Relationship test, SC enumerated the types of relationships embraced in S5(b) of RA 8799 (S1[a]
[2] of Interim Rules):
a) between the corporation, partnership, or association and the public; b) between the
corporation, partnership, or association and its stockholders, partners, members, or
officers; c) between the corporation, partnership, or association and the State as far as its
franchise, permit or license to operate is concerned; and d) among the stockholders,
partners or associates themselves.
For the nature of the controversy test, “The controversy must not only be rooted in the existence
of an intra-corporate relationship, but must as well pertain to the enforcement of the parties'
correlative rights and obligations under the Corporation Code and the internal and intra-corporate
regulatory rules of the corporation.” The second element (test) requires that the dispute among
the parties be intrinsically connected with the regulation of the corporation.

This case is an intra-corporate dispute. It obviously arose from the intra-corporate relations
between the parties, and the questions involved pertain to their rights and obligations under the
Corporation Code and matters relating to the regulation of the corporation. We further hold that
the nature of the case as an intra-corporate dispute was not affected by the subsequent dissolution
of the corporation.

Section 145 preserves a corporate actor's cause of action and remedy against another corporate
actor. In so doing, Section 145 also preserves the nature of the controversy between the parties as
an intra-corporate dispute.

85. Dela Torre v. Primetown Property Group, Inc., GR 221932, February 14, 2018, Peralta,
J., Second Division.
FACTS:
Respondent Primetown is engaged in owning and developing real estate. It experienced financial
difficulties due to the 1997 Asian financial crisis (devaluation of the PH peso, increase in interest
rates, and lack of access to adequate credit). Thus, in 2003, Primetown filed a petition for
corporate rehabilitation with prayer for suspension of payments and actions in RTC. On Aug. 15,
2003, the rehabilitation court issued a stay order.

On Oct. 15, 2004, petitioner dela Torre filed a motion for leave to intervene seeking judicial
order for specific performance- for Primetown to execute in her favor a deed of sale covering
Unit 3306, Makati Prime Citadel Condominium, which she bought from Primetown as she
allegedly had already fully paid the purchase price.

RTC granted dela Torre’s motion for intervention. CA, on certiorari, reversed. Hence this
petition for review on certiorari.

ISSUE:
Whether Dela Torre’s motion is covered by the stay order.
HELD: YES.
1) Contention: Dela Torre claims that her claim against Primetown was not suspended with the
issuance of the stay order as when the order was issued on Aug. 15, 2003, she had long already
fully paid the purchase price of the condominium unit she bought, i.e., as of July 25, 1996 (*This
claim is disproved by Primetown). She invokes Town and Country Enterprises, Inc. v.
Quisumbing.
Held:
The law on rehabilitation and suspension of actions for claims against corporations is PD902-A
as amended. RA 8799, SRC, amended S5 of PD 902-A and transferred to RTC the jurisdiction of
SEC over petitions of corporations etc. to be declared in suspension of payments. On Dec. 15,
2000, SC promulgated AM 00-8-10-SC or the Interim Rules of Procedure on Corporate
Rehabilitation.

Corporate rehabilitation contemplates a continuance of corporate life and activities in an effort to

restore and reinstate the corporation to its former position of successful operation and solvency,
the purpose being to enable the company to gain a new lease on life and allow its creditors to be
paid their claims out of its earnings. Under R4, S6 of the Interim Rules:
Sec. 6. Stay Order. — If the court finds the petition to be sufficient in form and
substance, it shall, not later than five (5) days from the filing of the petition, issue an
Order (a) appointing a Rehabilitation Receiver and fixing his bond; (b) staying
enforcement of all claims, whether for money or otherwise and whether such
enforcement is by court action or otherwise, against the debtor, its guarantors and sureties
not solidarily liable with the debtor; (c) prohibiting the debtor from selling, encumbering,
transferring, or disposing in any manner any of its properties except in the ordinary
course of business; (d) prohibiting the debtor from making any payment of its liabilities
outstanding as at the date of filing of the petition; xxx. (i) directing all creditors and all
interested parties (including the Securities and Exchange Commission) to file and serve
on the debtor a verified comment on or opposition to the petition, with supporting
affidavits and documents, not later than ten (10) days before the date of the initial
hearing and putting them on notice that their failure to do so will bar them from
participating in the proceedings;

Here, Primetown filed the petition with RTC on Aug. 15, 2003. The initial hearing was set on
September 24, 2003. Thus, any comment/opposition to the petition should have been filed 10
days before the initial hearing, but dela Torre did not file any and is already barred from
participating in the proceedings. But dela Torre filed a motion for leave to intervene on Oct. 15,
2004, 1 year later. Intervention is prohibited under R3, S1 of the Interim Rules. Thus, RTC
should not have entertained the petition for intervention at all.

2) Thus, while Primetown is undergoing rehabilitation, the enforcement of all claims against it is
stayed. R2, S1 of the Interim Rules defines a claim as referring to all claims or demands of
whatever nature or character against a debtor or its property, whether for money or otherwise.
The definition is all-encompassing as it refers to all actions whether for money or otherwise.

Dela Torre’s prayer in intervention for Primetown to execute the deed of sale in her favor is a
claim as defined. In fact, the RTC’s stay order also prohibited Primetown from selling,
encumbering, etc. in any manner of any of its properties. Thus, the RTC order granting the
intervention and ordering Primetown to execute the deed of sale is a violation of law.
3) In Town and Country Enterprises v. Quisumbing, Metrobank foreclosed a real estate mortgage
constituted by TCEI on its own property. TCEI failed to redeem the property. Thus, ownership
was already vested with Metrobank as of February 06, 2002, notwithstanding that the
affidavit of consolidation of ownership was executed only on April 25, 2003. TCEI filed on
Oct. 01, 2002 a petition for declaration of a state of suspension of payments, where a stay order
was issued on Oct. 8, 2002. SC held that Metrobank had already acquired ownership over the
mortgaged properties when TCEI commenced its petition on Oct. 01, 2002.

Here, Dela Torre’s allegation that she had fully paid the purchase price was disputed by
Primetown based on their MOA dated Jan. 20, 1997 where Dela Torre acknowledged that she
had paid the principal obligation on the condominium unit but had yet to pay respondent for
penalty charges and interest by reason of the delay in the payment of the monthly amortizations.

86. Rich v. Paloma III, GR 210538, March 07, 2018, Reyes, Jr., J., Second Division.
FACTS:
In 1997, petitioner Dr. Gil Rich lent P1M to his brother, Estanislao Rich. The agreement was
secured by a real estate mortgage over a land in Maasin City, Southern Leyte. When Estanislao
failed to pay, petitioner foreclosed the property via public auction sale conducted on March 14,
2005. He was declared the highest bidder.

But without petitioner’s knowledge and prior to the foreclosure, on January 24, 2005,
Estanislao entered into an agreement with Maasin traders Lending Corporation (MTLC) where
loans amounting to P2.6M were secured by a REM over the same property. On the strength of
this document, Servacio, president of MTLC, exercised equitable redemption after the
foreclosure proceedings. She tendered P2,090,000 as redemption money in the EJ foreclosure
sale. On March 15, 2006, respondent Paloma III, as sheriff of RTC, issued a deed of redemption
in favor of MTLC.

Petitioner thus filed a complaint for annulment of deed of redemption in RTC against respondent
Servacio, alleging that MTLC no longer has juridical personality to effect the equitable
redemption as it has already been dissolved by SEC as early as September 2003.

RTC ruled that the REM to MTLC was void. CA, on appeal, reversed and dismissed the
complaint to annul deed of redemption. Hence this petition.

ISSUE:
Whether a corporation that has been dissolved may enter into a deed of REM within 3 years from
such dissolution.
HELD: NO.
S122 of CorpCode empowers every corporation whose corporate existence has been legally
terminated to continue as a body corporate for three (3) years after the time when it would have
been dissolved. This continued existence would only be for the purposes of "prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to dispose of and
convey its property and to distribute its assets." But this extended authority, as mentioned by
CorpCode, necessarily excludes the purpose of continuing the business for which it was
established. The reason for this is simple: the dissolution of the corporation carries with it the
termination of the corporation's juridical personality. Any new business in which the
dissolved corporation would engage in, other than those for the purpose of liquidation, "will be a
void transaction because of the non-existence of the corporate party."

Thus, if MTLC entered into the REM after its dissolution, the REM is void due to nonexistence
of MTLC’s juridical personality. But if MTLC entered into the REM prior to its dissolution,
then MTLC’s redemption of the property, even if already after its dissolution ( as long as it
would not exceed 3y thereafter,) would still be valid because of the liquidation/winding up
powers accorded by S122.

Here, MTLC has already been dissolved by SEC as early as September 2003. Estanislao and
MTLC entered into the REM only on January 24, 2005. MTLC redeemed the property on Dec.
15, 2005, for which a deed of redemption was issued by Paloma III on March 16, 2006. Thus, by
the time MTLC executed the REM agreement, its juridical personality has already ceased
to exist. The agreement is void.

XIII. FOREIGN CORPORATIONS

87. Facilities Management Corporation v. De La Osa, GR L-38649, March 26, 1979,
Makasiar, J., First Division.
FACTS:
De la Osa filed a petition against petitioner FMC, seeking reinstatement and recovery of his
overtime compensation, swing shift and graveyard shift differentials, alleging that he was
employed by FMC as painter, houseboy, and cashier at different dates.

Contention: FMC filed an answer, claiming that FMC is domiciled in Wake Island which is
beyond the territorial jurisdiction of the PH Government. FMC also moved to dismiss. It also
claims that it has never been engaged in business in PH nor does it have an agent in PH.

The Court of Industrial Relations (CIR) ruled in favor of De la Osa. Hence this petition for
review on certiorari.

ISSUE:
Is the act of recruiting Filipino workers for its own use abroad by a resident foreign corporation
“doing business” in PH? -NO.
Can FMC be sued in PH even if it is not engaged in business herein? -YES.
HELD:
1) Under the Rules promulgated by the Board of Investments implementing RA 5455, “doing
business” was illustrated as:
1) Soliciting orders, purchases (sales) or service contracts. Concrete and specific
solicitations by a foreign firm amounting to negotiation or fixing of the terms and
conditions of sales or service contracts, regardless of whether the contracts are actually
reduced to writing;
2) Appointing a representative or distributor who is domiciled in the Philippines, unless
said representative or distributor has an independent status, i.e., it transacts business in its
name and for its own account, and not in the name or for the account of the principal;
 3) Opening offices, whether called 'liaison' offices, agencies or branches, unless proved
otherwise;
4) Any other acts that imply a continuity of commercial dealings or arrangements.
No general rule can be laid down as to what constitutes doing business. The true test, however,
seems to be whether the foreign corporation is continuing the body or substance of the
business or enterprise for which it was organized or whether it has substantially retired
from it and turned it over to another. The term implies continuity of commercial dealings.

2) In Eastboard Navigation v. Juan Ysmael & Co., we held:

While plaintiff is a foreign corporation without license to transact business in the
Philippines, it does not follow that it has no capacity to bring the present action. Such
license is not necessary because it is not engaged in business in the Philippines. In
fact, the transaction herein involved is the first business undertaken by plaintiff in the
Philippines, although on a previous occasion its vessel was chartered xxx. These two
isolated transactions do not constitute engaging in business in PH under S68 and 69
(*S150, RCC) of the Corporation Law as to bar plaintiff from seeking redress in court.
“Thus, since appellant xxx is not engaged in business, it is not barred from filing a
case.”

3) Indeed, if a foreign corporation, not engaged in business in the Philippines, is not barred from
seeking redress from courts in the Philippines, a fortiori, that same corporation cannot claim
exemption from being sued in Philippine courts for acts done against a person or persons in
the Philippines.

88. Home Insurance Company v. Eastern Shipping Lines, GR L-34382, July 20, 1983,
Gutierrez, Jr., J., First Division. (Contracts of foreign corporations not licensed to do
business in PH are enforceable)
FACTS:
In 1967, Kajta & Co shipped on board SS Eastern Jupiter from Japan 2361 coils of Black hot
rolled copper wire rods. The vessel is owned by Eastern Shipping Lines. The consignee was
Phelps Dodge Corporation at Manila. The shipment was insured with petitioner. 53 of the coils
were in bad order with 73 loose and partly cut. The weight of the coils were 263,940kg as against
its invoiced weight of 264,534kg, or a 593kg shortage. Thus, petitioner paid the consignee
P3,260.

In 1966, Hansa Transport shipped from Germany 30 packages of Service Parts of Farm
Equipment on board SS Neder Rijin owned by N.V. Nedlloyd Linen, represented in PH by its
local agent respondent Columbian Philippines, Inc. The shipment was insured by petitioner.
There was a short delivery of 1 package and missing items in 5 other packages. Petitioner thus
paid the consignee P2,426.

These are thus consolidated petitions by petitioner for recovery of maritime damages against
respondents Eastern and Columbian. As averment on its capacity to sue, petitioner HIC stated:
The plaintiff is a foreign insurance company duly authorized to do business in the
Philippines through its agent, Mr. VICTOR H. BELLO, xxx.
Respondents denied HIC’s capacity to sue for lack of knowledge or information sufficient to
form a belief as to the truth thereof.

CFI dismissed the complaints, ruling that HIC has no capacity to sue. Hence this petition for
review on certiorari. HIC, when it filed its complaints with CFI, was already issued a license to
conduct insurance business in PH. However, when the insurance contracts which are the
basis of these cases were executed, HIC had not yet secured the necessary licenses and
authority. CFI thus held that the insurance contracts were void and cannot be validated by
subsequent procurement of license.

ISSUE:
Whether contracts entered into in PH by a foreign corporation who at the time of execution of
the contracts were not licensed to do business in PH are void.
HELD: NO.
1) The objective of S68 and S69 of the old Corporation law was to subject the foreign
corporation to the jurisdiction of our courts.

2) SC ruled that on the two opposing views on whether contracts executed by a foreign
corporation with no capacity to sue is void, our jurisprudence leans towards the view that these
are valid, citing Peter & Burghard Stone Co. v. Carper:
The very fact that the prohibition against maintaining an action in the courts of the state
was inserted in the statute ought to be conclusive proof that the legislature did not intend
or understand that contracts made without compliance with the law were void. The statute
does not fix any time within which foreign corporations shall comply with the Act. If
such contracts were void, no suits could be prosecuted on them in any court. The
primary purpose of our statute is to compel a foreign corporation desiring to do business
within the state to submit itself to the jurisdiction of the courts of this state. The statute
was not intended to exclude foreign corporations from the state. It does not, in terms,
render invalid contracts made in this state by noncomplying corporations. The better
reason, the wiser and fairer policy, and the greater weight lie with those decisions which
hold that where, as here, there is a prohibition with a penalty, with no express or implied
declarations respecting the validity of enforceability of contracts made by qualified
foreign corporations, the contracts . . . are enforceable . . . upon compliance with the
law.'"

