1. MARICALUM MINING CORP. v.
FLORENTINO others, to provide the latter with steady supply of workers, machinery
Tickler: Piercing the veil; GH acquiring 90% of Maricalum thru the
APT and PSA; the fear of complainants are unfounded. There is
control test, but the fraud and harm test were not proven.
Facts: PNB (a GOCC) and the DBP transferred their ownership of
Maricalum to the National Gov’t (NG) for disposition or privatization
because it had become a nonperforming asset.
NG thru the Asset Privatization Trust (APT) executed a Purchase
and Sale Agreement (PSA) with G Holdings (GH), a domestic corp
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primarily engaged in owning and holding shares of different
companies.
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GH bought 90% of Maricalum’s shares, claims and liabilities in the
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form of company notes. In exchange, PSA required GH to pay APT
671.1m with a downpayment of 98.7m and with the balance divided
into 4 installments payable over 10 years. As to the liabilities
assumed by GH, they were converted into 3 promissory notes (PN)
totaling 550m, which were secured by mortgages over some of
Maricalum’s properties.
A,
G
Upon signing of the PSA and paying the downpayment, GH
immediately took physical possession of Maricalum’s Sipalay Mining
Complex (SMC) and its facilities, and took full control of the latter’s
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management and operations.
LO
7 yrs later, the SIpalay Hospital was incorporated to provide medical
services to the general public.
SA
Some of Maricalum’s employees retired and formed several
manpower cooperatives. In 2000, each cooperatives executed
identical sets of MoA with Maricalum wherein they undertook, among
and equipment for a monthly fee.
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2001, Maricalum’s VP and resident Manager wrote a memo to the
cooperatives informing them that Maricalum has decided to stop its
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mining operations to avert continuing losses brought about by the
low metal prices and high cost of production.
The properties of Maricalum, which had been mortgaged to secure
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the PNs, were extrajudicially foreclosed and eventually sold to GH as
the highest bidder.
Sept 2010, some of Maricalum’s workers and some of Sipalay
Hospital’s employees, filed a complaint with the LA against GH and
its officers for illegal dismissal, underpayment and nonpayment of
salaries.
During the hearings, some of the complainants attested that, prior to
the formation of the cooperatives, their services were terminated by
Maricalum as part of its retrenchment program. They claimed that in
1999, they were called by the top executives of Maricalum and GH
and informed that they will have to form a cooperative for the
purpose of providing manpower services in view of the retrenchment
program. Thus, they were “rehired” only after their cooperative
services were formed.
After the hearings, complainants presented their position paper
claiming that they worked as augmentation force to the security
guards to secure Maricalum’s assets acquired by GH which have
been exposed to pilferage by some of its rank and file employees
whose claims for CBA benefits were undergoing litigation. That
Sipalay Hospital is purportedly “among the assets” of Maricalum
acquired by GH and the payrolls for their wages were supposedly
prepared by GH’s accounting dept.
Summary of complainants allegations:
● The manpower coops were mere alter egos of GH to subvert
tenurial rights of complainants;
● GH implemented a retrenchment scheme to dismiss the
caretakers it hired before the foreclosure of Maricalum’s assets;
● GH was their employer because it allegedly had the power to
hire, pay wages, control working methods and dismiss them.
GH:
● it was Maricalum who entered into an agreement cooperatives
for the employment of complainants’ services for auxiliary or
seasonal mining activities;
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● the cooperatives were the ones who paid the wages, deducted
social security contributions, withheld taxes, provided medical
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benefits and had control over the working means and methods
of complainants;
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● despite Maricalum’s decision to stop its mining and milling
operations, complainants still continued to render their services
for the orderly winding down of the mines’ operations;
● Maricalum should have been impleaded because it is supposed
to be the indispensable party in the present suit;
A,
● Maricalum, as well as the cooperatives, each have distinct legal
personalities and that their individual corporate liabilities cannot
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be imposed upon each other;
● there was no E-E relationship between GH and complainants.
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LA: In favor of complainants. GH is guilty of labor-only contracting
with the manpower cooperatives.
LO
NLRC: Modified. Sipalay Hospital has a separate and distinct
corporate personality. Imposed the liability to pay against Maricalum,
SA
not GH. It was Maricalum, not GH, who entered into service
contracts with the cooperatives.
CA: affirmed the NLRC. Maricalum is liable, not GH.
Issue: W/N the veil of Maricalum should be pierced to enforce the
claims against GH?
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Ruling: No. A subsidiary company’s separate corporate personality
may be disregarded only when the evidence shows that such
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separate personality was being used by its parent or holding corp to
perpetrate fraud or evade an existing obligation.
The doctrine of piercing applies only in 3 basic areas, namely:
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a. Defeat of public convenience;
- When the corporate fiction is used as a vehicle for the
evasion of an existing obligation.
b. Fraud cases;
- When the corporate entity is used to justify a wrong,
protect fraud, or defend a crime.
c. Alter ego cases
- Where the corp is merely a face since it is a mere alter
ego or business conduit of a person, or where the corp
is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corp.
Piercing is applied only to determine liability. However, it is frowned
upon and must be done with caution. This is because a corp is
invested by law with a personality separate and distinct from those of
the persons composing it as well as from that of any other legal
entity to which it may be related.
A parent of holding company is a corp which owns or is organized to
own a substantial portion of another company’s voting shares of
stock enough to control or influence the latter’s management,
policies or affairs thru election of the latter’s board of directors or
otherwise. However, the term “holding company” is customarily used
interchangeably with the term “investment company” which, in turn,
is defined as “any corp which is or holds itself out as being engaged
primarily, or proposes to engage primarily, in the business of
investing, reinvesting, or trading in securities.”
In other words, a “holding company” is organized and is basically
conducting its business by investing substantially in the equity
securities of another company for the purposes of controlling their
policies (not directly engaging in operating activities) and “holding”
them in a conglomerate or umbrella structure along with other
subsidiaries. Significantly, the holding company - being a separate
entity - does not own the assets of and does not answer for the
liabilities of the subsidiary or affiliate. The management of the
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subsidiary or affiliate still rests in the hands of its own board and
officers.
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While the veil of corporate fiction may be pierced, mere ownership of
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a subsidiary does not justify the imposition of liability on the parent
corp. It must appear first that the parent company had aided in the
consummation of a wrong. Thus, a holding corp has a separate
corporate existence and is to be treated as a separate entity,
UNLESS the facts show that such separate corporate existence is a
truth.
A,
mere sham, or has been used as an instrument for concealing the
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In this case, the complainants anchor their cause on the alter ego
theory. Under this theory, piercing may be allowed only if the
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following elements concur:
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1. Control (Test) - not mere stock control, but complete
domination not only of finances, but of policy and business
practice (in respect to the transaction attacked), that the
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corporate entity (as to the transaction) had no separate
mind, will, or existence of its own.
2. Fraud (Test) - such control must have been used by the
defendant to commit fraud or a wrong, to perpetuate the
violation of a statutory or other positive legal duty, or a
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dishonest and an unjust act in contravention of plaintiffs’
legal right; and
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3. Harm (Test) - said control and breach of duty must have
proximately caused the injury or unjust loss complaint of.
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All 3 elements must concur before the corporate veil may be pierced
under the alter ego theory. Absence of any of these elements
prevents piercing the corporate veil.
I. As regards the Control Test, the following are factors, among
others, may render a subsidiary an instrumentality, to wit:
1. Parent corp (PC) owns all or most of the capital stock of the
subsidiary (SC);
2. PC pays the salaries and other expenses or losses of the
SC;
In this case, there is no doubt that GH - being the majority and
controlling stockholder - had been exercising significant control over
Maricalum. Moreover, it is observed that Maricalum’s corporate name
appearing on the heading of the cash vouchers issued in payment of
the services rendered by the coops is being superimposed with GH’s
corporate name. Hence, it can be reasonably inferred that GH is
paying for Maricalum’s salary expenses. The presence of both
circumstances of dominant equity ownership and provision for salary
expenses may adequately establish that Maricalum is an
instrumentality of GH.
HOWEVER, mere presence of control and full ownership of a PC
over a SC is not enough to pierce the veil of corporate fiction.
II. As regards the Fraud Test, the corporate veil may be lifted only if 4. the transaction is entered into fraudulently in order to escape
it has been used to shield fraud, defend crime, justify a wrong, defeat liability for such debts.
public convenience, insulate bad faith or perpetuate injustice. The

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following factors, among others, in the “Totality of Circumstances If any of the exceptions are present, the transferee corp shall
Test” may be considered, to wit: assume the liabilities of the transferor.