Thus, there is no question that the contracts are enforceable. The requirement of registration
affects only the remedy.

3) In General Corporation of the PH v. Union Insurance Society of Canton, SC held that the rule
on summons on a foreign corporation under the RoC makes no distinction as to corporations
with or without authority to do business in the Philippines. The test is whether a foreign
corporation was actually doing business here. Otherwise, a foreign corporation illegally doing
business here because of its refusal or neglect to obtain the corresponding license and authority
to do business may successfully though unfairly plead such neglect or illegal act so as to avoid
service and thereby impugn the jurisdiction of the local courts.
4) Penal sanction- BP 68 or the Corporation Code has corrected the ambiguity caused by the
wording of S69 of the old Corporation Law:
"SEC. 133. Doing business without a license.— No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency in the Philippines; but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals on any valid cause of action
recognized under Philippine laws."
The prohibition against doing business without license is given penal sanction, applicable also to
other violations of the Corporation Code, under the general provisions of Section 144.

Thus, it is not necessary to declare the contract null and void even as against the erring foreign
corporation. The penal sanction for the violation and the denial of access to our courts and
administrative bodies are sufficient from the viewpoint of legislative policy.

5) SC also ruled that the lack of capacity at the time of the execution of the contracts was cured
by the subsequent registration because of the failure of respondents to specifically deny HIC’s
averment that it is authorized to file the petition as required under the Rules of Court.

Thus, respondents were ordered to pay petitioner.

89. The Mentholatum Co., Inc. v. Mangaliman, GR 47701, June 27, 1941, Laurel, J., First
Division. (Selling goods thru exclusive distributing agent in PH by foreign corporation is
doing business in PH; Foreign corporation doing business without license = cannot sue for
violation of trade mark and unfair competition)
FACTS:
Mentholatum Co., Inc. and Philippine-American Drug, Co., Inc. filed an action in CFI against
Anacleto and Florencio Mangaliman and the Director of the Bureau of Commerce for
infringement of trade mark and unfair competition, praying for an order restraining respondents
from selling their product “Mentholiman,” and directing them to render an accounting of their
sales and profits. The complaint stated that Mentholatum Co. is a Kansas corporation which
manufactures “Mentholatum,” a medicament for treatment of colds, chapped skin, rectal
irritation, etc. It registered “Mentholatum” as trademark for its products. The complaint also
stated that “Mentholiman” is in a container of the same size, color, and shape as “Mentholatum.”

The complaint also alleged that PH-American Drug Co. is its exclusive distributing agent in
PH.

CFI ruled for Mentholatum Co. CA reversed. Hence this petition for certiorari.

ISSUE:
Whether Mentholatum is engaged in business in PH. -YES.
Whether Mentholatum Co., a foreign corporation, can institute this action without a license to do
business in PH as required by S69 of the Corporation Law. -Since it is doing business, NO.
HELD:
1) The true test as to what constitutes “doing” or “engaging in” business seems to be whether the
foreign corporation is continuing the body or substance of the business or enterprise for which it
was organized or whether it has substantially retired from it and turned it over to another. The
term implies a continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose and object of its organization.

The complaint stated that PH-American is the exclusive distributing agent in the PH Islands of
Mentholatum co., Inc. It follows that whatever transactions the Philippine-American Drug Co.,
Inc., had executed in view of the law, the Mentholatum Co., Inc., being a foreign corporation
doing business in the Philippines without the license required by S68 of the Corporation
Law, it may not prosecute this action for violation of trade mark and unfair competition.
Neither may the Philippine-American Drug Co., Inc., maintain the action here for the reason that
the distinguishing features of the agent being his representative character and derivative
authority, it cannot now, to the advantage of its principal, claim an independent standing in court.

90. Eriks Pte. LTD. v. CA, GR 118843, February 6, 1997, Panganiban, J., Third Division.
(Continuity of doing business- intention to continue business rather than quantity of
transactions)
FACTS:
Eriks is a nonresident (Singaporean) foreign corporation engaged in the manufacture and sale of
elements used in sealing pumps, valves, and pipes for industrial purposes. It alleged that it is a
not licensed to do business in PH and is suing on an isolated transaction.

On various dates from Jan. 17 to Aug. 16, 1989, respondent Delfin Enriquez, doing business
under Delrene EB Controls Center and/or EB Karmine Commercial, received from Eriks various
elements used in sealing pumps totaling 16 transactions for S$41,927. The transfers were
perfected in Singapore. Eriks made demands on Delfin to settle his account, but Delfin failed to
do so. Thus, Eriks filed in RTC an action for the recovery of S$41,939. Delfin moved to dismiss,
contending that Eriks has no legal capacity to sue.

RTC dismissed. CA affirmed. Hence this petition for review.

ISSUE:
Is a foreign corporation which sold its products sixteen times over a five-month period to the
same Filipino buyer without first obtaining a license to do business in the Philippines, prohibited
from maintaining an action to collect payment therefor in Philippine courts?
HELD: YES, since such is “doing business” in PH and not mere “isolated transactions.”
1) CorpCode provides:
"Sec. 133. Doing business without a license. — No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals on any valid cause of action
recognized under Philippine laws."
S133 prohibits not merely absence of the prescribed license, but it also bars a foreign
corporation “doing business” in the PH without such license access to our courts. A foreign
corporation without such license is not ipso facto incapacitated from bringing an action. A
license is necessary only if it is "transacting or doing business" in the country.

2) There is no definitive rule on what constitutes “doing,” “engaging in,” or “transacting”

business. CorpCode itself does not define such terms. To fill the gap, RA 7042 (FIA) provides:
SEC. 3. Definitions. — As used in this Act: xxx xxx xxx
(d) the phrase 'doing business' shall include soliciting orders, service contracts, opening
offices, xxx; appointing representatives or distributors domiciled in the Philippines or
who in any calendar year stay in the country for a period or periods totaling one hundred
eight(y) (180) days or more; participating in the management, supervision or control of
any domestic business, firm, entity or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or arrangements, and contemplate to
that extent the performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of, commercial gain or of the
purpose and object of the business organization: Provided, however, That the phrase
'doing business' shall not be deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do business, and/or the exercise
of rights as such investor; nor having a nominee director or officer to represent its
interests in such corporation; nor appointing a representative or distributor domiciled in
the Philippines which transacts business in its own name and for its own account."

SC cited the definition of “doing business” in Mentholatum v. Mangaliman (“The true test xxx.”
“The term implies a continuity xxx.”).

The purpose of the law is to subject to foreign corporation doing business in PH to the
jurisdiction of the courts. It is not to prevent the foreign corporation from performing single or
isolated acts, but to bar it from acquiring a domicile for the purpose of business without first
taking the steps necessary to render it amenable to suits in the local courts.

2.1) Here, more than the sheer number of transactions entered into, a clear and unmistakable
intention on the part of petitioner to continue the body of its business in the Philippines is more
than apparent. Eriks is engaged in the manufacture and sale of elements used in sealing pumps,
valves, and pipes for industrial purposes, valves and control equipment used for industrial fluid
control and PVC pipes and fittings for industrial use. Thus, the sale by petitioner of the items
covered by the receipts, which are part and parcel of its main product line, was actually
carried out in the progressive prosecution of commercial gain and the pursuit of the purpose and
object of its business.

Also, Eriks’ grant and extension of 90-day credit term to Delfin for every purchase shows an
intention to continue transacting with Delfin since credit is, in the usual course of commercial
transactions, extended only to customers in good standing or to those on whom there is an
intention to maintain long-term relationship.

Thus, the transactions could not have been isolated transactions.

2.2) Intention to continue business; isolated transaction- What is determinative of "doing
business" is not really the number or the quantity of the transactions, but more importantly,
the intention of an entity to continue the body of its business in the country. The number and
quantity are merely evidence of such intention. The phrase "isolated transaction" has a definite
and fixed meaning, i.e. a transaction or series of transactions set apart from the common
business of a foreign enterprise in the sense that there is no intention to engage in a
progressive pursuit of the purpose and object of the business organization.

Thus, SC held that Eriks is incapacitated to maintain this suit against Delfin.

3) Remedy- By this ruling, we are not foreclosing Erik’s right to collect payment. There is no res
judicata in a case dismissed for lack of capacity to sue since there is no determination on the
merits. Subsequent acquisition of the license will cure the lack of capacity at the time of the
execution of the contract.

91. Merrill Lynch Futures, Inc. v. CA, GR 97816, July 24, 1992, Narvasa, CJ., First
Division.
FACTS:
In 1987, petitioner MLF filed a complaint in RTC against Sps. Lara for recovery of a debt and
interest thereon. MLF described itself as a non-resident foreign corporation and a futures
commissioner merchant licensed in the US. It defined a “futures contract” as a "contractual
commitment to buy and sell a standardized quantity of a particular item at a specified future
settlement date and at a price agreed upon, with the purchase or sale being executed on a
regulated futures exchange."

MLF alleged that:

In 1983, it entered into a Futures Customer Agreement with Sps. Lara thru Merrill Lynch
Philippines, Inc. (MLPI) At the outset, Sps. Lara knew and were advised that Merrill
Lynch PH was not licensed by SEC to operate as a commodity trading advisor. In line
with the agreement, thru MLPI, Sps. Lara actively traded in futures contracts for four
years (or 7 years according to Sps. Lara). Because of a loss amounting to US$160k,
and after setting this off with US$75k owed by MLF to Sps. Lara, Sps. Lara became
indebted to MLF for US$84k. But Sps. Lara refused to pay this balance, alleging that the
transactions were void since MLPI had no license to operate as a commodity or financial
futures broker.

Sps. Lara moved to dismiss, alleging that MLF is prohibited by law to maintain or intervene in
any action in any PH court. Thus, it had no legal capacity to sue. Sps. Lara also denied being
informed that MLPI was not licensed to do business in PH.

Trial court dismissed. CA affirmed. Hence this petition.

ISSUE:
Whether the motion to dismiss should have been granted on the ground that MLF (foreign
corporation) has no legal capacity to sue due to lack of license to do business in PH where MLF
alleges that Sps. Lara had been made aware of its lack of license and where MLF and Sps. Lara
had been transaction for 4/7 years.
HELD: NO.
1) Doing business- The facts on record adequately establish that ML FUTURES, operating in the
United States, had indeed done business with the Lara Spouses in the Philippines over several
years, had done so at all times through Merrill Lynch Philippines, Inc. (MLPI), a corporation
organized in this country, and had executed all these transactions without ML FUTURES being
licensed to so transact business here, and without MLPI being authorized to operate as a
commodity futures trading advisor. Sps. Lara transacted with MLF thru its agent corporation in
PH, MLPI.

2) Received benefits + aware of lack of license- The rule is that a party is estopped to challenge
the personality of a corporation after having acknowledged the same by entering into a contract
with it. And the "doctrine of estoppel to deny corporate existence applies to foreign as well as to
domestic corporations;" "one who has dealt with a corporation of foreign origin as a
corporate entity is estopped to deny its corporate existence and capacity." The principle
"will be applied to prevent a person contracting with foreign corporations from later taking
advantage of its noncompliance with the statutes, chiefly in cases where such person has
received the benefits of the contract.

Here, the Laras received benefits generated by their business relations with ML FUTURES.
Those business relations, according to the Laras themselves, spanned a period of seven (7) years;
and they evidently found those relations to be of such profitability as warranted their maintaining
them for that not insignificant period of time; otherwise, it is reasonably certain that they would
have terminated their dealings with ML FUTURES much, much earlier.

Given these facts, and assuming that the Lara Spouses were aware from the outset that ML
FUTURES had no license to do business in this country and MLPI, no authority to act as broker
for it, it would appear quite inequitable for the Laras to evade payment of an otherwise
legitimate indebtedness due and owing to ML FUTURES upon the plea that it should not have
done business in this country in the first place, or that its agent in this country, MLPI, had no
license either to operate as a "commodity and/or financial futures broker."

Considerations of equity dictate that the issue of whether Sps. Lara are in truth liable to MLF
and, if so, in what amount, and whether they were aware of the absence of license by MLF
and MLPI as to be estopped should be ventilated and adjudicated on the merits by trial
court.

Thus, SC ordered trial court to reinstate the case and conduct a hearing to adjudicate these issues.

92. Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology PH Corp.,
GR 154618, April 14, 2004, Ynares-Santiago, J., First Division.
FACTS:
Agilent is a foreign corporation not licensed to do business in PH. Respondent Integrated Silicon
is a domestic corporation, 100% foreign owned, engaged in the business of manufacturing and
assembling electronics components.
Integrated and Hewlett-Packard Singapore (HPS) entered into a 5-year Value Added Assembly
Services Agreement (VAASA) where Integrated was to locally manufacture and assemble fiber
optics for export to HPS. HPS, for its part, was to consign raw materials to Integrated, transport
machinery to Integrated’s plant, and pay Integrated the purchase price of the finished products.
The VAASA was extendible by mutual written consent. In 1999, HPS, with the consent of
Integrated, assigned all its rights and obligations in VAASA to Agilent.

In 2001, Integrated filed a complaint for specific performance against Agilent, alleging that
Agilent breached the parties’ oral agreement to extend VAASA. Thus, Integrated prayed that
Agilent be ordered to execute a written extension of VAASA for 5 years.

Later, Agilent filed a separate complaint against Integrated, praying for a writ of replevin
ordering Integrated to return to Agilent its equipment, machineries, and materials to be used for
fiber-optic components which were left in the plant of Integrated. Integrated moved to dismiss on
the ground of litis pendentia. RTC denied. CA, on certiorari, reversed and ordered the dismissal
of Agilent’s complaint. Hence this petition.

ISSUE:
Whether Agilent is doing business in PH.
HELD: NO.
SC held that there is no litis pendentia.

1) Contention: Integrated argues that since Agilent is an unlicensed foreign corporation doing
business in PH, it lacks the legal capacity to file suit.
Held:
Agilent’s acts that are alleged as “doing business” in PH are: (1) mere entering into the VAASA,
which is a “service contract”; (2) appointment of a full-time representative in Integrated Silicon,
to “oversee and supervise the production” of Agilent’s products; (3) the appointment by Agilent
of six full-time staff members, who were permanently stationed at Integrated Silicon’s facilities
in order to inspect the finished goods for Agilent; and (4) Agilent’s participation in the
management, supervision and control of Integrated Silicon, including instructing Integrated
Silicon to hire more employees to meet Agilent’s increasing production needs, regularly
performing quality audit, evaluation and supervision of Integrated Silicon’s employees, regularly
performing inventory audit of raw materials to be used by Integrated Silicon, which was also
required to provide weekly inventory updates to Agilent, and providing and dictating Integrated
Silicon on the daily production schedule, volume and models of the products to manufacture and
ship for Agilent.

1.1) Principles- Citing S133 of CorpCode, Merrill Lynch Futures v. CA, SC said that the
principles as to the right of a foreign corporation to bring suit in PH may be condensed in 4
statements:
(1) if a foreign corporation does business in the Philippines without a license, it cannot
sue before the Philippine courts; (2) if a foreign corporation is not doing business in the
Philippines, it needs no license to sue before Philippine courts on an isolated transaction
or on a cause of action entirely independent of any business transaction; (3) if a foreign
 corporation does business in the Philippines without a license, a Philippine citizen or
entity which has contracted with said corporation may be estopped from challenging the
foreign corporation’s corporate personality in a suit brought before Philippine courts; and
(4) if a foreign corporation does business in the Philippines with the required license, it
can sue before Philippine courts on any transaction.

1.2) “Doing business”- Citing Mentholatum v. Mangaliman, SC held that there are 2 general
tests to determine whether a foreign corporation can be considered “doing business” in PH:
1) Substance test: “The true test [for doing business], however, seems to be whether the
foreign corporation is continuing the body of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to another.”
2) Continuity test: The term [doing business] implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in the
progressive prosecution of, the purpose and object of its organization
SC also cited the definition of “doing business” in RA 7042 or FIA.

1.3) Not “doing business” - The following acts enumerated in S1 of the IRR of FIA are NOT
deemed “doing business:”
(1) Mere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; (2) Having a
nominee director or officer to represent its interest in such corporation; (3) Appointing a
representative or distributor domiciled in the Philippines which transacts business in the
representative’s or distributor’s own name and account; (4) The publication of a general
advertisement through any print or broadcast media; (5) Maintaining a stock of goods in
the Philippines solely for the purpose of having the same processed by another
entity in the Philippines; (6) Consignment by a foreign entity of equipment with a
local company to be used in the processing of products for export; (7) Collecting
information in the Philippines; and (8) Performing services auxiliary to an existing
isolated contract of sale which are not on a continuing basis, such as installing in the
Philippines machinery it has manufactured or exported to the Philippines, servicing the
same, training domestic workers to operate it, and similar incidental services.

To constitute “doing business,” the activity must be one for profit-making.

2) Here, under VAASA, Agilent’s activities in PH were confined to 1) maintaining a stock of

goods in the Philippines solely for the purpose of having the same processed by Integrated
Silicon; and 2) consignment of equipment with Integrated Silicon to be used in the processing of
products for export. Thus, Agilent is not deemed doing business in PH. thus, it does not need
license to sue in our courts.

SC thus reversed CA, reinstated RTC, and ordered that a writ of replevin be granted.

93. Expertravel & Tours, Inc. v. CA, GR 152392, May 26, 2005, Callejo, Sr., J., Second
Division. (See case 59)
94. Cargill Inc. v. Intra Strata Assurance Corporation, GR 168266, March 15, 2010,
Carpio, J., Second Division. (Importing products exported from PH without establishing
office in PH is not doing business in PH)
FACTS:
Cargill is a corporation existing under the laws of the state of Delaware, US. Cargill and
Northern Mindanao Corporation (NMC) executed a contract whereby NMC agreed to sell to
Cargill 20-24k metric tons of molasses. The contract was amended 3 times. The third amendment
required NMC to put up a performance bond of US$451,500 representing the value of 10,500
metric tons of molasses at US$43 per metric ton. The bond was to guarantee NMC’s
performance to deliver the molasses. Thus, respondent Intra Strata issued a performance bond of
P11M to guarantee NMC’s delivery of the 10,500 tons of molasses and a surety bond of P9.9M
to guarantee repayment of the downpayment in the contract.

NMC was able to deliver only 219 metric tons of molasses out of the agreed 10,500 metric tons.
Cargill sent demands to Intra, but Intra refused to pay. Thus, Cargill filed a complaint for sum of
money against NMC and Intra.

RTC ruled for Cargill. CA reversed, holding that Cargill has no capacity to file this suit since it is
a foreign corporation doing business in PH without the requisite license.. Hence this petition for
review.

ISSUE:
Whether Cargill is doing business in PH as to bar it from maintaining a suit in PH courts due to
lack of license.
HELD: NO.
SC cited the definition of “doing business” in RA 5455, S1, RA 7042, S3(d). Since Intra is
relying on S133 of CorpCode to bar Cargill from maintaining an action in PH courts, it has the
burden of proving that Cargill’s business activities in PH were not just casual but constitute
doing business. Intra failed to prove that Cargill’s activities constitute doing business.

1) SC cited the IRR of RA 7042, S1(f) of Rule 1, on what “doing business” does NOT include
(See Case 92, par. 1.3).

Most of these activities do not bring any profits to the foreign corporation. Activities within
PH that do not create earnings or profits to the foreign corporation do not constitute doing
business in PH. Here, the contract between Cargill and NMC involved the purchase of molasses
by Cargill from NMC. It was NMC, the domestic corporation, which derived income from
the transaction and not Cargill. To constitute "doing business," the activity undertaken in the
Philippines should involve profit-making. Besides, under Section 3 (d) of RA 7042, "soliciting
purchases" has been deleted from the enumeration of acts or activities which constitute "doing
business."

Other factors that support the finding that Cargill is not doing business in PH are: 1) Cargill does
not have an office in PH, 2) it imports products from the PH thru its local broker whose authority
is limited to soliciting purchases, and 3) the local broker is an independent contractor and not an
agent of petitioner.
2) An exporter in one country may export its products to many foreign importing countries
without performing in the importing countries specific commercial acts that would constitute
doing business in the importing countries. The mere act of exporting from one's own country,
without doing any specific commercial act within the territory of the importing country, cannot
be deemed as doing business in the importing country. The importing country does not require
jurisdiction over the foreign exporter who has not yet performed any specific commercial act
within the territory of the importing country.

To be “transacting business in the PH” for purposes of S133, the foreign corporation must
actually transact business in PH, that is, perform specific business transactions within the
PH territory on a continuing basis in its own name and for its own account.

Here, Cargill merely imports molasses from a PH exporter and thus is not doing business in PH.

95. Global Business Holdings, Inc. v. Surecomp Software, B.V., GR 173463, October 13,
2010, Nachura, J., Second Division.
FACTS:
In 1999, Surecomp, a foreign corporation organized under the laws of Netherlands, entered into a
software license agreement with Asian Bank Corporation (ABC), domestic corporation, for the
use of Surecomp’s IMEX Software System in ABC’s computer system for 20 years. In 2000,
ABC merged with petitioner Global, with Global as the surviving corporation. When Global took
over ABC’s operations, it found the IMEX System unworkable and informed Surecomp of its
decision to discontinue with the agreement and to stop further payments thereon. Thus, due to
Global’s failure to pay its obligations despite demand, Surecomp filed a complaint for breach of
contract with damages in RTC.

In its complaint, Surecomp alleged that it is a foreign corporation not doing business in PH and is
suing on an isolated transaction. Pursuant to the agreement, it installed the System in ABC's
computers for a consideration of US$298,000.00 as license fee. ABC also undertook to pay
Surecomp professional services, which included on-site support and development of interfaces,
and annual maintenance fees for five (5) subsequent anniversaries, and committed to purchase
one (1) or two (2) Remote Access solutions at discounted prices. In a separate transaction, ABC
requested Surecomp to purchase on its behalf a software called MF Cobol Runtime with a
promise to reimburse its cost. Notwithstanding the delivery of the product and the services
provided, Global failed to pay and comply with its obligations under the agreement

Instead of filing an answer, Global filed a motion to dismiss, alleging that Surecomp had no
capacity to sue as it was doing business in PH without a license.

RTC denied the motion to dismiss. CA affirmed. Hence this petition for review on certiorari.

ISSUE:
Whether Global may assail Surecomp’s legal capacity to sue.
HELD: NO.
1) SC cited S133 of CorpCode. A corporation has a legal status only within the state or territory
in which it was organized. For this reason, a corporation organized in another country has no
personality to file suits in the Philippines. In order to subject a foreign corporation doing
business in the country to the jurisdiction of our courts, it must acquire a license from the
Securities and Exchange Commission and appoint an agent for service of process. Without such
license, it cannot institute a suit in the Philippines.

The exception to this rule is the doctrine of estoppel. Global is estopped from challenging
Surecomp’s capacity to sue. A foreign corporation doing business in the Philippines without
license may sue in Philippine courts a Filipino citizen or a Philippine entity that had contracted
with and benefited from it. A party is estopped from challenging the personality of a
corporation after having acknowledged the same by entering into a contract with it. The
principle is applied to prevent a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes, chiefly in cases where such person has
received the benefits of the contract.

96. Steelcase, Inc. v. Design International Selections, Inc., GR 171995, April 18, 2012,
Mendoza, J., Third Division. (Appointing a distributor which is not under the full control
of the foreign corporation is not doing business in PH; estoppel)
FACTS:
Steelcase Inc. is a foreign corporation existing under the laws of Michigan, USA and engaged in
the manufacture of office furniture with dealers worldwide. Respondent DISI is a domestic
corporation engaged in the furniture business, including distribution of furniture. In 1986 or
1987, Steelcase and DISI orally entered into a dealership agreement whereby Steelcase granted
DISI the right to marker, sell, distribute, install, and service its products to end-user customers
within PH. the business relationship continued smoothly until it was terminated in January 1999
after the agreement was breached with neither party admitting any fault.

Thus, Steelcase filed a complaint for sum of money against DISI alleging that DISI had an
unpaid account of US$600k. In its answer, DISI alleged that Steelcase was doing business in PH
without the required license to do so. Thus, Steelcase has no capacity to sue in PH courts. RTC
dismissed the complaint. CA, on appeal, affirmed RTC. Hence this petition.

ISSUE:
Whether Steelcase is “doing business” in PH.
HELD: NO.
1) Not doing business- “Doing business” is defined in S3(d) of RA 7042 (FIA):
Provided, however, That the phrase "doing business" shall not be deemed to include xxx
nor appointing a representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account;
Its IRR (S1(f)) also states that the following is not deemed “doing business” in PH:
3. Appointing a representative or distributor domiciled in the Philippines which transacts
business in the representative's or distributor's own name and account;
Thus, the appointment of a distributor in the Philippines is not sufficient to constitute "doing
business" unless it is under the full control of the foreign corporation. On the other hand, if the
distributor is an independent entity which buys and distributes products, other than those of the
foreign corporation, for its own name and its own account, the latter cannot be considered to be
doing business in the Philippines.

Here, DISI is independently owned and managed by Sps. Bantug. In addition to Steelcase
products, DISI also distributed products of other companies including carpet tiles,
relocatable walls, and theater settings. Thus, DISI was an independent contractor, distributing
various products of Steelcase and of other companies, acting in its own name and for its own
account.

1.1) Contention: Steelcase owns 25% of Modernform. DISI claims that there was delivery and
sale of Steelcase products to a PH client by Modernform. DISI claims that Modernform is an
agent of Steelcase.
Held:
But a corporation has a separate and distinct personality from its stockholders and from other
corporations. The 25% ownership is grossly insufficient to justify piercing the veil of corporate
fiction. Thus, Steelcase cannot be deemed to have been doing business thru Modernform.

2) Estoppel- Assuming that Steelcase had been doing business in PH without a license, DISI
would nonetheless be estopped from challenging Steelcase’s legal capacity to sue. DISI entered
into a dealership agreement with Steelcase and profited from it for 12 years from 1987 until
1999. DISI admits that it complied with its obligations under the dealership agreement by
exerting more effort and making substantial investments in the promotion of Steelcase products.
It also claims that it was able to establish a very good reputation and goodwill for Steelcase and
its products, resulting in the establishment and development of a strong market for Steelcase
products in the Philippines. Because of this, DISI was very proud to be awarded the "Steelcase
International Performance Award" for meeting sales objectives, satisfying customer needs,
managing an effective company and making a profit.

Entering into a dealership agreement with Steelcase CHARGED DISI with knowledge that
Steelcase was not licensed to engage in business activities in PH. By acknowledging the
corporate entity of Steelcase and entering into a dealership agreement with it and even benefiting
from it, DISI is estopped from questioning Steelcase’s existence and capacity to sue.

The rule is deeply rooted in the time-honored axiom of Commodum ex injuria sua non habere
debet — no person ought to derive any advantage of his own wrong. This is as it should be for as
mandated by law, "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."

SC thus reversed the dismissal of Steelcase’s complaint and remanded the case to RTC.

97. Air Canada v. CIR, GR 169507, January 11, 2016, Leonen, J., Second Division.
FACTS:
Air Canada is a foreign corporation organized under the laws of Canada. In 2000, it was granted
authority to operate as an offline carrier by the Civil Aeronautics Board until April 2005. As
offline carrier, Air Canada does not have flights originating from or coming to the PH and does
not operate any airplane in PH. In 1999, Air Canada engaged the services of Aerotel Ltd. Corp.
as its general sales agent in PH. Aerotel sells Air Canada’s passage documents in PH.

Air Canada filed quarterly and annual ITRs and paid income tax on gross PH billings of P5.1M
from the third quarter of 2000 to the second quarter of 2002. In Nov. 2002, Air Canada filed a
written claim for refund of alleged erroneously paid income taxes (the P5.1M), citing S28(A)(3)
(a) of the NIRC, stating that:
(a) International Air Carrier. — 'Gross Philippine Billings' refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo and mail originating
from the Philippines in a continuous and uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the ticket or passage document
Air Canada then filed a petition for review in CTA. CTA denied. CTA En Banc, on appeal, also
denied. Hence this petition for review.

ISSUE:
Whether Air Canada is engaged in business in the PH.
HELD: YES.
1) Air Canada is not liable to tax on GPB under S28(A)(3) of NIRC since it does not have flights
to and from PH.

2) Air Canada is a resident foreign corporation for income tax purposes under S28(A)(1) (32%
tax on taxable income). In CIR v. British Overseas Airways Corporation, we declared
respondent, an international carrier with no landing rights in PH, as a RFC engaged in business
in PH thru its local sales agent that sold and issued tickets for the airline company:
“Doing” or “engaging in” or “transacting” business implies a continuity of commercial
dealings and arrangements and contemplates the performance of acts or works or the
exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization. "
2.1) While S3(d) of RA 7042 states that "appointing a representative or distributor domiciled in
the Philippines which transacts business in its own name and for its own account" is not
considered as "doing business," the Implementing Rules and Regulations of Republic Act No.
7042 clarifies that "doing business" includes "appointing representatives or distributors,
operating under full control of the foreign corporation, domiciled in the Philippines or who in
any calendar year stay in the country for a period or periods totaling one hundred eighty (180)
days or more[.]"