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1. Commingling of funds and other assets of the corporation In this case, GH cannot be held liable for the satisfaction of
with those of the individual shareholders; labor-related claims against Maricalum under the Fraud Test for the
2. Use of the same office or business location by the following reasons:

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corporation and its individual shareholder(s);
3. Diversion of corporate assets from the corporation by or to a First, the transfer of some Maricalum’s assets in favor GH was by
stockholder or other person or entity to the detriment of virtue of the PSA as part of an official measure to dispose of the

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creditors, or the manipulation of assets and liabilities govt’s nonperforming assets — not to evade its monetary obligations
between entities to concentrate the assets in one and the to the complainants. Even before complainants’ monetary claims

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liabilities in another; supposedly existed in 2007, some of Maricalum’s assets had already
4. Contracting by the corporation with another person with the been validly extrajudicially foreclosed and eventually sold to GH in

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intent to avoid the risk of nonperformance by use of the 2001. Thus, GH could not have devised a scheme to avoid a
corporate entity; or the use of a corporation as a subterfuge nonexistent obligation. No fraud could be attributed to GH because
for illegal transactions. the transfer of assets was pursuant to a previously perfected valid
contract.
Aside from the aforementioned circumstances, it must be determined
A,
whether the transfer of assets from Maricalum to GH is enough to
invoke the equitable remedy of piercing. This was resolved in
Second, it was not proven that all of Maricalum’s assets were
transferred to GH or were totally depleted. Complainants never
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another case where the Court applied the “Nell Doctrine” that as a offered any evidence to establish that Maricalum had absolutely no
general rule, where one corp sells or transfers all of its assets to substantial assets to cover for their monetary claims. Their allegation
another corp, the latter is not liable for the debts and liabilities of the that their claims will be reduced to a mere “paper victory” has not
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transferor, except where: been confirmed with concrete proof.

LO

1. the purchaser expressly or impliedly agrees to assume such Third, GH purchased Maricalum’s shares from the APT not for the
debts; purpose of continuing the latter’s existence and operations but for
2. the transaction amounts to a consolidation or merger of the the purpose of investing in the mining industry without having to
SA

corporations; directly engage in the management and operation of mining. A

3. the purchasing corporation is merely a continuation of the holding company’s primary business is merely to invest in the equity
selling corporation; and of another corp for the purpose of earning from the latter’s
endeavors. It generally does not undertake to engage in the daily
operating activities of its subsidiaries. Thus, there should be proof transferred surreptitiously to GH. However, since complainants failed
that a holding company had indeed fraudulently used the separate to show that GH’s mere exercise of control had a clear hand in the
corporate personality of its subsidiary to evade an obligation before it depletion of Maricalum’s assets, no proximate cause was

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can be held liable. Since GH is a holding company, the corporate veil successfully established. The transfer of assets was pursuant to a
of its subsidiaries may only be pierced based on fraud or gross valid and legal PSA between GH and APT.

negligence amounting to bad faith.
Lastly, no clear and convincing evidence was presented by the
complainants to conclusively prove the presence of fraud on the part
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Therefore, complainants failed to satisfy the second (fraud) and third
(harm) tests to justify the application of the alter ego theory. Hence,
CA committed no reversible error in upholding the NLRC’s Decision

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of GH. declaring Maricalum as the proper party liable to pay the monetary
awards in favor of complainants.
Here, the complainants did not satisfy the requisite quantum of

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evidence to prove fraud on the part of GH. They merely offered
allegations and suppositions that, since Maricalum’s assets appear

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to be continuously depleting and that the same corp is a subsidiary,
GH could have been guilty of fraud. Bare allegations do not prove

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anything. There must be proof that fraud — not the inevitable effects
of a previously executed and valid contract such as the PSA — was
the cause of the latter’s total asset depletion. The presence of control
per se is not enough to justify the piercing of the corporate veil.

A,
III. As regards the Harm Test, it has been stressed that the control
necessary to invoke the alter ego rule is not majority or even
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complete stock control but such domination of finances, policies and
practices that the controlled corp has no separate mind, will or
existence of its own, and is but a conduit for its principal. The control
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must be shown to have been exercised at the time the acts

complained of took place. Moreover, the control and breach of duty
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must proximately cause the injury or unjust loss for which the
complaint is made.
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In this case, complainants have not yet even suffered any monetary
injury. They have yet to enforce their claims against Maricalum. The
complainants are merely anxious that their monetary awards will not
be satisfied because the assets of Maricalum were allegedly
THE MISSIONARY SISTERS OF OUR LADY OF FATIMA (PEACH
SISTERS OF LAGUNA [PSOL]), REPRESENTED BY REV.
MOTHER MA. CONCEPCION R. REALON, et al. v. AMANDO V.
ALZONA, et al.
Tickler: Legal status; not a de facto corp but a corporation by
estoppel; donation is valid.
Facts:
● PSOL is a religious and charitable group established under the
patronage of the Roman Catholic Bishop of San Pablo. Its
primary mission is to take care of the abandoned and neglected
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elderly persons.
● PSOL came into being as a corp by virtue of a certificate issued
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by the SEC on Aug 31, 2001. Mother Concepcion (MC) is
PSOL’s Superior General.
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● Respondents are the legal heirs of the late Purificacion Alzona.
● Purificacion, an unmarried woman, is the registered owner of
parcels of land covered by TCT 20 and 75 and a co-owner of
another property covered by TCT 80, all located in Calamba.
● In 1996, Purificacion, impelled by her unmaterialized desire to
A,
be a nun, decided to devote the rest of her life in helping others.
In the same year, she became a benefactor of PSOL by giving
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support to the community and its works.
● 1997, during a doctor’s appointment, Purificacion, accompanied
by MC, discovered that she has been suffering from lung
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cancer. Because of the restrictions in her movement,
Purificacion requested MC to take care of her in her house, to
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which the latter agreed.
● 1999, Purificacion called MC and handed her a handwritten
letter dated Oct 1999. In the letter, Purificacion donated her
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house and lot at Mercado Street and Riceland at Banlic, both at
Calamba, to PSOL through MC. On the same occasion,
Purificacion introduced MC to her nephew, Francisco, and
niece, Lourdes. Purificacion instructed Francisco to give a share
of the harvest to MC and informed Lourdes that she had given
her house to MC.
● Aug 2001, at the request of Purificacion, MC went to see Atty.
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Arcillas in Los Banos. During their meeting, Atty. Arcillas asked
MC whether their group is registered with the SEC to which MC
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replied no.
● Acting on the advice given by Atty. Arcillas, MC went to SEC
and filed the corresponding registration application on Aug 28,
2001.
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● Aug 29, 2001, Purificacion executed a Deed of Donation (DoD)
in favor of PSOL, conveying the properties covered by TCT 20
and 75, and her undivided share in TCT 80. The DoD was
notarized by Atty. Arcillas and witnessed by Purificacion’s
nephews Francisco and Diosdado, and grandnephew, Atty.
Fernando. The donation was accepted on the same date by MC
for and in behalf of PSOL.
● Thereafter MC filed an application before the BIR that PSOL be
exempted from donor’s tax as a religious organization. BIIR
granted on January 14, 2002
● Subsequently, the DoD, with the duplicate copies of the TCTs,
and the exemption letter from the BIR was presented for
registration. The RD denied the registration on account of the
affidavit of adverse claim dated Sept 26, 2001 filed by the
brother of Purificacion, Amando.
● Oct 30, 2001, Purificacion died and was survived only by her
brother, Amando, who also died during the pendency of this
case and is now represented and substituted by his legal heirs.
● April 9, 2002, respondents filed a complaint to annul the DoD on
the ground that at the time of the donation, PSOL was not
registered with the SEC and therefore has no juridical
personality and cannot legally accept the donation.
RTC: in favor of PSOL. at the time of the execution of the DoD,
PSOL was a de facto corp. PSOL’s incapacity cannot be assailed in
this case as it constitutes a collateral attack.
CA: Declared the DoD void. PSOL cannot be considered a de facto
corp considering that at the time of donation, there was no bona fide
attempt to incorporate.
Issue: W/N PSOL is a de facto corp?
Ruling: No. The filing of AOI and the issuance of the COI are
essential for the existence of a de facto corp. It is the act of
registration with the SEC through the issuance of a COI that marks
the beginning of an entity’s corporate existence.
PSOL filed its AOI on Aug 28, 2001. SEC issued the COI only on
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Aug 31, 2001, two days after Purificacion executed a DoD on Aug
29, 2001.
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Clearly, at the time the donation was made, PSOL cannot be
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considered a corporation de facto.
Rather, this case calls for the application of the doctrine of
corporation by estoppel:
A,
Corporation by estoppel - All persons who assume to act as
a corp knowing it to be without authority to do so shall be
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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
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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
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a defense its lack of corporate personality.
One who assumes an obligation to an ostensible
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corporation as such, cannot resist performance thereof
on the ground that there was in fact no corporation.
The doctrine of corp by estoppel is found on principles of equity and
is designed to prevent injustice and unfairness. It applies when a
nonexistent corp enters into contracts or dealings with third persons.
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In which case, the person who has contracted or otherwise dealt with
the nonexistent corp is estopped to deny the latter’s legal existence
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in any action leading out of or involving such contract or dealing.
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 working of the law which sets forth the
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doctrine of corporation by estoppel permits such interpretation. Such
that a person who has assumed an obligation in favor of a non
existent corp, having transacted with the latter as if it was duly
incorporated, is prevented from denying the existence of the latter to
avoid the enforcement of the contract.
The doctrine of corp by estoppel applies for as long as there is no
fraud and when the existence of the association is attacked for
causes attendant at the time the contract or dealing sought to be
enforced was entered into, and not thereafter.
In this case, Purificacion dealt with PSOL as if it were a corp. This is
evident from the fact that Purificacion executed 2 documents
conveying her properties in favor of PSOL - first, via handwritten
letter and second, through a DoD; the latter having been executed
the day after PSOL filed its application for registration with the SEC.
The doctrine of corp by estoppel rests on the idea that if the Court
were to disregard the existence of an entity which entered into a
transaction with a third party, unjust enrichment would result as some
form of benefit have already accrued on the part of one of the
parties. Thus, the Court affords upon the unorganized entity
corporate fiction and juridical personality for the sole purpose of
upholding the contract or transaction.
In this case, while the contract is a donation, and thus rooted on as a token of appreciation for the services they rendered to her
liberality, it cannot be said that Purificacion, as the donor failed to during her illness.
acquire any benefit so as to prevent the application of the doctrine of