Thus, SC held that Air Canada is doing business in PH. Aerotel performs acts or works or
exercises functions that are incidental and beneficial to the purpose of petitioner's business. The
activities of Aerotel bring direct receipts or profits to petitioner. There is nothing on record to
show that Aerotel solicited orders alone and for its own account and without interference from,
let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into any contract on
behalf of [petitioner Air Canada] without the express written consent of [the latter,]" and it
must perform its functions according to the standards required by petitioner. Through Aerotel,
petitioner is able to engage in an economic activity in the Philippines.
Thus, Air Canada is a RFC taxable on its income derived from PH sources. The income from
sale of airline tickets thru Aerotel is income realized from the pursuit of its business activities in
PH.

3) International air carriers maintaining flights to and from PH shall be taxed at the 2.5% GPB
while those that do not have flights to and from PH but nonetheless earn income from other
activities in PH (like sale of airline tickets) is taxed at 32% of taxable income.

Here, there is a tax treaty that must be taken into consideration. In 1976, the PH and Canada
government signed the Convention between the Philippines and Canada for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
(Republic of the Philippines-Canada Tax Treaty). This treaty entered into force on December 21,
1977.

Thus, while Air Canada is taxable as a RFC under S28(A)(1) of NIRC, it can only be taxed at a
maximum of 1.5% of gross revenues pursuant to Art. VIII of the Republic of the PH-Canada Tax
Treaty.

**Ago Realty & Development Corporation (ARDC) v. Dr. Ago, GR 210906, October 16,
2019, AB Reyes, Jr., J., Third Division. (BoD Resolution not required for filing derivative
suits; If majority stockholder files derivative suit, one of his remedies that he must exhaust
is the fact that as majority stockholder, he may prevail on the BoD to authorize him to file
suit; Designation of stockholder as president is ineffectual if board of directors is not
constituted because president must also be a board member)
FACTS:
Petitioner ARDC is a close corporation. Its stockholders are Emmanuel, his wife Corazon, their
children Victor and Arthur (Emmanuel et al.), and Emmanuel’s sister, respondent Angelita. Their
stockholdings are:
Number of Subscribed Shares Amount
Emmanuel 2,498 P249,800.00
Corazon 1,000 P100,000.00
Victor 1 P100.00
Arthur 1 P100.00
Angelita 1,500 P150,000.00
TOTAL 5,000 P500,000.00

Angelita introduced improvements in lands titled in ARDC’s name without proper resolution
from the corporation’s board of directors. Thus, Emmanuel et al. filed a complaint in RTC
against Angelita, demanding damages of P10M.

Angelita claims that Emmanuel et al. was never authorized to institute the suit on behalf of
ARDC as he had no board resolution. RTC held that Emmanuel et al. had no legal standing
and dismissed the complaint. CA held that the case was a derivative suit, thus Emmanuel et al.
needed the imprimatur of ARDC’s board of directors to institute the action. CA affirmed the
dismissal. Hence this petition.
ISSUE:
Whether a derivative suit requires a board resolution. -NO.
Whether Emmanuel et al. have complied with the requisites for filing a derivative suit,
particularly to exhaust all available intra-corporate remedies. -NO.
Whether the stockholders of a close corporation automatically has the power to exercise the
powers of a board of directors. -NO.
Whether Emmanuel was validly designated as president of ARDC in the absence of an elected
BoD. -NO.
HELD:
1) The business of a corporation is conducted by its BoD and so long as the BoD acts in GF, the
state, thru the courts, may not interfere with its management decisions. One of the powers of the
corporation is the power to sue. As with other corporate powers, the power to sue is lodged in
the BoD acting as a collegial body. The board may authorize a representative of the corporation
to perform all necessary physical acts, like signing of documents. Such authority may be derived
from the by-laws or from a specific act of the BoD, i.e. a board resolution.

2) An exception is a derivative suit defined as “a suit by a shareholder to enforce a corporate

cause of action.” In derivative suits, it is the corporation that is the victim of the wrong.
Thus, the corporation is the real party in interest while the relator-stockholder is merely a
nominal party. The corporation must be impleaded so that the benefits of the suit accrue to it
and also because it must be barred from bringing a subsequent case against the same defendants
for the same cause of action. Stated otherwise, the judgment rendered in the suit must constitute
res judicata against the corporation, even though it refuses to sue through its board of directors.

3) In Republic v. Coalbrine Int’l, SC dismissed a complaint for damages instituted by a

corporation because the managing director who signed the certification against forum shopping
failed to show that the BoD authorized her to do so (no board resolution).

But in derivative suits, since the BoD is guilty of breaching the trust reposed in it by the
stockholders, it is but logical to dispense with the requirement of obtaining from its
authority to institute the case and to sign the certification against forum shopping. When
the corporation is under the control of the defendants (BoD), a demand upon the BoD to
prosecute them is useless. Thus, the institution of a derivative suit need not be preceded by a
board resolution.

4) But Emmanuel et al. do not have the right to file a derivative suit - The right of stockholders
to bring derivative suits is not based on any provision of the Corporation Code or the Securities
Regulation Code, but is a right that is implied by the fiduciary duties that directors owe
corporations and stockholders. Derivative suits are, therefore, grounded not on law, but on
equity.

In Gochan v. Young, minority stockholders filed a complaint against directors who appropriate
corporate funds to themselves thru excessive salaries. SC held that the suit was a derivative suit
as the stockholders alleged injury to the corporation. That plaintiffs alleged damage to
themselves in their personal capacities on top of the damage to the corporation merely gave rise
to an additional cause of action, but it did not disqualify them from filing a derivative suit.
4.1) The requisites for a derivative suit are enumerated in the Interim rules of Procedure for
Intra-Corporate Controversies:
Rule 8 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 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 acts
or acts complained of; and (4) The suits is not a nuisance or harassment suit.
Here, the second requisite is not present. Emmanuel alleged that they invited Angelita to a
meeting to amicably settle the dispute. Emmanuel, Corazon, and Angelita came together to a
special stockholders’ meeting on Aug. 11, 2006. However, Angelita walked out before the
meeting even started. This attempt to settle the dispute with Angelita can hardly be considered
“all reasonable efforts to exhaust all remedies available.”

4.2) An apparent remedy available to Emmanuel was to cause ARDC itself, thru its BoD, to
directly institute the case. Because of their controlling interest in the corporation, Emmanuel, et
al., could have prevailed upon the board to pass a resolution authorizing any of them to file the
case and sign the certification against forum shopping. The right of a stockholder to participate in
the control or management of the corporation is exercised through his vote in the election of
directors because it is the BoD that controls or manages the corporation. Thus, in the normal
course of things, when a corporation is wronged, the board will readily litigate in order to
protect the majority’s corporate interests. For the minority on the other hand, this may not
be the case. Here, Emmanuel et al. own 70% of ARDC’s shares.

4.3) ARDC did not have a BoD because ARDC’s stockholders did not ever meet to elect its
BoD. From its incorporation, ARDC never held any stockholders’ meetings. There is also no
showing that ARDC held an election for its BoD. The failure of ARDC’s majority stockholders
to elect a BoD must be taken against them. There was nothing preventing Emmanuel et al. from
holding a meeting for the purpose of electing a board even in Angelita’s absence or over her
objection. Majority shareholders cannot be allowed to bypass the formation of a board and
directly conduct corporate business themselves. Their failure to elect a board ultimately
resulted in their failure to exhaust all legal remedies to obtain the relief they desired.

5) Contention: The stockholders of a close corporation may take part in the active management
of corporate affairs. Thus, Emmanuel et al. claim that as ARDC’s stockholders, they have the
power to sue for the corporation.
Held:
Under S96 of the RCC, a close corporation may task its stockholders with the management of
business essentially designating them as directors. But the close corporation must do so thru a
provision to that effect contained in its AoI. Here, nowhere in ARDC’s AoI can such a
provision be found.
Also, that ARDC is a close family corporation is not justification for non-compliance with the
requirements for filing of a derivative suit.

6) Contention: Emmanuel et al. claims that Emmanuel, as president of ARDC, had authority to
file the case and sign the certification against forum shopping as provided in the bylaws of
ARDC, stating that the president is authorized “to represent the corporation at all functions and
proceedings” and “to perform such other duties as are incident in his office or are entrusted by
the BoD.”
Held:
But Emmanuel’s designation as president was INEFFECTUAL because ARDC did not have a
BoD. S24 of the RCC requires the president to concurrently hold office as a director.

SECURITIES AND REGULATIONS CODE

98. SEC v. Price Richardson Corporation, GR 197032, July 26, 2017, Leonen, J., Second
Division.
FACTS:
Respondent Price is a PH corporation. Its primary purpose is to “provide administrative services
which includes but is not limited to furnishing all necessary and incidental clerical, bookkeeping,
mailing and billing services." On Oct. 17, 2001, its former employee Avelino executed a sworn
affidavit at NBI, alleging that Price was engaged in boiler-room operations wherein it would sell
non-existent stocks to investors using high pressure sales tactics. Whenever this activity was
discovered, the company would close and emerge under a new company name. His sworn
statement narrated that:
Avelino worked as telemarketer at Price. As telemarketer, his supervisor would give
“leads” or prospective investors for him to call. He would read a script and, if the
prospect is interested, he will write all the information about this person and forward the
same to his supervisor. All leads are foreigners. He averaged 100 calls a day and
qualified 6 would-be investors daily. After he qualifies the investor, the company sends
him a newsletter, then the salesman would contact him and use high-pressure sales tactics
to make a sale of non-existent stocks. If the investor agreed, the salesman would give him
instructions on how to send the money to the company, usually thru telegraphic transfers.
After payment, a confirmation receipt would be sent by courier to the investor, indicating
the number of shares, amount per share, tax and commissions paid. But no hard copy of
the stock or certificates will be issued for in truth, there was no actual sale. The salesmen
are also foreigners/tourists in PH.

Rillo corroborated Avelino’s claim. She was a former employee of Capital International
Consultants, Inc., a corporation that allegedly merged with Price.

Upon application of NBI and SEC, RTC issued 3 search warrants against Capital International
and Price for violation of S28 of SRC. These were served, and Price’s office equipment and
documents were seized. SEC filed before DOJ its complaint against Price, Albert, and Resnick,
among others, for violation of Art. 315(1)(b) of RPC and S26.3 and S28 of SRC. Albert was
Price’s director for operations and Resnick its Associated Person. SEC alleged that Price was
neither licensed nor registered to engage in the business of buying and selling securities
within PH or act as salesman or associated person of any broker or dealer.
Individuals claiming to have agreed to purchase securities from Price and defrauded by it also
surfaced and executed sworn statements against Price. But the state prosecutor found no probable
cause. On petition for review with DOJ, SOJ Gonzales affirmed. On certiorari with CA, CA
affirmed. Hence this petition.

ISSUE:
Whether there is probable cause that Price engaged in the buying and selling of securities in PH
without being licensed to do so.
HELD: YES.
SRC provides:
Section 26. Fraudulent Transactions. — It shall be unlawful for any person, directly or
indirectly, in connection with the purchase or sale of any securities to: xxx xxx xxx
26.3. Engage in any act, transaction, practice or course of business which operates or
would operate as a fraud or deceit upon any person. xxx xxx xxx
Section 28. Registration of Brokers, Dealers, Salesmen and Associated Persons. — 28.1.
No person shall engage in the business of buying or selling securities in the Philippines as
a broker or dealer, or act as a salesman, or an associated person of any broker or dealer
unless registered as such with the Commission.
1) Based on the certification issued by the Market Regulation Department of SEC, Price has
never been issued any secondary license to act as broker/dealer in securities. The documents
seized from Price show possible sales of securities:
a) A company brochure consisting of 8 pages which declares that it is a financial
consultant geared towards portfolio investment advice and other financial services to
investors . . .
b) Detailed Quotes of OWTNF Otis-Winston Ltd. shares downloaded from the
Bloomberg.com website which indicates its price, return, fundamentals and other matters.
c) Confirmation of Trade issued by Price to its client MR. PETER VAN DER HAEGEN
which indicates that he bought on Oc[to]ber 16, 2001 750 Otis-[W]inston Ltd at $4.15
price per share for $3,112.50 . (**among other confirmations of trade) xxx.
h) Telegraphic Transfers issued by China Banking Corporation to Union Bank of
California International NY with Price Richardson as the Order Party and M.L. Vitale as
the beneficiary in the amount of $2000 and Citibank Belgium as the Beneficiary Bank .
SEC also submits the complaint-affidavits and letters of individuals who transacted with Price.

Price also stated in its memorandum:

If this Honorable Court were to consider the set-up of Price Richardson, it was as if it
engaged in outsourced operations wherein persons located in the Philippines called up
persons located in foreign locations to inform them of certain securities available in
certain locations, and to determine if they wanted to buy these securities which are
offered in a different country.
These are sufficient to support a reasonable belief that Price is probably guilty of the offense
charged.

2) But Albert and Resnick cannot be indicted. SEC failed to allege the specific acts of Albert and
Resnick that could be interpreted as participation in the alleged violations. The evidence merely
proves that they were not licensed to act as broker, salesman, or associated person. But no proof
was shown that they indeed acted as such in trading securities.

99. SEC v. Interport Resources Corporation, GR 135808, October 06, 2008, Chico-Nazario,
J., En Banc.
FACTS:
On Aug. 6, 1994, the BoD of respondent IRC approved a MOA with Ganda Holdings Berhad
(GHB) where IRC acquired 100% of the capital stock of Ganda Energy Holdings, Inc. (GEHI),
which would own and operate a gas turbine power generating barge. The agreement also
stipulates that GEHI would assume a 5-year power purchase contract with National Power
Corporation. GEHI’s barge would go online by mid-September of 1994. In exchange, IRC will
issue to GHB 55% of the capital stock of IRC (40.88B shares, with par value of P488.44M).

On the side, IRC would acquire 67% of the capital stock of PH Racing Club, Inc. (PRCI). PRCII
owns 25ha of real estate in Makati. Under the MOA, GHB shall extend a loan required to pay for
the proposed acquisition by IRC of PRCI.

IRC alleged that it sent a press release announcing approval of the MOA on Aug. 8, 1994 to the
PSE and SEC but that the facsimile machine of SEC could not receive it. SEC averred that IRC
failed to make timely public disclosures of its negotiations with GHB and that some of its
directors, respondents herein, heavily traded IRC shares utilizing this material insider
information.

SEC chairman directed IRC to submit to SEC a copy of the MOA and all principal IRC officers
to appear at a hearing before the Brokers and Exchanges Department (BED) of SEC to explain
IRC’s failure to immediately disclose the information as required by the Rules on Disclosure of
Material Facts. Thus, IRC sent to SEC a copy of the MOA to SEC and IRC’s directors appeared
before SEC.

On September 19, 1994, SEC Chairman issued an order finding that IRC violated the Rules on
Disclosure of Material Facts. SEC also found that some officers and directors of IRC entered into
transactions involving IRC shares in violation of S30 and 36 of the Revised Securities Act. SEC
constituted a special investigating panel to hear and decide the case.

Respondents filed a petition in CA, praying for WPI to enjoin SEC from proceeding with the
hearing of the case against respondents. CA ruled for respondents, issuing a WPI which is later
made permanent, thus prohibiting SEC from taking cognizance or initiating any action against
respondents since CA found no statutory authority for SEC to file any suit under S8, 30, and 36
of the Revised Securities Act. There were also no IRR on insider trading. Thus, an action
thereunder would violate respondents’ rights to due process and equal protection. Hence this
petition.

ISSUE:
Whether SEC can investigate respondents for possible violations of S8, 30, and 36 of Revised
Securities Act.
HELD: YES.
1) S8, 30, & 36 do NOT require IRRs to make them binding and effective- SC held that laws are
presumed valid without a declaration of unconstitutionality. The mere absence of IRRs cannot
invalidate provisions of law.

The Court does not discern any vagueness or ambiguity in S30 and 36 of the Revised Securities
Act such that the acts proscribed/required would not be understood by a person of ordinary
intelligence.

2) S30 of Revised Securities Act states:

Sec. 30. Insider's duty to disclose when trading . — (a) It shall be unlawful for an insider
to sell or buy a security of the issuer, if he knows a fact of special significance with
respect to the issuer or the security that is not generally available, unless (1) the insider
proves that the fact is generally available or (2) if the other party to the transaction (or
his agent) is identified, (a) the insider proves that the other party knows it, or (b) that
other party in fact knows it from the insider or otherwise.

(b) "Insider" means (1) the issuer, (2) a director or officer of, or a person controlling,
controlled by, or under common control with, the issuer, (3) a person whose relationship
or former relationship to the issuer gives or gave him access to a fact of special
significance about the issuer or the security that is not generally available, or (4) a person
who learns such a fact from any of the foregoing insiders as defined in this subsection,
with knowledge that the person from whom he learns the fact is such an insider.
(c) A fact is "of special significance" if (a) in addition to being material it would be
likely, on being made generally available, to affect the market price of a security to a
significant extent, or (b) a reasonable person would consider it especially important
under the circumstances in determining his course of action in the light of such factors as
the degree of its specificity, the extent of its difference from information generally
available previously, and its nature and reliability.
The intent of the law is the protection of investors against fraud, committed when an insider,
using secret information, takes advantage of an uninformed investor. Insiders are obligated to
disclose material information to the other party or abstain from trading the shares of his
corporation. This duty to disclose or abstain is based on two factors: 1) the existence of a
relationship giving access, directly or indirectly, to information intended to be available only
for a corporate purpose and not for the personal benefit of anyone; and 2) the inherent
unfairness involved when a party takes advantage of such information knowing it is unavailable
to those with whom he is dealing.

3) “Material Fact”- A fact is material if it induces or tends to induce or otherwise affect the
sale or purchase of its securities. Thus, S30 of the Revised Securities Act provides that if a fact
affects the sale or purchase of securities, as well as its price, then the insider would be required
to disclose such information to the other party to the transaction involving the securities. This is
the first definition given to a "fact of special significance".

3.1) “Reasonable Person”- The doctrine on negligence uses the discretion of the "reasonable
man" as the standard. A purchaser in good faith must also take into account facts which put a
"reasonable man" on his guard. It is the belief of the reasonable and prudent man that an offense
was committed that sets the criteria for probable cause for a warrant of arrest. This Court, in such
cases, differentiated the reasonable and prudent man from "a person with training in the law such
as a prosecutor or a judge", and identified him as "the average man on the street", who weighs
facts and circumstances without resorting to the calibrations of our technical rules of evidence of
which his knowledge is nil. Rather, he relies on the calculus of common sense of which all
reasonable men have in abundance. The US SC similarly determined its standards by the actual
deliberations of a “reasonable investor” when it ruled in TSC Industries Inc. v. Northway Inc.
that the determination of materiality “requires delicate assessments of the inferences of a
‘reasonable shareholder’ would draw from a given set of facts and the significance of those
inferences to him.

3.2) “Nature and reliability”- The "nature and reliability" of a significant fact in determining the
course of action a reasonable person takes regarding securities must be clearly viewed in
connection with the particular circumstances of a case. To enumerate all circumstances that
would render the "nature and reliability" of a fact to be of special significance is close to
impossible.

3.3) Materiality concept- What is referred to in our laws as a fact of special significance is
referred to in US as the “materiality concept” and the latter is similarly not provided with a
precise definition. In Basic v. Levinson, the US SC cautioned against confining materiality to a
rigid formula. Materiality "will depend at any given time upon a balancing of both the
indicated probability that the event will occur and the anticipated magnitude of the event in
light of the totality of the company activity." The materiality concept is judgmental in nature
and it is not possible to translate this into a numerical formula.

3.4) “Generally available”- Whether information found in a newspaper, a specialized magazine,

or any cyberspace media be sufficient for the term "generally available" is a matter which may
be adjudged given the particular circumstances of the case. The standards cannot remain at a
standstill. A medium, which is widely used today was, at some previous point in time,
inaccessible to most.

3.5) "The broad language of the anti-fraud provisions", which include the provisions on insider
trading, should not be "circumscribed by fine distinctions and rigid classifications." The ambit of
anti-fraud provisions is necessarily broad so as to embrace the infinite variety of deceptive
conduct.

4) Contention: As to S36 (a), respondents claim that “beneficial ownership” is vague and that it
requires implementing rules to give effect to the law.
Held:
S36 provides (S23 of SRC):
Sec. 36. Directors, officers and principal stockholders . — (a) Every person who is *1)
directly or indirectly the beneficial owner of more than ten per centum of any [class]
of any equity security which is registered pursuant to this Act, or *2) who is [a] director
or an officer of the issuer of such security, shall file, at the time of the registration of
such security on a securities exchange or by the effective date of a registration statement
or within ten days after he becomes such a beneficial owner, director or officer, a
 statement with the Commission and, if such security is registered on a securities
exchange, also with the exchange, of the amount of all equity securities of such issuer of
which he is the beneficial owner, and within ten days after the close of each calendar
month thereafter, if there has been a change in such ownership during such month, shall
file with the Commission, and if such security is registered on a securities exchange, shall
also file with the exchange, a statement indicating his ownership at the close of the
calendar month and such changes in his ownership as have occurred during such calendar
month.

Beneficial owner has been defined as: “[F]irst, to indicate the interest of a beneficiary in trust
property (also called "equitable ownership"); and second, to refer to the power of a corporate
shareholder to buy or sell the shares, though the shareholder is not registered in the
corporation's books as the owner.

Even if “beneficial ownership” was vague, it would not affect respondents’ case where
respondents are directors and/or officers of the corporation who are specifically required to
comply with the reportorial requirements under S36(a).

4.1) S30 and 36 were enacted to prevent unscrupulous individuals who obtain non-public
information from taking advantage of an uninformed public. No individual would invest in a
market which can be manipulated by a limited number of corporate insiders. Such reaction
would stifle, if not stunt, the growth of the securities market.

5) Although there is an express repeal in S76 of SRC of the Revised Securities Act, S8, 30, and
36 of Revised Securities Act were reenacted in SRC. S8, 12, 26, 27, and 23 of SRC impose
duties substantially similar to S8, 30, and 36 of Revised Securities Act.

6) SC held that the case has not yet prescribed since SEC has been investigating the case since
1994. It was held in Baviera v. Paglinawan that a criminal complaint must first be filed in SEC
which determines the existence of probable cause before DOJ can commence a preliminary
investigation for violations of the Revised Securities Act. The preliminary investigation
interrupts the prescriptive period for special laws under Act 3326. Since DOJ cannot conduct PI
without the investigation of SEC, SEC’s investigation also interrupted the prescriptive period.

Thus, SC reversed CA, lifted the permanent injunction, and ruled that SEC can undertake the
investigation of respondents for violation of S8, 30, and 36 of Revised Securities Act.

100. Baviera v. Paglinawan, GR 168380, February 08, 2007, Sandoval-Gutierrez, J., First
Division.
FACTS:
Baviera was the former head of the HR Service Delivery of Standard Chartered Bank-PH (SCB),
one of respondents. SCB is a foreign banking corporation licensed to engage in banking, trust,
and other fiduciary business in PH. The BSP, in Resolution 1142, subjected SCB’s conduct of
business in PH to certain conditions (25% of trust accounts must be for non-residents of PH
during the first year of SCB’s functions and 50% in the second year). SCB did not comply and
instead acted as a stock broker, soliciting from local residents foreign securities called “Global
Third Party Mutual Funds. (GTPMF).” These securities were not registered with SEC. These
were then remitted to SCB-HK/Singapore.

Investment Capital Association of the PH (ICAP) filed a complaint against SCB with SEC. SEC
issued a cease and desist order against SCB. SEC indorsed ICAP’s complaint to BSP. BSP
directed SCB not to include investments in global mutual funds issued abroad in its trust
investments portfolio without registration with SEC. SCB sent a letter to BSP stating that it will
comply. But SCB continued to offer and sell GTPMF securities in PH.

This prompted Baviera to enter into an investment trust agreement with SCB wherein he
purchased US$8,000 worth of securities upon SCB’s promise of 40% return on his investment.
After 6 months, Baviera’s investment went down to US$7k, then to US$3k. Baviera learned
from the head of SCB’s Legal Department that SCB had been prohibited by BSP to sell GPTMF
securities. Thus, Baviera filed a letter-complaint with BSP demanding compensation for his lost
investment. SCB denied his demand. Thus, Baviera filed with DOJ, represented by respondents
prosecutors herein, a complaint charging SCB’s BoD with syndicated estafa and S8.1 of the
SRC.

DOJ dismissed the complaint for violation of the SRC, holding that it should have been filed
with SEC. CA affirmed. Hence this petition.

ISSUE:
Whether a criminal complaint for violation of the SRC should be filed with SEC.
HELD: YES.
S53 of SRC provides:
xxx. Provided, further, That all criminal complaints for violations of this Code and the
implementing rules and regulations enforced or administered by the Commission shall be
referred to the Department of Justice for preliminary investigation and prosecution
before the proper court:
The Court of Appeals held that under the above provision, a criminal complaint for violation of
any law or rule administered by the SEC must first be filed with the latter. If the Commission
finds that there is probable cause, then it should refer the case to the DOJ.

A criminal charge for violation of the Securities Regulation Code is a specialized dispute. Hence,
it must first be referred to an administrative agency of special competence, i.e., the SEC.
Under the doctrine of primary jurisdiction, courts will not determine a controversy involving a
question within the jurisdiction of the administrative tribunal, where the question demands the
exercise of sound administrative discretion requiring the specialized knowledge and expertise of
said administrative tribunal to determine technical and intricate matters of fact. The Securities
Regulation Code is a special law. Its enforcement is particularly vested in the SEC. Hence, all
complaints for any violation of the Code and its implementing rules and regulations should
be filed with the SEC. Where the complaint is criminal in nature, the SEC shall indorse the
complaint to the DOJ for preliminary investigation and prosecution as provided in Section
53.1 earlier quoted.
101. Cemco Holdings, Inc. v. National Life Insurance Company of the PH, Inc., GR 171815,
August 07, 2007, Chico-Nazario, J.
FACTS:
Union Cement Corporation (UCC), a publicly-listed company, has 2 principal stockholders:
Union Cement Holdings Corporation (UCHC; non-listed) – 60.51% and petitioner Cemco –
17.03%.

Majority of UCHC’s stocks were owned by Bacnotan Consolidated Industries (BCI) – 21.31%
and by its subsidiary Atlas Cement Corp (ACC) – 29.69%. Cemco owned 9% of UCHC stocks.

In a disclosure letter, BCI informed PSE that it and ACC resolved to sell to Cemco BCI’s and
ACC’s stocks in UCHC, equivalent to 21.31%+29.69% = 51%. Thus, Cemco’s direct and
indirect ownership in UCC has increased by 36% to 53% (17.03+36). The 36% was computed
thus: Total stocks of Cemco in UCHC = (9+51% =60%); UCHC ownership of UCC= 60%;
60%*60% = 36% indirect Cemco ownership in UCC. The transaction was later consummated.

PSE inquired thru letter to SEC whether the Tender Offer Rule under Rule 19 of the SRC IRR
applies to Cemco. SEC en banc initially ruled that tender offer was not required. Later, feeling
aggrieved by the transaction, respondent NLIC, minority stockholder of UCC, sent a letter to
Cemco demanding that Cemco comply with the mandatory tender offer. But Cemco refused.
Thus, NLIC filed a complaint in SEC against Cemco, UCC, UCHC, BCI, and ACC, praying that
the mandatory tender offer rule be applied to its UCC shares.

SEC ruled for NLIC, reversing its earlier ruling, and directing Cemco to make a tender offer for
UCC shares to NLIC and other holders of UCC shares similar to the class held by UCHC. CA,
on petition by Cemco, affirmed. Hence this petition.

ISSUE:
1) Whether SEC has jurisdiction to exercise adjudicative (quasi-judicial?) functions. -YES.
2) Whether the tender offer rule applies only to direct acquisitions of shares. -NO.
HELD:
1) Contention: The SRC does not vest SEC with jurisdiction to adjudicate and determine the
rights and obligations of the parties since under SRC, SEC’s authority is purely administrative.
In the absence of grant of jurisdiction by Congress, SEC cannot, by mere administrative
regulation, confer on itself that jurisdiction.
Held:
In taking cognizance of NLIC’s complaint against Cemco and rendering judgment ordering
Cemco to make a tender offer, SEC acted pursuant to Rule 19(13) of its IRR of the SRC:
If there shall be violation of this Rule by pursuing a purchase of equity shares of a public
company at threshold amounts without the required tender offer, the Commission, upon
complaint, may nullify the said acquisition and direct the holding of a tender offer
The basis of R19(13) is SRC, S5.1(n):
[T]he Commission shall have, among others, the following powers and functions: xxx
xxx xxx (n) Exercise such other powers as may be provided by law as well as those
which may be implied from, or which are necessary or incidental to the carrying out
 of, the express powers granted the Commission to achieve the objectives and purposes of
these laws.
As a regulatory agency, SEC has the incidental power to conduct hearings and render decisions
fixing the rights and obligations of the parties. In fact, to deprive the SEC of this power would
render the agency inutile, because it would become powerless to regulate and implement the law.
Section 5.1 of the SRC allows a general grant of adjudicative powers to the SEC which may be
implied from or are necessary or incidental to the carrying out of its express powers to
achieve the objectives and purposes of the SRC. We must bear in mind in interpreting the
powers and functions of the SEC that the law has made the SEC primarily a regulatory body with
the incidental power to conduct administrative hearings and make decisions.