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corp by estoppel. To recall, the subject properties were given by To put it differently, the reference to PSOL was merely a descriptive
Purification, as a token of appreciation for the services rendered to term used to refer to the sisters comprising the congregation

her during her illness. In fine, the subject DoD partakes of the nature
of a remuneratory or compensatory donation, having been made “for
the purpose of rewarding the donee for past services, which services
do not amount to a demandable debt.”
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collectively. Accordingly, the acceptance of MC for the sisters
comprising the congregation is sufficient to perfect the donation and
transfer title to the property to the petitioner. Ultimately, the
subsequent incorporation of PSOL and its affirmation of MC’s

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authority to accept on its behalf cured whatever defect that may have
Therefore, under the premises, past services constitutes attended the acceptance of the donation.
consideration, which in turn can be regarded as “benefit” on the part

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of the donor, consequently, there exists no obstacle to the application
of the doctrine of corp by estoppel; although strictly speaking, the

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PSOL did not perform these services on the expectation of
something in return.

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Precisely, the existence of the PSOL as a corporate entity is upheld
in this case for the purpose of validating the DoD to ensure that the
primary objective for which the donation was intended is achieved,
that is, to convey the property for the purpose of aiding the petitioner
A,
in the pursuit of its charitable objectives.
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In this controversy, while the initial conveyance is defective, the
genuine intent of Purificacion to donate the properties in favor of
PSOL is indubitable. Also, while the PSOL is yet to be incorporated,
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it cannot be said that the initial conveyance was tainted with fraud or
misrepresentation. Contrarily, Purificacion acted with full knowledge
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of the circumstances of PSOL. This is evident from Purificacion’s act

of referring MC to Atty. Arcillas, who, in turn, advised the petitioner to
apply for registration. Further, with the execution of two documents of
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conveyance in favor of the PSOL, it is clear that what Purificacion

intended was for the sisters comprising PSOL to have ownership of
her properties to aid them in the pursuit of their charitable activities,
3. LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES ● CA affirmed the RTC and held that Lim was a partner of Chua
and Yao in a fishing business and may thus be held liable as
Tickler: Corporation by estoppel; third party is also liable; liable as such for the fishing nets and floats.

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general partners.
Lim:

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Facts: ● There is no partnership between him, Yao and Chua.
● On behalf of “Ocean Quest Fishing Corp,” Antonio Chua and ● Disclaims any direct participation in the purchase of the nets.
Peter Yao entered into a contract for the purchase of fishing The negotiations were conducted by Chua and Yao only, and he
nets from PFGI. has not even met the representatives of PFGI.

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● Chua and Yao claimed that they were engaged in a business ● He was a lessor, not a partner, of Chua and Yao of the F/B
venture with petitioner Lim, who however was not a signatory to Lourdes.
the agreement. ● Under the doctrine of corporation by estoppel, liability can be

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● The total price for the nets amounted to 532k. 400 pcs of floats imputed only to Chua and Yao, and not to him.
worth 68k were sold to OQFC.

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● Chua and Yao failed to pay. Hence, PFGI filed a collection suit Issue: W/N the doctrine of corporation by estoppel applies only to
against Chua, Yao, and Lim with a prayer for attachment. Chua and Yao and not to Lim?

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● The suit was brought against the 3 in their capacities as general
partners, on the allegation that OQFC was a nonexistent corp Ruling: No. Under the Corp Code, all persons who assume to act as
as shown by a certification from the SEC. a corporation knowing it to be without authority to do so shall be
● The RTC issued a writ of attachment of the fishing nets on liable as general partners for all ebts, liabilities, and damages
board F/B Lourdes. incurred or arising as a result thereof. When any such ostensible
A,
● Instead of answering the complaint, Chua filed a manifestation
admitting his liability and requesting a reasonable time within
corp 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
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which to pay. He also turned over to PFGI some of the nets in defense its lack of corporate personality.
his possession.
● Yao filed an answer, after which he was deemed to have waived Those who act or purport to act as the representatives or agents of
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his right to present evidence and cross examine witness an ostensible corporate entity who is proven to be legally inexistent
because of his absences in subsequent hearings. do so without authority and at their own risk.
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● Lim filed an answer with counterclaim and crossclaim and

moved for the lifting of the writ of attachment. Even if the ostensible corporate entity is proven to be legally
● RTC maintained the writ and ordered the sale of the fishing nets nonexistent, a party may be estopped from denying its corporate
SA

at a public auction. PFGI won the bidding. existence. “The reason behind this doctrine is obvious—an
● RTC rendered its decision ruling that PFGI was entitled to the unincorporated association has no personality and would be
writ and that the 3, as general partners, were jointly liable to pay incompetent to act and appropriate for itself the power and attributes
PFGI. 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 Unquestionably, Lim benefited from the use of the nets found inside
purport to act as its representatives or agents do so without authority F/B Lourdes, the boat which has earlier been proven to be an asset
and at their own risk. And as it is an elementary principle of law that of the partnership. He in fact questions the attachment of the nets,

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a person who acts as an agent without authority or without a because the writ has effectively stopped his use of the fishing vessel.
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
AR
It is difficult to disagree with the RTC and the CA that Lim, Chua and
Yao decided to form a corporation. Although it was never legally
formed for unknown reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in representation of it.

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performed as such agent. Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid
The doctrine of corporation by estoppel may apply to the alleged existence, are held liable as general partners.

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corporation and to a third party. In the first instance, an
unincorporated association, which represented itself to be a Technically, it is true that Lim did not directly act on behalf of the

VI
corporation, will be estopped from denying its corporate capacity in a corporation. However, having reaped the benefits of a contract
suit against it by a third person who relied in good faith on such entered into by persons with whom he previously had an existing