1.1) SEC has authority to promulgate rules and regulations subject to the limitation that they be
consistent with the policy of SRC, among which is the protection of investors. S5.1(g) and S72
of SRC provides:
72.1. . . . To effect the provisions and purposes of this Code, the Commission may issue,
amend, and rescind such rules and regulations and orders necessary or appropriate, . . . .
72.2. The Commission shall promulgate rules and regulations providing for reporting,
disclosure and the prevention of fraudulent, deceptive or manipulative practices in
connection with the purchase by an issuer, by tender offer or otherwise, of and equity
security of a class issued by it that satisfies the requirements of Subsection 17.2. xxx.
1.2) Cemco is also estopped from questioning the jurisdiction of SEC since it participated in all
proceedings before SEC and had prayed for affirmative relief. Cemco did not question SEC’s
jurisdiction when it rendered an opinion favorable to Cemco.

2) Contention: The tender offer rule applies only to direct acquisition of shares of the public
company and not to an indirect acquisition arising from the purchase of the shares of a holding
company of the listed firm.
Held:
Tender offer is a publicly announced intention by a person acting alone or in concert with other
persons to acquire equity securities of a public company. A public company is defined as a
corporation which is listed on an exchange, or a corporation with assets exceeding
P50,000,000.00 and with 200 or more stockholders, at least 200 of them holding not less
than 100 shares of such company. Stated differently, a tender offer is an offer by the acquiring
person to stockholders of a public company for them to tender their shares therein on the terms
specified in the offer. Tender offer is in place to protect minority shareholders against any
scheme that dilutes the share value of their investments. It gives the minority shareholders
the chance to exit the company under reasonable terms, giving them the opportunity to sell
their shares at the same price as those of the majority shareholders.

S19 of SRC states xxx. Under SEC Rules, the 15 and 30% threshold acquisition of shares was
increased to 35%. It is further provided therein that mandatory tender offer is still applicable
even if the acquisition is less than 35% when the purchase would result in ownership of
over 51% of the total outstanding equity securities of the public company.

2.1) Mandatory tender offer rule covers not only direct acquisition but also indirect
acquisition or “any type of acquisition.” This is clear from the discussions of the Bicameral
Conference Committee on the SRC. The legislative intent of Section 19 of the Code is to
regulate activities relating to acquisition of CONTROL of the listed company and for the
purpose of protecting the minority stockholders of a listed corporation. Whatever may be the
method by which control of a public company is obtained, either through the direct
purchase of its stocks or through an indirect means, mandatory tender offer applies. What
is decisive is the determination of the power of control.

102. PH Veterans Bank v. Callangan, GR 191995, August 03, 2011, Brion, J., Second
Division. (“Public company”)
FACTS:
The SEC informed petitioner PVB that it qualifies as a “public company” under S17.2 of the
SRC. Thus, it is required to comply with the reportorial requirements under S17.1 of SRC. PVB
responded that it is not a “public company” because its shares of stock are available only to a
limited class or sector, i.e. to WWII veterans, and not to the general public. SEC rejected
this explanation and assessed PVB P1.9M for failing to comply with the SRC reportorial
requirements from 2001 to 2003. SEC en banc affirmed. CA affirmed. SC affirmed. Hence this
MR with SC.

ISSUE:
Whether PVB, whose assets are worth at least P50M, has around 400k stockholders, and whose
shares are available only to WWII veterans and not to the general public, is a public company.
HELD: YES.
1) S17.2 of SRC provides:
17.2.The reportorial requirements of Subsection 17.1 shall apply to the following: xxx
xxx xxx c) An issuer with assets of at least Fifty million pesos (P50,000,000.00) or such
other amount as the Commission shall prescribe, and having two hundred (200) or more
holders each holding at least one hundred (100) shares of a class of its equity
securities: xxx.

Thus, a “public company is not limited to a company whose shares are publicly listed. Even
companies like PVB, whose shares are offered only to a specific group of people, are
considered a public company, provided they meet the above requirements.

Here, PVB does not dispute that it has assets exceeding P50M and has 395,998 shareholders.
Thus, it is a public company that must comply with the reportorial requirements in S17.1 of
SRC.

2) Contention: PVB argues that even assuming that it is a public company under S17, SC should
interpret the SRC provisions in such a way that no financial prejudice is done to the thousands of
veterans who are stockholders of the bank. PVB claims that requiring it to comply with S17.5 of
SRC to “furnish to each holder of such equity security an annual report” would make it spend
approximately P40M just to reproduce and mail the “Information Statement” to its 400,000
shareholders nationwide. This would affect the bank’s cause for “veteranism.”
Held:
But the fundamental duty of SC is to apply the law. Construction and interpretation come only
after a demonstration that the application of the law is impossible or inadequate unless
interpretation is resorted to. In this case, we see the law to be very clear and free from any doubt
or ambiguity; thus, no room exists for construction or interpretation.

103. SEC v. Prosperity.com, Inc., GR 164197, January 25, 2012, Abad, J., Third Division.
(Howey test, investment contract)
FACTS:
Respondent PCI sold computer software and hosted websites without providing internet service.
To make profit, PCI devised a scheme in which for US$234, a buyer could acquire from it an
internet website of 15MB capacity. At the same time, by referring to PCI his own down-line
buyers, a first-time buyer could earn commissions, interest in real estate in the Philippines and
in the United States, and insurance coverage worth P50,000.00. To benefit from this scheme, a
PCI buyer must enlist and sponsor at least two other buyers as his own down-lines. These second
tier of buyers could in turn build up their own down-lines. For each pair of down-lines, the
buyer-sponsor received a US$92.00 commission. But referrals in a day by the buyer-sponsor
should not exceed 16 since the commissions due from excess referrals inure to PCI, not to the
buyer-sponsor.

PCI patterned its scheme from Golconda Ventures Inc. (GVI) which stopped operations after
SEC issued a cease and desist order (CDO) against it. The same persons who ran the affairs of
GVI directed PCI’s actual operations.

In 2001, disgruntled elements of GVI filed a complaint with SEC against PCI, alleging that PCI
had taken over GVI’s operations. SEC issued a CDO against PCI, ruling that PCI’s scheme
constitutes an investment contract. Under SRC, it should have first registered such securities
with SEC.

PCI filed a petition for certiorari with CA against SEC. CA ruled for PCI, saying that the scheme
is not an investment contract that needs to be registered under SRC. Hence this petition.

ISSUE:
Whether PCI’s scheme constitutes an investment contract under SRC.
HELD: NO.
1) SRC treats investment contracts as “securities” that must be registered with SEC. under
the SRC IRR, an investment contract is a contract, transaction, or scheme where a person
invests his money in a common enterprise and is led to expect profits primarily from the
efforts of others.

2) Howey Test- The US SC held in SEC v. WJ Howey Co. that for an investment contract to exist,
the following elements, referred to as the Howey test must concur: (1) a contract, transaction,
or scheme; (2) an investment of money; (3) investment is made in a common enterprise; (4)
expectation of profits; and (5) profits arising primarily from the efforts of others. An example
is the long-term commercial papers that large companies like San Miguel Corporation
(SMC) offer to the public for raising funds that it needs for expansion. When an investor
buys these papers or securities, he invests his money, together with others, in SMC with an
expectation of pro
3) Here, PCI’s clients do not make such investments. They buy a product of some value to them:
an Internet website of a 15-MB capacity. The client can use this website to enable people to have
internet access to what he has to offer to them, say, some skin cream. The buyers of the website
do not invest money in PCI that it could use for running some business that would generate
profits for the investors. The price of US$234.00 is what the buyer pays for the use of the
website, a tangible asset that PCI creates, using its computer facilities and technical skills. PCI is
correct in saying that the US$234 it gets from its clients is merely a consideration for the sale
of the websites that it provides.

The commissions, interest in real estate, and insurance coverage worth P50,000.00 are incentives
to down-line sellers to bring in other customers. These can hardly be regarded as profits from
investment of money under the Howey test.

PCI appears to be engaged in network marketing a scheme adopted by companies for getting
people to buy their products outside the usual retail system where products are bought from the
store's shelf. Under this scheme, adopted by most health product distributors, the buyer can
become a down-line seller. The latter earns commissions from purchases made by new buyers
whom he refers to the person who sold the product to him. The network goes down the line
where the orders to buy come.

104. Intestate Estate of Alexander Ty v. CA, GR 112872, April 19, 2001, Melo, J., Third
Division. (Jurisdiction of SEC in intra-corporate disputes transferred to RTC by RA 8799)
FACTS:
Petitioner Sylvia Ty, administratrix of Alexander Ty, was married to Alexander Ty, son of
respondent Alejandro Ty. Alexander died in 1988. Sylvia was appointed administratrix of
Alexander’s intestate estate. Sylvia filed a motion for leave to sell or mortgage estate property in
order to generate funds for the payment of deficiency estate taxes of P4.7M. Included in the
inventory of property, among others, were shares of stock of various corporations.

Alejandro filed complaints for recovery of the above shares of stock, praying for the declaration
of nullity of the deed of absolute sale of the shares executed by Alejandro in favor of Alexander.
Alejandro claims that even if the shares were placed in Alexander’s name, they were acquired
thru Alejandro’s money without any consideration from Alexander.

Contention: Sylvia moved to dismiss, alleging lack of jurisdiction by RTC, claiming that the
cases were intra-corporate disputes cognizable by SEC since it involved a dispute between
stockholders.

RTC denied the motions to dismiss. CA, on certiorari, affirmed. Hence this petition.

ISSUE:
Whether a dispute between two stockholders is necessarily an intra-corporate dispute.
HELD: NO.
1) It does not necessarily follow that when both parties of a dispute are stockholders of a
corporation, the dispute is automatically considered intra-corporate in nature and jurisdiction
consequently falls with the SEC under PD 902-A. The better policy in determining which body
has jurisdiction over this case would be to consider, not merely the status of the parties involved,
but likewise the nature of the question that is the subject of the controversy. When the nature of
the controversy involves matters that are purely civil in character, it is beyond the ambit of the
limited jurisdiction of the SEC.

Here, the relationship of Alejandro when he sold his shares of stock to his son was one of
vendor and vendee, nothing else. The question raised is whether or not there was indeed a sale
in the absence of consideration. The proper forum for such a dispute is a regular trial court. No
special corporate skill is necessary in resolving the issue of validity of the transfer of shares
from one stockholder to another of the same corporation. The determination whether a
contract is simulated or not is an issue that could be resolved by applying pertinent provisions of
the Civil Code, particularly those relative to obligations and contracts.

2) It should also be noted that under the newly enacted Securities Regulation Code (Republic Act
No. 8799), this issue is now moot and academic because whether or not the issue is intra-
corporate, it is the regional trial court and no longer the SEC that takes cognizance of the
controversy. Under Section 5.2 of Republic Act No. 8799, original and exclusive jurisdiction
to hear and decide cases involving intra-corporate controversies have been transferred to
courts of general jurisdiction or the appropriate regional trial court.

105. Yujuico v. Quiambao, GR 168639, January 29, 2007, Sandoval-Gutierrez, J., First
Division.
FACTS:
Strategic Alliance Development Corporation (STRADEC) is a domestic corporation. Its
principal place of business was in Ortigas Center, Pasig City. Later, SEC approved the
amendment of STRADEC’s AoI authorizing the change of its principal office from Pasig City to
Bayambang, Pangasinan. On March 1, 2004, STRADEC held its annual stockholders’ meeting in
its Pasig City office. At the meeting, petitioners Yujuico, Bonifacio Sumbilla, and Dolney
Sumbilla, and respondents Cesar Quiambao et al. were elected. 5 months later on Aug. 16, 2004,
respondents filed in RTC Pangasinan a complaint against STRADEC, praying that the election
be nullified on the ground of improper venue pursuant to S51 of CorpCode. The case was
transferred to RTC Urdaneta, a special commercial court.

RTC ordered that a special stockholders’ meeting be held in the principal place of office in
Pangasinan and granted respondents’ application for writs of preliminary prohibitory injunction,
restraining petitioners from acting as officers of the corporation.

Contention: Petitioners, on certiorari with CA, claimed that only SEC, not RTC, that has
jurisdiction to order the holding of a special stockholders’ meeting.

ISSUE:
Whether RTC has jurisdiction to order the holding of a special stockholders’ meeting.
HELD: YES.
1) An intra-corporate controversy is one which "pertains to any of the following relationships:
(1) between the corporation, partnership or association and the public; (2) between the
corporation, partnership or association and the State in so far as its franchise, permit or license to
operate is concerned; (3) between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) among the stockholders, partners or
associates themselves." Thus, the dispute is an intra-corporate controversy, the contending
parties being stockholders and officers of a corporation.

2) Originally, PD 902-A, S5 bestowed the SEC original exclusive jurisdiction over:

(a) Devices or schemes employed by, or any act of, the board of directors, business
associates, its officers or partners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or of the stockholders, partners, or
members of associations registered with the Commission;
(b) Controversies arising out of intra-corporate or partnership relations, between and
among stockholders, members or associates; between any or all of them and the
corporation, partnership or association and the State insofar as it concerns their individual
franchise or right as such entity;
(c) Controversies in the election or appointment of directors, trustees, officers or
managers of such corporations, partnership or associations; (*election contest)
(d) Petitioners of corporations, partnerships or associations to be declared in the state of
suspension of payment in cases where the corporation, partnership or association
possesses sufficient property to cover all its debts but foresees the impossibility of
meeting them when they fall due or in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities but is under the management of
a rehabilitation receiver or management committee created pursuant to this Decree.
Upon the enactment of RA 8799 or SRC, the jurisdiction of SEC over intra-corporate
controversies and other cases enumerated in PD 902-A, S5 has been transferred to the courts of
general jurisdiction or the RTC (S5.2, RA 8799).

3) On March 13, 2001, SC approved the Interim Rules of Procedure Governing Intra-Corporate
Controversies under RA 8799 which took effect on April 01, 2001.

4) In Morato v. CA, we held that pursuant to RA 8799 and the Interim Rules, "among the powers
and functions of the SEC which were transferred to the RTC include the following: (a)
jurisdiction and supervision over all corporations, partnerships or associations which are the
grantees of primary franchises and/or a license or permit issued by the Government; (b) the
approval, rejection, suspension, revocation or requirement for registration statements, and
registration and licensing applications; (c) the regulation, investigation, or supervision of the
activities of persons to ensure compliance; (d) the supervision, monitoring, suspension or take
over the activities of exchanges, clearing agencies, and other SROs; (e) the imposition of
sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto;
(f) the issuance of cease-and-desist orders to prevent fraud or injury to the investing public; (g)
the compulsion of the officers of any registered corporation or association to call meetings
of stockholders or members thereof under its supervision; and (h) the exercise of such other
powers as may be provided by law as well as those which may be implied from, or which are
necessary or incidental to the carrying out of, the express powers granted the Commission to
achieve the objectives and purposes of these laws."
Thus, RTC has the power to hear and decide the intra-corporate controversy herein. Concomitant
to said power is the authority to issue orders necessary or incidental to carrying out of the powers
expressly granted. Thus, RTC may, in appropriate cases, order the holding of a special meeting
of stockholders or members of a corporation involving an intra-corporate dispute under its
supervision.