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representation. It cannot allege lack of personality to be sued to relationship is deemed to be part of said association and is covered
evade its responsibility for a contract it entered into and by virtue of by the scope of the doctrine on corporation by estoppel.
which it received advantages and benefits. 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,
A,
may be barred from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who
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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.
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There is no dispute that the PFGI is entitled to be paid for the nets it
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sold. The only question here is whether Lim should be held jointly
liable with Chua and Yao. Lim contests such liability, insisting that
only those who dealt in the name of the ostensible corporation
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should be held liable. Since his name does not appear on any of the
contracts and since he never directly transacted with PFGI, hence,
cannot be held liable.
4. BATAAN SHIPYARD v. PCGG
Tickler: Right against self-incrimination has no application to juridical
persons.
Facts:
● BASECO challenges the E.O. 1 and 2 of Pres. Cory Aquino and
the sequestration, takeover, and other orders issued, and acts
done, in accordance with said EOs by the PCGG.
● The sequestration order complained of was the one that
directed the PCGG to sequester BASECO and produce certain
documents, to wit: stock transfer book, AOI, BL, minutes of
N
annual stockholders meetings from 1973-1986, minutes of
regular and special meetings of the board from 1973-1986,
VI
minutes of the executive committee meetings from 1973-1986,
existing contracts, list of stockholders with their stockholdings,
AR
financial statements, cash reports, inventory listings, schedule
of accounts receivable and payable, list of depository banks,
schedule of company investments. Failure to produce such
documents shall be punishable by contempt of the PCGG.
● BASECO argues that the order to produce corporate records
A,
from 1973 to 1986, which it has apparently complied with, was
issued without court authority and infringed its constitutional
G
right against self-incrimination, and unreasonable search and
seizure.
N
Issue: W/N the sequestration order and acts of the PCGG violated
the right of BASECO against self-incrimination and unreasonable
LO
searches and seizures?
Ruling: No. The right against self-incrimination has no application to
SA
judicial persons.
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.
L
Corporations are not entitled to all of the constitutional protections
AR
which private individuals have. They are not at all within the privilege
against self-incrimination, although this court more than once has
said that the privilege runs very closely with the Search and Seizure
provisions.
C
An officer of the company cannot refuse to produce its records in its
possession, upon the plea that they will either incriminate him or may
incriminate it.
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 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.
5. FILIPINAS BROADCASTING NETWORK (FBN) v. AGO
MEDICAL and EDUCATIONAL CENTER (AMEC)
Tickler: Generally, a juridical person is not entitled to moral
damages; if a corp has a good reputation which is besmirched, it
may be a ground for moral damages; 2219(7) provides for recovery
of moral damages in cases of libel regardless of whether the plaintiff
is a natural or juridical person.
Facts:
● Expose is a radio documentary program hosted by Rima and
Alegre. It is aired over DZRC-AM owned by FBN and heard
N
over in Albay and Bicol.
● Dec 1989, Rima and Alegre exposed various alleged
VI
complaints from students, teachers, and parents against AMEC
and its administrators.
AR
● Claiming defamation, AMEC and Ago, the Dean of the college
of medicine, filed a complaint for damages against FBN, Rima
and Alegre.
● Among the reports were the following:
1. If you fail a subject, you will repeat even those that you
A,
have passed;
2. Physical Therapy course is not recognized by DECS
G
3. Students are required to take and pay for a subject even
if the subject has no instructor - such greed for money.
4. AMEC has been surviving because of donations from
N
foreign foundations
5. AMEC administrators, in their effort to minimize
LO
expenses in terms of salary, are absorbing or continues
to accept rejects (teachers removed from other schools
because of immorality); that AMEC is a dumping ground,
SA
garbage, not merely of moral and physical misfits.
6. The dean is old and is just being exploited by AMEC.
RTC: FBN and Alegre are liable for libel to AMEC. Rima only agreed
to the expose.
L
CA: affirmed. Rima is also liable.
AR
Issue: W/N AMEC is entitled to moral damages?
Ruling: Yes. FBN contends that AMEC is not entitled to moral
damages because it is a corporation.
C
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, serious anxiety,
mental anguish or moral shock. The CA cites the Mambulao case to
justify the award of moral damages. However, the Court’s statement
in Mambulao that "a corporation may have a good reputation which,
if besmirched, may also be a ground for the award of moral
damages" is an obiter dictum.
Nevertheless, AMEC’s claim for moral damages falls under Article
2219(7) of the Civil Code. This provision expressly authorizes the
recovery of moral damages in cases of libel, slander or any
other form of defamation. Article 2219(7) does not qualify whether
the plaintiff is a natural or juridical person. Therefore, a juridical
person such as a corporation can validly complain for libel or any
other form of defamation and claim for moral damages.
Moreover, where the broadcast is libelous per se, the law implies
damages. In such a case, evidence of an honest mistake or the want
of character or reputation of the party libeled goes only in mitigation
of damages. Neither in such a case is the plaintiff required to
introduce evidence of actual damages as a condition precedent to
the recovery of some damages. In this case, the broadcasts are
libelous per se. Thus, AMEC is entitled to moral damages.
6. GOLD LINE TOURS v. HEIRS OF MARIA CONCEPCION
LACSA
Tickler: Piercing the veil; corporate fiction cannot be used as a
shield to defeat the ends of justice; bus accident; TTA and GLT are
one and the same; amended the AOI 3 months after the accident.
Facts:
● Aug 2, 1993, Cocepcion and her sister, Miriam, boarded a
Goldline bus owned and operated by Travel & Tours Advisers
(TTA).
● They were enroute from Sorsogon to Cubao. That time,
N
Concepcion had just obtained her degree in Nursing from
AMEC and was proceeding to Manila to take the board exam.
VI
● Upon reaching the highway at CamSur, the Goldline bus, driven
by Abania, collided with a passenger Jeepney driven by Belbis.
AR
● As a result, a metal part of the jeep was detached and struck
Concepcion, who was seated behind the driver’s seat, in the
chest. She died.
● Aug 23, 1993, Concepcion’s heirs instituted a suit against TTA
and Abania to recover damages from breach of COC.
A,
● Miriam testified that Abania had been occasionally looking up at
the video monitor installed in the front portion of the bus despite
G
driving at fast speed; that the collision happened while the bus
was in the process of overtaking another bus; that concerned
bystanders hailed another bus to rush Concepcion to the
N
Hospital because the Goldline bus employees had ignored
Miriam’s cries for help.
LO
● According to the investigation report, the jeepney driver had
been at fault. Cheng, the bus operator, also interposed the due
diligence required of him.
SA
RTC: In favor of Concepcion. TTA failed to exercise EOD.
CA: dismissed the appeal for failure to pay docket fees within the
required period.
L
● CA DISMISSAL BECAME FINAL, AND ENTRY OF
JUDGMENT WAS MADE ON JULY 17, 1998.
AR
● The heirs moved for a writ of execution. RTC granted and
issued the writ.
● The sheriff implementing the writ rendered a partial return,
certifying that the writ had been personally served and a copy
C
had been duly tendered to TTA or Cheng and that Cheng failed
to settle the judgment amount. Accordingly, a tourist bus with a
plate number 883 was levied.
● April 20, 2001, GLT submitted a third party claim, claiming that
the tourist bus that was levied be returned to them because
they were the owner and that they were not made a party to the
civil case; that they are a corporation entirely different from TTA.
● It is notable that GLT’s AOI was amended 3 months after the
filing of the case against TTA.
● The heirs opposed the third party claim alleging that TTA and
GLT were identical entities operated and managed by the same
person, Cheng, and that GLT was attempting to defraud the
heirs, hence, the doctrine of piercing the veil of corporate entity
is applicable.
RTC: dismissed the third party claim. TTA cannot be divorced from
that of GLT considering that Cheng claimed to be the operator as
well as the President, Manager, and Incorporator of both entities.
That TTA had been known in Sorsogon as Goldline.
CA: Affirmed.
Issue: W/N TTA and GLT are one and the same?
Ruling: Yes.
The documents submitted by the GLT disclosed that Ching who Moreover, the name Goldline was added to TTA’s name in the
claimed to be the operator of the TTA is also the President/Manager Complaint. There was no objection from William Ching who could
and incorporator of the GLT and he is joined by his co-incorporators have raised the defense that GLT was in no way liable or involved.

L
who are “Ching” and “Dy.” Therefore, these two corporations are one Indeed it appears to this Court that rather than TTA it is GLT, which
and the same corporations. This is of judicial knowledge that since should have been named party defendant.

TTA came to Sorsogon it has been known as GOLDLINE.
SC is not persuaded by the proposition of GLT that a corporation has
an existence separate and/or distinct from its members insofar as
AR
Be that as it may, We concur in the RTC’s finding that the 2
companies are actually one and the same, hence the levy of the bus
in question was proper.

C
this case at bar is concerned, for the reason that whenever
necessary for the interest of the public or for the protection of The RTC thus rightly ruled that GLT might not be shielded from
enforcement of their rights, the notion of legal entity should not and is liability under the final judgment through the use of the doctrine of

N
not to be used to defeat public convenience, justify wrong, protect separate corporate identity. Truly, this fiction of law could not be
fraud or defend crime. employed to defeat the ends of justice.

VI
In the case of Palacio v. Fely Transportation, we held that:

AR
“Where the main purpose in forming the corporation was to evade
one’s subsidiary liability for damages in a criminal case, the
corporation may not be heard to say that it has a personality
separate and distinct from its members, because to allow it to do so
A,
would be to sanction the use of fiction of corporate entity as a shield
to further an end subversive of justice.”
G
As stated in the (RTC) decision, Ching disclosed during the trial that
TTA, of which he is an officer, is operating 60 units of Goldline buses.
N

That the Goldline buses are used in the operations TTA is obvious
from Mr. Cheng’s admission. The Amended AOI of GLT disclose that
LO

the following persons are the original incorporators thereof: Antonio

O. Ching, Maribel Lim Ching, witness William Ching, Anita Dy Ching
and Zosimo Ching. We see no reason why TTA would be using
SA

Goldline buses in its operations unless the two companies are

actually one and the same.
7. CALIFORNIA MANUFACTURING (CM) v. ADVANCED the new management of CM that she was authorized to request
TECHNOLOGY SYSTEMS (ATS) the offsetting of PPPC’s obligation with ATS’ receivables.
● When ATS filed a suit, PPPC’s debt amounted to 10.7m. Based

L
Tickler: Piercing the veil must be done with caution; Alter ego on the aforementioned instances, legal compensation had set in
doctrine; control, fraud, and harm test are all absent. and that ATS was even liable for the balance of PPPC’s unpaid

AR
obligation after deducting the rentals from the machine.
Facts:
● CM is a domestic corp engaged in food and beverage RTC: In favor of ATS. PPPC has a separate legal personality from
manufacturing. ATS and there was no board resolution or any other proof showing

C
● ATS is also a domestic corp that fabricates and distributes food that the VP’s proposal to set off had been authorized by the 2 corps.
processing machines and equipment, parts, and allied products.
● CM leased from ATS a machine used to pack products in 20ml CA: affirmed. Piercing cannot apply. There must be clear and

N
pouches. convincing proof that ATS and PPPC’s separate personalities are
● The parties agreed to a monthly rental of 98k exclusive of tax. being used as shield to commit fraud or any wrong against CM.