But SC held that the order of the RTC was void because the judge who issued it already had no
authority to do so by the time he issued the order because he was already replaced by another
pairing judge at that time. Also, under the Interim Rules, the prescriptive period to file
election contest is 15days from the date of election. Here, the election contest was filed 5
months from the date of election. Also, the granting of the WPI was improper because the right
of respondents thereto was not clear and the order requiring the special meeting was akin to
deciding the main case already.

106. GSIS v. CA, GR 183905, April 16, 2009, Tinga, J., Second Division.
FACTS:
The annual stockholders’ meeting of Meralco was scheduled on May 27, 2008. Proxies were
required to be submitted on or before May 17, 2008 and the proxy validation was slated for 5
days later or on May 22. In view of the resignation of Quiason, the position of corporate
secretary of Meralco became vacant. The BoD of Meralco designated Jose Vitug to act as
corporate secretary for the meeting. But when the proxy validation began on May 22, the
proceedings were presided over by respondent Rosete, assistant corporate secretary and in-house
chief legal counsel of Meralco. GSIS, major shareholder of Meralco, was distressed over the
proxy validation proceedings and the resulting certification of proxies in favor of the Meralco
management.

On May 23, 2008, GSIS filed a complaint in RTC seeking the declaration of certain proxies as
invalid. On May 26, 2008, it manifested dismissal of the complaint in RTC and also filed an
urgent petition with SEC seeking to restrain Rosete from recognizing the proxies in favor of
respondents Lopez et al. GSIS prayed for issuance of a cease and desist order (CDO) to restrain
the use of said proxies during the annual meeting. SEC Commissioner Martinez issued a CDO to
that effect on May 26, 2008, the same day the complaint was filed. But on May 27, Rosete
announced that the meeting would push thru, opining that the SEC CDO was void.

Thus, on May 28, SEC issued a Show Cause Order (SCO) against respondents on why they
should not be cited in contempt. Respondents filed a petition for certiorari with CA, praying that
the CDO and SCO be annulled.

CA ruled that SEC has no jurisdiction over GSIS’ complaint. Hence this petition.

ISSUE:
A) Whether SEC has jurisdiction over GSIS’s complaint against the proxy solicitation and
validation process in the meeting to elect Meralco’s board of directors. – NO.
B) Whether the CDO issued by GSIS, which cites S5(i), S53, and S64 as bases, is valid. -NO.
HELD:
A) Contention: GSIS anchors its argument on S53.1 and S20.1 in that since proxy solicitations
under S20.1 have to be made in accordance with rules and regulations issued by SEC, it is SEC
under S53.1 that has jurisdiction to investigate alleged violations of the rules on proxy
solicitations.

Respondents argue that under S5.2 of SRC, SEC’s jurisdiction over all cases under S5 of PD
902-A was transferred to RTC, particularly S5(2) (intra-corporate) and S5(3) (election of
directors etc.) of PD 902-A. Respondents also cite the definition of election contest under the
Interim Rules.
Held: In elections of directors etc. under S5(3) of PD 902-A, RTC has jurisdiction now.
Rule 6, S2 of the Interim Rules defines “election contests” as follows:
SEC. 2. Definition. — An election contest refers to any controversy or dispute involving
title or claim to any elective office in a stock or nonstock corporation, the validation of
proxies, the manner and validity of elections and the qualifications of candidates,
including the proclamation of winners, to the office of director, trustee or other officer
directly elected by the stockholders in a close corporation or by members of a nonstock
corporation where the articles of incorporation or bylaws so provide.

1) Proxy solicitation vs proxy validation- The right of a stockholder to vote by proxy is

established by CorpCode, but it is SRC which specifically regulates the form and use of proxies,
particularly the procedure of proxy solicitation, thru S20. AIRR-SRC Rule 20 defines “solicit”
and “solicitation:”
The terms solicit and solicitation include: A. any request for a proxy whether or not
accompanied by or included in a form of proxy B. any request to execute or not to
execute, or to revoke, a proxy; or C. the furnishing of a form of proxy or other
communication to security holders under circumstance reasonably calculated to result in
the procurement, withholding or revocation of a proxy.
Proxy solicitation is a procedure that antecedes proxy validation. The former involves the
securing and submission of proxies, while the latter concerns the validation of such secured and
submitted proxies.

1.1) Not S5(2) of PD 902-A - Under Section 20.1, the solicitation of proxies must be in
accordance with rules and regulations issued by the SEC, such as AIRR-SRC Rule 4. And by
virtue of Section 53.1, the SEC has the discretion "to make such investigations as it deems
necessary to determine whether any person has violated" any rule issued by it, such as AIRR-
SRC Rule 4. The investigatory power of the SEC established by S53.1 is central to its regulatory
authority, most crucial to the public interest especially as it may pertain to corporations with
publicly traded shares. For that reason, we are not keen on pursuing private respondents'
insistence that the GSIS complaint be viewed as rooted in an intra-corporate controversy solely
within the jurisdiction of the trial courts to decide. It is possible that an intra-corporate
controversy may animate a disgruntled shareholder to complain to the SEC a corporation's
violations of SEC rules and regulations, but that motive alone should not be sufficient to deprive
the SEC of its investigatory and regulatory powers, especially so since such powers are
exercisable on a motu proprio basis.

1.2) Power to decide on validity of proxies withdrawn from SEC- PD 902-A, S6(g) states:
 SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess
the following powers: xxx xxx xxx
(g) To pass upon the validity of the issuance and use of proxies and voting trust
agreements for absent stockholders or members;
The provision confers on SEC the power to adjudicate controversies related not only to proxy
solicitation, but also to proxy validation. Such power of the SEC then was incidental or
ancillary to the “exercise of such jurisdiction.” S6 is immediately preceded by S5 conferring
on SEC jurisdiction to hear and decide cases involving “controversies in the election or
appointments of directors xxx (S5(3), PD 902-A). The cases in S5 were transferred from
SEC’s jurisdiction to RTC by S5.2 of SRC. Thus, the power of SEC to pass upon the validity
of proxies in relation to election controversies has been effectively withdrawn, tied as it is to
its abrogated jurisdictional powers.

2) S5(c) of PD 902-A pertains only to election of directors, etc., not to all situations where
shares may vote- Shares of stock may be divided into voting shares and non-voting shares
(preferred or redeemable). The Corp Code provides for a whole range of matters which can be
voted upon by stockholders, including a limited set on which even non-voting stockholders are
entitled to vote on. On any of these matters, the proxy device is generally available.

Under S5(c) of PD 902-A in relation to SRC, RTC’s jurisdiction as to election related

controversies is specifically confined to “controversies in election or appointment of
directors, etc.” thus, RTC’s jurisdiction over election contests under S5(c) does NOT
extend to every potential subject that may be voted on by shareholders but only to the
election of directors or trustees under S24 of CorpCode.

2.1) Thus, the power of SEC to investigate violations of its rules on proxy solicitation is
unquestioned when proxies are obtained to vote on matters unrelated to the cases enumerated
under S5 of PD 902-A. But when proxies are solicited in relation to the election of corporate
directors, the controversy, even if it raised a violation of SEC rules on proxy solicitation,
should be seen as an election controversy within the original and exclusive jurisdiction of
RTCs by virtue of S5.2 of SRC in relation to S5(c) of PD 902-A.

2.2) If all matters anteceding the holding of election, such as the proxy solicitation process, are
deemed to be within the jurisdiction of SEC, then the prospect of overlapping and competing
jurisdictions between SEC and RTC becomes frighteningly real.

Here, the proxy challenge raised by GSIS relates to the election of Meralco’s directors.

B) Since SEC has no jurisdiction, the CDO and SCO it issued are void. But for guidance of SEC,
SC ruled on the validity of the CDO. The CDO of SEC was issued without notice and hearing on
the same day the complaint was filed on May 26, 2008. It cited as basis Sections 5.1(i), S53.3,
and S64 altogether.

1) There are 3 distinct bases for the issuance by the SEC of the CDO:
1.1) Section 5(i)- The first, allocated by Section 5 (i), is predicated on a necessity "to prevent
fraud or injury to the investing public". No other requisite or detail is tied to this CDO
authorized under Section 5 (i).
1.2) Section 53.3- The second basis, found in Section 53.3, involves a determination by the SEC
that "any person has engaged or is about to engage in any act or practice constituting a
violation of any provision of this Code, any rule, regulation or order thereunder, or any rule of
an Exchange, registered securities association, clearing agency or other self-regulatory
organization". The provision additionally requires a finding that "there is a reasonable
likelihood of continuing [or engaging in] further or future violations by such person". The
maximum duration of the CDO issued under Section 53.3 is ten (10) days.
1.3) Section 64- The third basis for the issuance of a CDO is Section 64. This CDO is founded
on a determination of an act or practice, which unless restrained, "will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury or prejudice to the
investing public”. Section 64.1 plainly provides three segregate instances upon which the SEC
may issue the CDO under this provision: (1) after proper investigation or verification, (2) motu
proprio, or (3) upon verified complaint by any aggrieved party. While no lifetime is expressly
specified for the CDO under Section 64, the respondent to the CDO may file a formal request
for the lifting thereof within 5 days from receipt of the CDO, which the SEC must hear within
fifteen (15) days from filing and decide within ten (10) days from the hearing.

1.4) S53 vs. S64- The CDO under S5(i) is similar to the CDO under S64.1. Both require a
common finding of a need to prevent fraud or injury to the investing public. At the same time, no
mention is made whether the CDO defined under S5 (i) may be issued ex-parte, while the CDO
under Section 64.1 requires "grave and irreparable" injury, language absent in S5 (i).
Notwithstanding the similarities between S5 (i) and S64.1, it remains clear that the CDO issued
under S53.3 is a distinct creation from that under S64.

In the case of S53.3, the SEC must make two findings: (1) that such person has engaged in any
such act or practice, and (2) that there is a reasonable likelihood of continuing, (or engaging in)
further or future violations by such person. In the case of S64, the SEC must adjudge that the act,
unless restrained, will operate as a fraud on investors or is otherwise likely to cause grave or
irreparable injury or prejudice to the investing public."

1.4.1) The error of SEC in granting the CDO without stating the kind of CDO it was issuing
contravenes due process. It is legally impermissible for the SEC to have utilized both S53.3 and
S64 as basis for the CDO at the same time. The CDO under S53.3 is premised on distinctly
different requisites than the CDO under S64. Even more crucially, the lifetime of the CDO
under S53.3 is confined to a definite span of ten (10) days, which is not the case with the CDO
under S64. This CDO under Section 64 may be the object of a formal request for lifting within
five (5) days from its issuance, a remedy not expressly afforded to the CDO under Section 53.3.

Any respondent to a CDO which cites both S53.3 and S64 would not have an intelligent basis to
respond to it. He would not know whether the CDO has a lifespan of 10 days as in S53.3 or if it
would need a formal request for lifting within 5 days under S64.1.
2) Also, the CDO was signed, much less deliberated upon, by only one commissioner. The SEC
is a collegial body composed of a chairperson and 4 commissioners. To constitute a quorum to
conduct business, the presence of at least 3 commissioners is required. Commissioner Martinez
is not the SEC. He alone does not speak for and in behalf of the SEC. The SEC acts through a
five- person body, and the five members of the commission each has one vote to cast in every
deliberation concerning a case or any incident therein that is subject to the jurisdiction of the
SEC.

107. SEC v. Performance Foreign Exchange Corporation, GR 154131, July 20, 2006,
Sandoval-Gutierrez, J., Second Division. (Cease and desist order of SEC)
FACTS:
Respondent PFEC is a domestic corporation registered with SEC with the following purpose:
To operate as a broker/agent between market participants in transactions involving, but
not limited to, foreign exchange, deposits, interest rate instruments, xxx.
After 2 years of operation, PFEC received a letter from SEC requiring it to appear before the
Compliance and Enforcement Department (CED) on Dec. 14, 2000 for a clarificatory conference
on its business operations. PFEC’s officers complied and explained before CED the nature of
their business.

On Jan. 16, 2001, the CED Director issued a cease and desist order in CED Case 99-2297
stating that upon CED’s inquiry on PFEC’s business for possible violation of RA 8799, PFEC is
shown to be engaged in foreign currency futures contracts in behalf of its clients without the
necessary license in violation of RA 8799, S11 and SEC IRRs.

PFEC moved for lifting of the cease and desist order, alleging that it was not engaged in currency
futures contracts trading but in spot currency trading which is not a form of currency futures
transaction. On Feb. 8, 2001, SEC Chairman Bautista, in her desire to know with certainty the
nature of PFEC’s business, sent a letter to BSP requesting for a definitive statement that
PFEC’s transactions are a form of financial derivatives and thus can only be undertaken by banks
or non-bank financial intermediaries performing quasi-banking functions.

Without waiting for BSP’s determination, SEC denied PFEC’s motion on Feb. 9, 2001, stating
that the cease and desist order stays until PFEC shall have submitted the “endorsement” from
BSP that it can engage in financial derivative transactions. On April 23, 2001, SEC issued an
order making the cease and desist order permanent.

PFEC filed a petition for certiorari with CA on June 20, 2001. Meanwhile, on Aug. 13, 2001, the
BSP, in answer to SEC Chairman Bautista’s Feb. 8, 2001 letter, stated that PFEC’s business does
not fall under the category of futures trading and cannot be classified as financial derivatives
transactions. CA ruled in favor of PFEC. Hence this petition for review on certiorari by SEC.

ISSUE:
Whether SEC can issue a cease and desist order without a definitive finding on the kind of
business of PFEC.
HELD: NO.
RA 8799, S64 provides:
 Sec. 64. Cease and Desist Order. — 64.1. The Commission, after proper investigation
or verification , motu proprio, or upon verified complaint by any aggrieved party, may
issue a cease and desist order without the necessity of a prior hearing if in its judgment
the act or practice, unless restrained, will operate as a fraud on investors or is otherwise
likely to cause grave or irreparable injury or prejudice to the investing public.
Thus, the 2 requirements for SEC to issue a cease and desist order are: 1) it must conduct the
proper investigation or verification, and 2) there must be a finding that the act or practice,
unless restrained, will operate as a fraud on investors or is otherwise likely to cause grave
or irreparable injury or prejudice to the investing public.