VI
● Upon receipt of an open purchase order, ATS delivered the
machine to CM at General Trias Cavite. CM’s Argument:

AR
● ATS filed a complaint for sum on money against CM to collect ● Interlocking board of directors, incorporators, and majority
unpaid rentals for 4 months. stockholder;
● CM averred that ATS was one and the same with Processing ● Control of the 2 corps by spouses Celones;
Partners and Packaging Corp (PPPC), which was a toll packer ● 2 corps were mere alter egos or business conduits of each
of CM products. In support of this, CM submitted copies of the other
A,
AOI and General Information Sheet (GIS) of the 2 corporations.
● CM pointed out that ATS was even a stockholder of PPPC. Issue: W/N piercing the veil may apply in this case?
G
● CM alleged that in 2000, PPPC agreed to transfer the
processing of CM’s product line from its factory in Bulacan. Ruling: No. Any piercing of the corporate veil must be done with
Upon request of PPPC, CM advanced 4m mobilization fund. caution. It must be certain that the corporate fiction was misused to
N

PPPC allegedly committed to pay the amount in 12 equal such an extent that injustice, fraud, or crime was committed against
installments deductible from PPPC’s monthly invoice to CM. another, in disregard of rights. The wrongdoing must be clearly and
LO

● CM likewise claims that PPPC’s VP, through a letter, proposed convincingly established.
to set off PPPC’s obligation to pay the mobilization fund with the
rentals for ATS’ machine.
SA

● CM argued that the proposal was binding on both PPPC and

ATSI because PPPC’s VP was an officer and a majority
stockholder of the 2 corps. That the VP of PPPC represented to
The doctrine of piercing the corporate veil applies only in 3 basic
areas, namely:
a. Defeat of public convenience;
- When the corporate fiction is used as a vehicle for the
evasion of an existing obligation.
b. Fraud cases;
- When the corporate entity is used to justify a wrong,
protect fraud, or defend a crime.
c. Alter ego cases
- Where the corp is merely a face since it is a mere alter
ego or business conduit of a person, or where the corp
N
is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality,
VI
agency, conduit or adjunct of another corp.
AR
CM’s alter ego theory rests on the alleged interlocking board of
directors and the stock ownership of the 2 corps. However, mere
ownership by a single stockholder of even all or nearly all of the
capital stocks of a corp, by itself, is not sufficient ground to disregard
the corporate veil.
A,
The instrumentality/control test of the alter ego doctrine requires not
G
mere majority or complete stock control, but complete domination of
finances, policy, and business practice with respect to the transaction
in question. The corporate entity must be shown to have no separate
N
mind, will, or existence of its own at the time of the transaction.
LO
Without question, the spouses Celos are incorporators, directors,
and majority stockholders of the ATS and PPC. But that is all that CM
has proven. There is no proof that PPPC controlled the financial
SA
policies and business practices of AATS when PPPC’s VP proposed
to set off the unpaid mobilization fund with CM’s rental of ATS’
machines or when the lease agreement between CM and ATS
commeeced.
Assuming arguendo that PPPC’s VP was clothed with authority to
propose the offsetting, her proposal cannot bind ATS because at that
time the latter had no transaction yet with CM. Besides, CM had
L
leased only one machine. PPPC’s VP reference to the “machines” in
its letter could only mean that those were different from the machine
AR
that CM had leased from ATS.
Contrary to the claim of CM, none of the letters from the spouses
Celones tend to show that ATS was even remotely involved in the
C
proposed offsetting of the outstanding debts of CM and PPPC. Even
the PPPC’s VP letter to the new management of CM contains
nothing to support CM’s argument that the VP represented herself to
be clothed with authority to propose the offsetting.
In all its pleadings, CM averred that the 4m mobilization fund was in
furtherance of its agreement with PPPC. Prior thereto, PPPC had
been a toll packer of its products. Clearly, CM had been dealing with
PPPC as a distinct juridical person for 7 years (1996-2003). CM’s
dealings with ATS began only in 2001. It appears however, that CM
was the court to look at the separate corporate existence of ATS and
PPPC notwithstanding the absence of evidence showing either
PPPC or ATS used their corporate cover to commit fraud or evade
their respective obligations to CM.
The fraud test under the alter ego doctrine requires that the parent
corp’s conduct in using the sub-corp be unjust, fraudulent, or
wrongful. Under the Harm test, a causal connection between the
fraudulent conduct committed through the instrumentality of the
sub-corp and the injury suffered or the damage incurred by CM has
to be established. None of these elements have been demonstrated
in this case.
8. ZAMBRANO v. PHILIPPINE CARPET
Tickler: Corporate personality; piercing the veil; interlocking
directors, officers, and shareholders is not enough to pierce the veil
in the absence of fraud or other public policy considerations; asset
transfer, transferee is not liable for debts and liabilities of transferor.
Facts:
● Petitioners claim that they were employees of PC.
● Jan 3, 2011, there were notified of the termination of their
employment effective 1 month thereafter on the ground of
cessation of operation due to serious business losses.
N
● Petitioners believe that the closure of PC was a mere pretense
to transfer its operations to its wholly-owned and controlled
VI
corporation, Pacific Carpet (PAC).
● Petitioners claimed that the job orders of some regular clients of
AR
PC were transferred to PAC and that several machines were
moved from the premises of PC to PAC.
● Petitioners claimed unfair labor practice.
● PC countered that it permanently closed and ceased operations
because of the steady decline in the demand for its products
market.
A,
due to global recession, stiffer competition, and changing
G
● PC claimed that it complied with the requisites for closure or
cessation of business under the Labor code and served
petitioners and DOLE written notices 1 month prior to closure.
N
LA: in favor of PC.
LO
NLRC: affirmed.
SA
CA: affirmed.
● Petitioners’ claim that their termination was a mere pretense
was unfounded;
● Mere ownership by a single stockholder or by another corp of all
or nearly all of the capital stock of a corp is not of itself sufficient
ground for disregarding the separate corporate personality.
L
Issue: W/N PAC may be held liable for PC’s obligation?
AR
Ruling: No.
PAC has a personality separate and distinct from PC.
C
A corp is an artificial being created by operation of law. It possesses
the right of succession and such powers, attributes, and properties
expressly authorized by law or incident to its existence. It has a
personality separate and distinct from the persons composing it, as
well as from any other legal entity to which it may be related.
Equally well-settled is the principle that the corporate mask may be
removed or the corporate veil pierced when the corp is just an alter
ego of a person or of another corp. For reasons of public policy and
in the interest of justice, the corporate veil will justifiably be impaled
only when it becomes a shield for fraud, illegality or inequity
committed against third persons.
Hence, any application of the doctrine of piercing should be done
with caution. It must be certain that the corporate fiction was misused
to such an extent that injustice, fraud, or crime was committed
against another, in disregard of rights. The wrongdoing must be
clearly and convincingly established; it cannot be presumed.
Otherwise, an injustice that was never unintended may result from
an erroneous application.
The doctrine of piercing the corporate veil applies only in 3 basic
areas, namely:
a. Defeat of public convenience;
 - When the corporate fiction is used as a vehicle for the None of the tests has been satisfactorily met in this case.
evasion of an existing obligation.
Although ownership by one corp of all or a great majority of stocks of

L
b. Fraud cases; another corp and their interlocking directorates may serve as indicia
- When the corporate entity is used to justify a wrong, of control, by themselves and without more, these circumstances are

protect fraud, or defend a crime.
c. Alter ego cases
- Where the corp is merely a face since it is a mere alter
AR
insufficient to establish an alter ego relationship or connection
between PC on the one hand and PAC on the other hand, that will
justify the puncturing of the latter’s corporate cover.

C
ego or business conduit of a person, or where the corp
is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality,

N
agency, conduit or adjunct of another corp.

VI
In this connection, case law lays down a three-pronged test to
determine the application of the alter ego theory, which is also known

AR
as the instrumentality theory, namely:

(1) Control Test - 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
A,
the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
G
(2) Fraud Test - Such control must have been used by the
defendant to commit fraud or wrong, to perpetuate the violation of a
N

statutory or other positive legal duty, or dishonest and unjust act in

contravention of plaintiff’s legal right; and
LO

(3) Harm Test - The aforesaid control and breach of duty must

have proximately caused the injury or unjust loss complained of.
SA

Piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements. The absence of any of these
elements prevents piercing the corporate veil.
9. KUKAN INTERNATIONAL CORPORATION v. REYES
Tickler: Piercing the veil is a means to determine liability, not of
jurisdiction; due process; corp not impleaded cannot be subject to
piercing; mere ownership by a single stockholder of majority of the
stocks; paid up capital is merely seed money
Facts:
● March 1998, Kukan conducted a bidding for the supply and
installation of signages in a building being constructed in Makati
● Morales tendered the winning bid and was awarded the 5m
contract. Some items in the project award were later excluded
N
resulting in the reduction of the contract price to P3,388,502.
● Despite compliance with his undertakings, Morales was only
VI
paid P1,976,371, leaving a balance of P1,412,130, which Kukan
refused to pay.
AR
● Morales filed a complaint for sum of money. Kukan answered.
Trial ensued
● Nov 2000, Kukan no longer appeared and participated in the
proceedings. RTC declared it in default.
● RTC rendered a decision finding for Morales. The decision
execution.
A,
became final and executory. Morales moved for a writ of
G
● The sheriff levied various personal properties found at what was
supposed to be Kukan’s office at Makati.
● Alleging that it was a different corp from Kukan, KIC filed a third
N
party claim.
● Notably, KIC was incorporated in Aug 2000.
LO
● Morales moved to pierce the veil, that an order be issued for the
satisfaction of the judgment debt of Kukan with the properties
under the name or in the possession of KIC, it being alleged
SA
that both corps are one and the same entity. (RTC DENIED)
● Morales filed a motion for examination of Judgment Debtors
where Morales sought that subpoena be issued against the
primary stockholders of Kukan, among them Chan. (RTC
DENIED)
● Morales sought that Judge Peralta be inhibited. The case was
L
re-raffled to Judge Reyes.
● Morales filed a motion to pierce to declare KIC as having no
AR
existence separate and distinct from Kukan. RTC granted.
● CA affirmed.
Issue: W/N the piercing of Kukan and KIC’s veil were proper?
C
Ruling: No.
Whether the separate personality of the corporation should be
pierced hinges on obtaining facts appropriately pleaded or proved.
While a corporation may exist for any lawful purpose, the law will
regard it as an association of persons or, in case of two corporations,
merge them into one, when its corporate legal entity is used as a
cloak for fraud or illegality. This is the doctrine of piercing the veil of
corporate fiction. The doctrine applies only when such corporate
fiction is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, or when it is made as a shield to confuse
legitimate issues.
To disregard the separate juridical personality of a corp, the
wrongdoing must be established clearly and convincingly. It cannot
be presumed.
KIC maintains that the RTC violated its right to due process when, in
the execution of its Decision, the court authorized the issuance of the
writ against KIC for Kukan’s judgment debt, albeit KIC has never
been a party to the underlying suit.
As a counterpoint, Morales argues that KIC’s specific concern on due
process and on the validity of the writ to execute the RTC’s Decision
would be mooted if it were established that KIC and Kukan are ADDITIONAL NOTES:
indeed one and the same corporation.
RTC brushed aside the separate corporate existence of Kukan and

L
Morales is wrong. KIC on the main argument that Chan owns 40% of the common
shares of both corps, obviously oblivious that overlapping stock

The principle of piercing the veil, and the resulting treatment of
two related corps as one and the same juridical person with respect
to a given transaction, is basically applied only to determine
established liability; it is not available to confer on the court a
AR
ownership is a common business phenomenon. It must be
remembered, however, that KIC’s properties were the ones seized
upon levy on execution and not that of Kukan or of Chan for that
matter. Mere ownership by a single stockholder or by another

C
jurisdiction it has not acquired, in the first place, over a party corporation of a substantial block of shares of a corporation does
not impleaded in a case. A corp not impleaded in a suit cannot be not, standing alone, provide sufficient justification for disregarding the
subject to the court’s process of piercing the veil. In that situation, the separate corporate personality. For this ground to hold sway in this

N
court has not acquired jurisdiction over the corp and, hence, any case, there must be proof that Chan had control or complete
proceedings taken against that corp and its property would infringe dominion of Kukan and KIC’s finances, policies, and business

VI
on its right to due process. practices; he used such control to commit fraud; and the control was
the proximate cause of the financial loss complained of by Morales.

AR
Piercing the veil of corporate entity applies to determination of The absence of any of the elements prevents the piercing of the
liability not of jurisdiction. x x x This is so because the doctrine of corporate veil. And indeed, the records do not show the presence of
piercing the veil of corporate fiction comes to play only during the these elements.
trial of the case after the court has already acquired jurisdiction over
the corporation. Hence, before this doctrine can be applied, based
A,
on the evidence presented, it is imperative that the court must first
have jurisdiction over the corporation.
G
The implication of the above comment is twofold:
(1) the court must first acquire jurisdiction over the corporation or
N

corporations involved before its or their separate personalities are

disregarded; and
LO

(2) the doctrine of piercing the veil of corporate entity can only be
raised during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the authority of the
SA

court by way of service of summons or what passes as such service.

10. INTERNATIONAL ACADEMY OF MANAGEMENT AND ● Second, the real property was transferred to IAME during the
ECONOMICS (IAME) v. LITTON AND COMPANY (LAC) pendency of the appeal for the revival of the judgment in the
ejectment case.

L
Tickler: Corporate personality; Piercing the veil; equitable owner; ● Third, the RD of Makati issued TCT 65 only on Nov 17, 1993,
outsider reverse piercing; tinago ung property sa corp para di 14 years after the execution of the deed of sale and more than

AR
makuha. 8 years after IAME was incorporated.

Facts: Issue: W/N piercing the veil of IAME was proper?

● Santos, a lessee to 2 buildings owned by LAC, owed the latter

C
rental arrears as well as his share of the payment of realty tax. Ruling: Yes.
● LAC filed a complaint for unlawful detainer against Santos.
METC ruled in LAC’s favor and ordered Santos to vacate and IAME avers that its right to due process was violated when it was

N
pay unpaid arrears, realty taxes, and penalty. dragged into the case and its real property made an object of a writ
● The judgment was not executed. LAC filed an action for revival of execution in a judgment against Santos. It argues that since it was

VI
which was granted by RTC and affirmed by the CA and became not impleaded in the main case, the court a quo never acquired
final and executory March 22, 1994. jurisdiction over it.

AR
● Nov 11, 1996, the sheriff levied on a piece of real property
covered by TCT 65, registered in the name of IAME, to execute In general, corporations, whether stock or nonstock, are treated as
the judgment against Santos. The annotations on the TCT separate and distinct legal entities from the natural persons
indicated that such levy was “only up to the extent of the share composing them. The privilege of being considered a distinct and
of Santos.” separate entity is confined to legitimate uses, and is subject to
A,
● IAME filed a motion to lift or remove annotations. It claimed that
it has a separate and distinct personality from Santos; hence, its
equitable limitations to prevent its being exercised for fraudulent,
unfair or illegal purposes. However, once equitable limitations are
G
properties should not be made to answer forr Santos’ liabilities. breached using the coverture of the corporate veil, courts may step
This motion was granted by the MeTC. in to pierce the same.
● Litton elevated the case to the RTC. the RTC reversed and
N

reinstated the annotation. IAME went to the CA. The piercing of the corporate veil is premised on the fact that the
corporation concerned must have been properly served with
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CA: Affirmed the RTC. It took note of how Santos had utilized IAME summons or properly subjected to the jurisdiction of the court a quo.
to insulate the Makati real property from the execution of judgment. Corollary thereto, it cannot be subjected to a writ of execution meant
Piercing is proper. for another in violation of its right to due process.
SA

● First, the deed of sale dated 1979 indicated that Santos, being
the President, was representing I/AME as the vendee. However There exists, however, an exception to this rule: if it is shown “by
records show that it was only in 1985 that IAME was organized clear and convincing proof that the separate and distinct personality
as a juridical entity. of the corporation was purposefully employed to evade a
legitimate and binding commitment and perpetuate a fraud or In determining the propriety of applicability of piercing the veil, this
like wrongdoings.” Court, in a number of cases, did not put in issue whether a
corporation is a stock or nonstock corporation.