1) The first requirement is not present. The clarificatory conference by SEC cannot be
considered a proper investigation or verification process. It was merely an initial stage of such
process considering that after it issued the cease and desist order after the conference, SEC still
sought verification from BSP on the nature of PFEC’s business activity. The referral to BSP
is an essential part of the investigation and verification process. In fact, such referral indicates
that petitioner concedes to the BSP's expertise in determining the nature of respondent's business.
It bears stressing, however, that such investigation and verification, to be proper, must be
conducted by petitioner before, not after, issuing the Cease and Desist Order in question. This,
SEC utterly failed to do.

SEC denied PFEC’s motion for lifting of the C&D order despite its admission therein that it
cannot determine certain material facts involving PFEC’s transactions. Worst, without waiting
for BSP’s action, SEC made its C&D order permanent, directing PFEC to show cause why its
registration should not be revoked for violation of SRC on the ground of serious
misrepresentation as to what the corporation is doing. Without BSP’s determination of
PFEC’s business, there was no factual and legal basis to justify such order.

2) As to the second requirement, this implies that the act to be restrained has been determined
after conducting the proper investigation/verification. Here, the nature of the act can only be
determined after BSP has submitted its findings to SEC.

108. SEC v. Subic Bay Golf and Country Club, Inc., GR 179047, March 11, 2015, Leonen,
J., Second Division. (Jurisdiction of RTC vis a vis regulatory power of SEC under SRC-
order of refund of purchase price of shares)
FACTS:
Subic Bay Golf and Country Club Inc. (SBGCCI) and Universal International Group
Development Corporation (UIGDC) entered into a Development Agreement. UIGDC agreed to
finance, construct, and develop the golf course in consideration of the payment by SBGCCI of
1,530 SBGCCI shares of stock. Upon SBGCCI’s application, SEC issued an order for
registration of 3,000 no par value shares of SBGCCI. SBGCCI was issued a certificate of permit
to offer securities for sale to the public of its 1,530 no par shares. The shares were sold at
P425,000 per share. SBGCCI would use the proceeds to pay UIGDC for the development of the
golf course.

In a letter to SEC, Filart and Villareal informed SEC that they had been asking UIGDC for the
refund of their payment for their SBGCCI shares. UIGDC did not act on their requests. They
alleged that they purchased the shares in 1996 based on the promise of SBGCCI and UIGDC to
deliver an 18-hole golf course, a swimming pool and tennis courts, hotel, a 9-hole executive
course, and other club facilities. But these promises were not delivered. Villareal and Filart
prayed for relief.

SEC Corporate Finance Department conducted an ocular inspection of the project and found that
SBGCCI and UIGDC failed to comply substantially with their commitment to complete the
project. Thus, SEC ordered SBGCCI and UIGDC to refund Filart and Villareal the purchase
price of their shares of P740k each. It also ordered SBGCCI to amend its prospectus to reflect
the actual status of the facilities of the club. SEC also suspended the certificate of registration
and permit to sell securities to the public which it issued to SBGCCI until the prospectus is
amended. The order of refund was pursuant to Rule 14 of the IRR of SRC that SEC had issued.

SEC affirmed the order of its Corporation Finance Department. CA, on petition for review,
reversed and declared void the order insofar as it ordered the refund of the purchase price. Hence
this petition.

ISSUE:
Whether SEC has the power to order refund of the purchase price of the shares.
HELD: NO.
1) Under PD 902-A, SEC had jurisdiction over acts amounting to fraud and misrepresentation by
a corporation’s board of directors etc. (S5(a)) and over intra-corporate disputes (S5(b)). S5.2 of
SRC/RA 8799 transferred this jurisdiction to RTC.

1.1) Intra-corporate- For disputes to be intra-corporate, it must satisfy the relationship and
nature of controversy tests. The relationship test requires that the dispute be between a
corporation/partnership/association and the public; a corporation/partnership/association and the
state regarding the entity's franchise, permit, or license to operate; a
corporation/partnership/association and its stockholders, partners, members, or officers; and
among stockholders, partners, or associates of the entity. The nature of the controversy test
requires that the action involves the enforcement of corporate rights and obligations.

Here, the dispute is intra-corporate. It is between the corporation, SBGCCI, and its shareholders,
Villareal and Filart. It also involves corporate rights and obligations as determined from the
allegations and reliefs in the complaint. The claim for refund is based on SBGCCI and UIGDC’s
failure to abide by their representations in their prospectus. This is an intra-corporate matter
under RTC’s jurisdiction.

2) But SEC is not necessarily ousted of its regulatory and administrative jurisdiction to
determine and act if there were administrative violations. SEC’s regulatory power pertains to
approval and rejection, and suspension or revocation, of applications for registration of securities
for, among others, violations of the law, fraud, and misrepresentations. SC cites S13, 13.1, 13.4,
and 15.

To ensure compliance with the law and rules, SEC is also given the power to impose fines and
penalties (SRC, S5(f)). It may also investigate motu proprio whether corporations comply with
the CorpCode, SRC, and rules implemented by SEC (S5(d)). SC cites SRC, S5(d), 5(f), 5(i),
5(m), and 5(n).

SEC’s approval of securities registrations signals to the public that the securities are valid. It
provides the public with basis for relying on the representations of corporations that issue
securities or financial instruments. Thus, when Villareal and Filart alleged in their letter-
complaint to SEC that SBGCCI and UIGD committed misrepresentations in the sale of their
shares, nothing prevented the SEC from taking cognizance of it to determine if SBGCC and
UIGDC committed administrative violations and were liable under SRC.

2.1) However, SEC’s regulatory power does NOT include the authority to order the refund of
the purchase price of Villareal’s and Filart’s shares in the golf club. The issue of refund is intra-
corporate or civil in nature. Similar to issues such as the existence or inexistence of appraisal
rights, pre-emptive rights, and the right to inspect books and corporate records, the issue of
refund is an intracorporate dispute that requires the court to determine and adjudicate the
parties' rights based on law or contract. Injuries, rights, and obligations involved in intra-
corporate disputes are specific to the parties involved. They do not affect the SEC or the
public directly.

2.2) Contention: SEC argues that the power to order refund is in accordance with the SRC’s IRR,
Rule 14.
Held:
But the IRR cannot give to SEC the power that is more than what is provided under SRC. IRRs
are limited by the laws they implement.

Thus, SC held that the issue of refund should be litigated in the RTC.

109. Roman, Jr. v. SEC, GR 196329, June 01, 2016, Mendoza, J., Second Division. (SEC
retains regulatory powers; can also create management committees, implied power)
FACTS:
Attys. Atienza et al., respondents, filed a letter complaint against petitioners Roman (president)
and Defensor as officers of Capitol Hills Golf and Country Club (Capitol). Respondents allege
that on April 23, 1996, a special BoD meeting was held wherein a resolution was passed
authorizing Roman, as president of Capitol, to acquire 4 lands in Montalban at P150/m2, to enter
on behalf of Capitol into a JVA with Ayala Land Inc. (ALI) to develop and market Capitol’s golf
course into saleable lots in consideration of 40% of the proceeds of the sale thereof, to obtain
loans from ALI in order to acquire the Montalban properties in the amount of P150M, etc. The
complaint also alleged that Roman asked the BoD to pass a resolution authorizing a third party,
Pacific Asia, to receive from ALI the proceeds of the loan when even before such proposal by
Roman, ALI had already made substantial cash advances in favor of Capitol but directly payable
to Pacific Asia. Roman, in evident bad faith, did not inform the BoD thereof. To respondents,
these were all anomalies that prompted them to ask SEC to investigate the BoD and order the
constitution of a management committee to temporarily oversee the affairs of Capitol.

Contention: Petitioners claim that SEC has no jurisdiction as the complaint involved an intra-
corporate controversy. Thus, RTC acting as special commercial court has jurisdiction.
SEC found merit in the complaint and constituted the management committee (MANCOM). The
MANCOM in turn notified petitioners of its assumption of duties and ordered that relevant
documents of Capitol be made available to it.

Petitioners filed a petition for prohibition under R65 in CA, asking CA to enjoin SEC from
conducting further proceedings and to dismiss the case. CA affirmed SEC’s power to investigate
and constitute the MANCOM. Hence this petition.

ISSUE:
Whether SEC has jurisdiction over the complaint against petitioners, alleging mismanagement,
and to constitute the management committee.
HELD: YES.
1) In SEC v. Subic Bay Golf and Country Club, Inc., SC cited S5 and 53 of SRC:
SECTION 5. Powers and Functions of the Commission. — 5.1. The commission xxx
shall have the powers and functions provided by this Code, Presidential Decree No. 902-
A, the Corporation Code, the Investment Houses Law, the Financing Company Act and
other existing laws. Pursuant thereto the Commission shall have, among others, the
following powers and functions:
(a) Have jurisdiction and supervision over all corporations, partnerships or associations
who are the grantees of primary franchises and/or a license or permit issued by the
Government; xxx
(d) Regulate, investigate or supervise the activities of persons to ensure compliance; xxx
(n) Exercise such other powers as may be provided by law as well as those which may be
implied from, or which are necessary or incidental to the carrying out of, the express
powers granted the Commission to achieve the objectives and purposes of these laws.
SECTION 53. Investigations, Injunctions and Prosecution of Offenses. — 53.1. The
Commission may, in its discretion, make such investigations as it deems necessary to
determine whether any person has violated or is about to violate any provision of this
Code, any rule, regulation or order thereunder, or any rule of an Exchange, registered
securities association, clearing agency, other self-regulatory organization, xxx.

Thus, SEC has authority to hear cases regardless of whether an action involves issues
cognizable by RTC, provided that SEC could only act upon those which are merely
administrative and regulatory in character. In other words, the SEC was never dispossessed of
the power to assume jurisdiction over complaints, even if these are riddled with intra-corporate
allegations, if their invocation of authority is confined only to the extent of ensuring compliance
with the law and the rules, as well as to impose fines and penalties for violation thereof; and
to investigate even motu proprio whether corporations comply with the Corporation Code,
the SRC and the implementing rules and regulations.

Thus, SEC has jurisdiction over the letter-complaint. The complaint of respondents sought SEC’s
investigation in the interest of the minority stockholders over the “anomalies and fraud over the
agreement with ALI, the growing labor unrest at Capitol, the unpaid individual creditors some of
whom have already gone into courts to enforce collection, the continuing financial
mismanagement and gross negligence and incompetence shown by Mr. Pablo B. Roman, Jr., et
al. in running the business affairs of [Capitol] . . . that resulted in losses, wastages and dissipation
of funds of the corporation." The prayer for SEC to exercise its investigatory powers justifies
SEC’s jurisdiction even if intra-corporate allegations were raised.

2) SEC has authority to constitute the management committee. Under Section 5.1 (n) of the SRC,
the SEC is permitted to exercise such other powers as may be provided for by law as well as
those which may be implied from, or which are necessary or incidental to the carrying out, of
the express powers granted the SEC to achieve the objectives and purposes of these laws. Thus,
SEC has broad discretion to act on matters relating to its express power of supervision over all
corporations etc. The grant of express power of supervision necessarily includes the power to
create a management committee following the doctrine of necessary implication. The creation of
a MANCOM is premised on the immediate and speedy protection of the interest not only of
minority stockholders, but also of the general public from immediate danger of loss, wastage or
destruction of assets or the paralyzation of business of a concerned corporation or entity.

**If Management committee is constituted, what happens to the Board of Directors?

It doesn’t
110. Abacus Capital and Investment Corporation v. Dr. Tabujara, GR 197624, July 23,
2018, Tijam, J., First Division. (Investment House)
FACTS:
Abacus is an investment house. On July 6, 2000, Tabujara engaged Abacus as his lending agent
for purposes of investing his money of P3M. Abacus, in turn, lent the P3M to Investors
Financial Services Corporation (IFSC) with a term of 32 days or until Aug. 7, 2000. Tabujara
would get P3,024,400 as return. But on July 24, 2000, IFSC filed with SEC a petition for
declaration of suspension of payments. This was granted by SEC.

Learning of this development, Tabujara gave notice to Abacus and IFSC that he is opting to pre-
terminate his money placement. Upon maturity on Aug. 7, 2000, Tabujara did not receive either
the interest or the principal.

IFSC’s petition for suspension of payments was later raffled to a regular court and treated as a
petition for rehabilitation. Pursuant to IFSC’s rehabilitation plan, Tabujara received interest
payments from Abacus from Jan. 1 to Dec. 31, 2001. But the interest due ceased to be paid come
Jan. 2002, prompting Tabujara to file his complaint in RTC against Abacus (and IFSC, but as
against IFSC, the complaint was dismissed). He claims that his investment was co-mingled with
the monies of other investors to support the credit line facility of P700M which Abacus had
issued to IFSC.

RTC dismissed Tabujara’s complaint. CA reversed and ordered Abacus to pay Tabujara his P3M
investment with interest. Hence this petition.

ISSUE:
Whether Abacus is liable to Tabujara for his investment which Abacus in turn invested in IFSC.
HELD: YES.
1) An investment house is defined under PD 129 as an entity engaged in underwriting of
securities of other corporations. In turn, "underwriting" is defined as the act or process of
guaranteeing the distribution and sale of securities of any kind issued by another corporation;
while "securities" is therein defined as written evidences of ownership, interest, or participation,
in an enterprise, or written evidences of indebtedness of a person or enterprise. SC also cited the
definition of “securities” in SRC.

2) Contention: Abacus claims to have facilitated Tabujara’s purchase of debt instruments issued
by IFSC. It only purchased a unit of participation in loan agreement 0003 issued by IFSC for
Tabujara’s account using Tabujara’s money. Abacus claims that Tabujara directly transacted
with IFSC and its involvement is limited only to acting as collecting and paying agent for
Tabujara.
Held:
As it turns out, Abacus had an existing loan agreement with IFSC whereby it agreed to grant the
latter a credit line facility in the amount of P700,000,000.00. That Tabujara’s investment of P3M
was used as part of the pool of funds made available to IFSC is confirmed by the facts that it is
Abacus, not Tabujara, which was actually regarded as IFSC’s creditor in the rehabilitation plan
and Abacus even proposed to assign its rights to its “funders” in proportion to their participation.
Thus, it was really Abacus who was the creditor entitled to the proceeds of IFSC’s rehabilitation
plan, necessitating the assignment by Abacus of said proceeds to the source of funds, including
Tabujara.

3) Also, the transaction involved is akin to money market placements. "The money market is a
market dealing in standardized short-term credit instruments (involving large amounts) where
lenders and borrowers do not deal directly with each other but through a middle man or
dealer in the open market." The fundamental function of the money market device in its
operation is to match and bring together in a most impersonal manner both the "fund users" and
the "fund suppliers." The money market is an "impersonal market," free from personal
considerations. "The market mechanism is intended to provide quick mobility of money and
securities." A money market placement partakes of the nature of loan.

Here, Tabujara as the investor is the lender or “funder” who loaned his P3M to IFSC through
Abacus. Thus, Tabujara may recover from Abacus.