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The resistance of the Court to offend the right to due process of
a corporation that is a nonparty in a main case, may The IAME also insists that piercing cannot be applied to a natural

disintegrate not only when its director, officer, shareholder,
trustee or member is a party to the main case, but when it finds
facts which show that piercing of the corporate veil is merited.
AR
person simply because as a human being, he has no corporate veil
shrouding or covering his person.
We disagree. Piercing the corporate veil may apply to natural

C
In this case, the Court confirms the lower courts’ findings that Santos persons in 2 instances, namely, when the corp is the alter ego of a
had an existing obligation based on a court judgment that he owed natural person and in cases of reverse piercing.
monthly rentals and unpaid realty taxes under a lease contract he

N
entered into as lessee with the Littons as lessor. He was not able to The alter ego doctrine is based upon the misuse of a corp by an
comply with this particular obligation, and in fact, refused to comply individual for wrongful or inequitable purposes, and in such case the

VI
therewith. court merely disregards the corporate entity and holds the individual
responsible for acts knowingly and intentionally done in the name of

AR
This Court agrees with the CA that Santos used I/AME as a means the corp. This, Santos has done in this case. Santos formed IAME,
to defeat judicial processes and to evade his obligation to Litton. using the nonstock corporation, to evade paying his judgment
Thus, even while I/AME was not impleaded in the main case and yet creditor, Litton.
was so named in a writ of execution to satisfy a court judgment
against Santos, it is vulnerable to the piercing of its corporate veil. In cases of reversed piercing, Litton, as judgment creditor, seeks the
A,
I/AME argues that the doctrine of piercing the corporate veil applies
Court’s intervention to pierce the corporate veil of IAME in order to
make its Makati real property answer for a judgment against Santos,
G
only to stock corporations, and not to nonstock, nonprofit who formerly owned and still substantially controls IAME.
corporations such as I/AME since there are no stockholders to hold
liable in such a situation. Hence, they do not have investments or
N

shares of stock or assets to answer for possible liabilities. Thus, no

one in a nonstock corporation can be held liable in case the
LO

corporate veil is disregarded or pierced.

Since the law does not make a distinction between a stock and a
SA

nonstock corporation, neither should there be a distinction in case

the doctrine of piercing has to be applied.
11. DUTCH MOVERS INC. v. LEQUIN ● In their opposition to the motion to implead, Sps. Smith alleged
that as part of their services as lawyers, they lent their names to
Tickler: corporate personality; piercing; final judgment and on petitioners to assist them in incorporating DMI. After such

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execution; violation of labor laws; hiding from being associated with undertaking, Sps. Smith transferred their supposed rights in
the corp DMI in favor of petitioners.

AR
● Sps. Smith stressed that they never participated in the
Facts: management and operations of DMI, and they were not its
● This case arose from an illegal dismissal complaint filed by stockholders, directors, officers, or managers at the time
respondents against DMI, and/or Sps. Lee, its alleged respondents were terminated.

C
President/Owner and manager respectively. ● April 1, 2009, LA Savari issued an order holding petitioners
● DMI is engaged in hauling LPG. It employed Lequin as truck liable for the judgment award.
driver and the other respondents as helpers. ● Respondents filed a new reiterated motion for writ of execution

N
● Dec 2004, Lee, through the supervisor, Furio, informed them which LA savarri granted.
that DMI would cease its operation for no reason. As such, ● Petitioners moved to quash the writ of execution contending

VI
respondents requested DMI to issue a formal notice regarding that the April 1, 2009 LA order was void; LA has no jurisdiction
the matter, but to no avail. to modify the final and executory NLRC decision.

AR
● Upon respondents’ request, DOLE issued a certification
revealing that DMI did not file any notice of business closure. LA: denied motion to quash
This. respondents alleged illegal dismissal.
● LA dismissed for lack of cause of action. NLRC reversed. NLRC: quashed the writ of execution. The writ should only pertain to
● Dec 30, 2007, the NLRC decision became final and executory. DMI since petitioners were not held liable under the final and
A,
● Respondents motioned for a writ of execution.
● Later, respondents filed a manifestation stating that upon
executory NLRC decision.
G
investigation, they discovered that DMI no longer operates. CA: Reversed NLRC decision and affirmed the writ of execution
Nevertheless, they insisted that the petitioners - who managed impleeding petitioners. As a rule, a final judgment cannot be altered
and operated DMI - continue to work at Toyota Alabang, which or modified; exception is when there is a supervening event, which
N

petitioners also own and operate. renders the execution of judgment unjust or impossible.
● Respondents further averred that the AOI of DMI did not include
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petitioners as its directors or officers and that the creation and Issue: W/n the DMI’s veil should be pierced?
operation of DMI was attended with fraud making it convenient
for petitioners to evade their legal obligations. Ruling: Yes. While a corp has a separate and distinct personality
SA

● With these developments, respondents prayed that petitioners, from its stockholders, and from other corps it may be connected with.
and the officers named in DMI’s AOI (Spouses Smith), be Such personality may be disregarded, or the veil of corporate fiction
impleaded, and be held solidarily liable with DMI in paying the may be pierced attaching personal liability against responsible
judgment awards. person if the corporation’s personality “is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or is used
as a device to defeat the labor laws x x x.” Responsible person
refers to an individual or entity responsible for, and who acted in bad
faith in committing illegal dismissal or in violation of the Labor Code;
or one who actively participated in the management of the
corporation.
Here, the veil of corporate fiction must be pierced and petitioners
should be held personally liable for judgment awards 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
N
mind of its own, and used DMI as shield in evading legal liabilities,
including payment of the judgment awards in favor of respondents.
VI
First, petitioners and DMI jointly filed their Position Paper, Reply, and
AR
Rejoinder in contesting respondents’ illegal dismissal. While they
argued that they were not part of DMI and were not privy to its
dealings; yet, petitioners, along with DMI, collectively raised
arguments on the illegal dismissal case against them. They denied
having any participation in the management and operation of DMI;
A,
however, they were aware of and disclosed the circumstances
surrounding respondents’ employment, and propounded arguments
G
refuting that respondents were illegally dismissed.
Petitioners revealed the annual compensation of respondents and
N
their length of service; they also set up the defense that respondents
were merely project employees, and were not terminated but that
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DMI’s contract with its client was discontinued.
Petitioners could have revealed who operated it, and from whom
SA
they derived the information in their pleadings. Such failure to reveal
gives credence to respondents’ stand that petitioners are no
strangers to DMI, and that they were the ones who managed and
operated it.
Second, the declarations made by Sps. Smith further bolster that
petitioners controlled DMI.
L
Sps. Smith identified petitioners as the owners and managers of
DMI. In their Motion to Quash, however, petitioners neither denied
AR
the allegation of Sps. Smith nor adduced evidence to establish that
they were not the owners and managers of DMI. They simply
insisted that they could not be held personally liable because of the
immutability of the final and executory NLRC Decision, and of the
C
separate and distinct personality of DMI.
Third, piercing the veil of is allowed, and responsible persons may be
impleaded, and be held solidarily liable even after final judgment
and on execution, provided that such persons deliberately used the
corporate vehicle to unjustly evade the judgment obligation, or
resorted to fraud, bad faith, or malice in evading their obligation.
In this case, petitioners were impleaded from the inception of this
case. They had ample opportunity to debunk the claim that they
illegally dismissed respondents, and that they should be held
personally liable for having controlled DMI and actively participated
in its management, and for having used it to evade legal obligations.
While one’s control does not by itself result in the disregard of
corporate fiction; however, considering the irregularity in the
incorporation of DMI, then there is sufficient basis to hold that such
corporation was used for an illegal purpose, including evasion of
legal duties to its employees, and as such, piercing is warranted. The
act of hiding behind the cloak of corporate fiction will not be allowed
in such situation where it is used to evade one’s obligations.
Clearly, petitioners should be held liable for the judgment awards as
they resorted to such scheme to countermand labor laws by causing
the incorporation of DMI but without any indication that they were
part thereof.
12. DE LA SALLE MONTESSORI INTERNATIONAL OF MALOLOS courses of study in pre-elementary, elementary, and secondary
INC., (DLSM) v. DE LA SALLE BROTHERS INC. (DLSB) education.
● SEC en banc affirmed the SEC order and held that the term “De

L
Tickler: Corporate names; identical or deceptively or confusingly La Salle” is not generic for the principle in the Lyceum case to
similar; prior registrants’ right to use; SEC’s duty to prevent confusion apply.

AR
● The CA affirmed the SEC.
Facts:
● DSLM reserved with the SEC its corporate name from June 4 to Issue: W/N DLSM may retain their corporate name?
Aug 3, 2007, after which the SEC endorsed DSLM’s AOI and

C
BL to DepED for comments and recommendation. Ruling: No. A corp’s right to use its corporate and trade name is a
● DepEd returned the endorsement without any objections. property right, a right in rem, which it may assert and protect against
● SEC issued a COI to DLSM. Afterwards, DepEd Region 3 the world in the same manner as it may protect its tangible property,

N
granted DLSM gov’t recognition for its pre-elementary and real or personal, against trespass or conversion and one which
elementary courses on June 30, 2008 and for its secondary cannot be impaired or defeated by subsequent appropriation by

VI
courses on Feb 15, 2010. another corp in the same field.
● Jan 29, 2010, respondents filed a petition with SEC to compel

AR
DLSM to change its corporate name, claiming that DLSM’s A name is peculiarly important as necessary to the very existence of
corporate name is misleading or confusingly similar to that a corpo x x x. Its name is one of its attributes, an element of its
which respondents have acquired a prior right to use, and that existence, and essential to its identity x x x. The general rule as to
respondents’ consent to use such name was not obtained. corps is that each corp must have a name by which it is to sue and
● According to respondents, DLSM’s use of the dominant phrases be sued and do all legal acts. The name of a corp in this respect
A,
“La Salle” and “De La Salle” gives an erroneous impression that
DLSM is part of “La Salle” group, which violates the Corp Code.
designates the corp in the same manner as the name of an individual
designates the person x x x; and the right to use its corporate name
G
● Moreover, being the prior registrant, respondents have acquired is as much a part of the corporate franchise as any other privilege
the use of said phrases as part of their corporate names and granted x x x.
have freedom from infringement of the same.
N

● May 12, 2010, SEC issued an order directing DLSM to change No corporate name may be allowed by the SEC if the proposed
or modify its corporate name, holding that respondents have the name is identical or deceptively or confusingly similar to that of any
LO

right to the exclusive use of the name “La Salle” with freedom existing corpor to any other name already protected by law or is
from infringement by priority of adoption, as they all have been patently deceptive, confusing or contrary to existing laws. When a
incorporated using the name ahead of DLSM. change in the corporate name is approved, the SEC shall issue an
SA

● SEC held that confusion is probably or likely to occur amended COI under the amended name.
considering not only the similarity in the parties’ names but also
the business or industry they are engaged in, which is providing The policy underlying the prohibition is the avoidance of fraud upon
the public which would have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the
reduction of difficulties of administration and supervision over corps.
Indeed, parties organizing a corp must choose a name at their peril;
and the use of a name similar to one adopted by another corp, if
misleading or likely to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the corp having a prior
right, by a suit for injunction against the new corp to prevent its use.
To fall within the prohibition, two requisites must be proven:
1. Acquisition of a prior right over the use of such name; and
2. the proposed name is either: I-DCS-PDCC
N
a. identical; or
b. deceptively or confusingly similar to that of any
VI
existing corporation or to any other name already
protected by law; or
AR
c. patently deceptive, confusing or contrary to existing
law.
With respect to the first requisite, the Court has held that the right
to the exclusive use of a corporate name with freedom from
A,
infringement by similarity is determined by priority of adoption.
G
In this case, respondent’s corporate names were registered from
1961 up to 1998. On the other hand, DLSM was issued a certificate
of registration only in 2007.
N
Clearly, respondents are the prior registrants and they have acquired
LO
the right to use the words “De La Salle” or “La Salle”.
The second requisite is also satisfied since there is a confusing
SA
similarity between DLSM’s and respondents’ corporate names. While
these corporate names are not identical, it is evident that the phrase
“De La Salle” is the dominant phrase used.
In determining the existence of confusing similarity in corporate
names, the test is whether the similarity is such as to mislead a
person using ordinary care and discrimination.
L
DLSM’s assertion that the words “Montessori International of
AR
Malolos, Inc.” are four distinctive words that are not found in
respondents’ corporate names so that their corporate name is not
identical, confusingly similar, patently deceptive or contrary to
existing laws.
C
DLSM IS WRONG. 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 a branch of, or
is likewise founded by, any or all of the respondents, thereby causing
confusion.
DLSM’s argument 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,
similarly does not hold water.
The phrase “De La Salle” is not merely a generic term. Respondents’
use of the phrase being suggestive and may properly be regarded as
fanciful, arbitrary and whimsical, it is entitled to legal protection.
DLSM’s use of the phrase “De La Salle” in its corporate name is
patently similar to that of respondents that even with reasonable care
and observation, confusion might arise.
The Court notes not only the similarity in the parties’ names, but also
the business they are engaged in. They are all private educational
institutions offering pre-elementary, elementary and secondary
courses. As aptly observed by the SEC En Banc, DLSM’s name
gives the impression that it is a branch or affiliate of respondents. It is
settled that proof of actual confusion need not be shown. It suffices
that confusion is probable or likely to occur.
13. NARRA NICKEL MINING AND DEVELOPMENT CORP v. for MPSA with the MGB. DENR issued such MPSA covering an
REDMONT CONSOLIDATED MINES CORP area of 3.277 hectares in brgys Calategas and San Isidro.
● Another MPSA application of SM was filed with DENR over

L
Tickler: Grandfather rule; filipino ownership; beneficial ownership; 3,402 hectares in Barangays Malinao and Princesa Urduja. MS
60% subsequently conveyed, transferred and assigned its rights and

AR
interest over the said MPSA application to TESORO.
Background: ● Jan 2, 2007, Redmont filed before the DENR, 3 petitions for the
● This is an MR from the denial of the Petrev on certiorari filed by denial of petitioner’s applications for MPSA. Redmont alleged
Narra. that at least 60% of the capital stock of McArthur, Tesoro, and

C
● The challenged decision sustained the CA’s ruling that Narra, Narra are owned and controlled by MBMI, a 100% Canadian
being foreign corps, are not entitled to Mineral Production corp. Redmont alleged that since MBMI is a considerable
Sharing Agreements (MPSA). stockholder of petitioners, it was the driving force behind their

N
● This court, in the pet cert, upheld the CA’s findings that there filing of MPSAs since it knows that it can only participate in
was doubt as to Narra’s nationality since a 100% mining activities through corporations which are deemed

VI
Canadian-owned firm (MBMI), effectively owns 60% of the Filipino Citizens. Since petitioner’s capital stocks were mostly
common stocks of Narra by owning equity interest of Narra’s owned by MBMI, they were likewise disqualified from engaging

AR
other majority corporate shareholders. in mining activities through MPSAs, which are reserved only for
Filipino Citizens.
Facts:
● Dec 2006, Redmont, a domestic corp, took interest in mining Petitioners arguments:
and exploring certain areas of Palawan. After inquiring with the ● They were qualified under the Philippine Mining Act of 1995
A,
DENR, it learned that the areas it wanted to explore and mine
were already covered by MPSA applications of Narra, Tesoro
(PMA) because a “qualified person” means “any citizens of the
PH with capacity to contract, or a corporation x x x duly
G
and McArthur. registered in accordance with law at least 60% of the capital of
● McArthur, thru its predecessor Sara Mining (SM), filed an which is owned by citizens of the PH. Provided, That a legally
application for MPSA and Exploration Permit (EP) with the organized foreign-owned corp shall be deemed a qualified
N

Mines and Geo-Sciences Bureau (MGB). SM was issued MPSA person for purposes of granting an exploration permit, financial
covering 1,782 hectares in Brgy. Sumbiling and 3,720 hectares or technical assistance agreement or mineral processing
LO

in Brgy. Malatagao. The MPSA and EP were then transferred to permit.”

Madridejos Mining Corp (MMC) and later assigned to petitioner ● That their nationality as applicants is immaterial because they
McArthur. also applied for Financial or Technical Assistance Agreements
SA

● Narra acquired its MPSA from Alpha Resources and (FTAA) which are granted to foreign owned corporations.
Development Corp and Patricia Louise Mining and ● That the issue on nationality should not be raised since the 3 of
Development Corp (PLM) which previously filed an application them are in fact PH nationals as their capital is owned by
citizens of the PH.
● Even though MBMI owns 40% of the shares of PLMC (which
owns 5,997 shares of Narra), 40% of the shares of MMC (which
owns 5,997 shares of McArthur), and 40% of the shares of
SLMC (which owns 5,997 shares of Tesoro), the shares of
MBMI will not make it the owner of at least 60% of the capital
stock of each petitioners.
● That the best tool in determining nationality of a corp is the
“control test,” in the Foreign Investment Act (FIA).
● The grandfather rule has no leg to stand on since the definition
of a “PH national” under FIA does not provide for it.
Furthermore, the grandfather rule has been abandoned and is
no longer the applicable rule
N
● That FIA admits the application of a “corporate layering”
scheme of corporations. The clear and unambiguous wordings
VI
of the statute preclude the court from construing it and prevent
the court’s use of discretion in applying the law. That the plain,
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literal meaning of the statute meant the application of the
control test is obligatory.
CA:
● There was doubt as to the nationality of petitioners.
A,
● Petitioners had a common major investor, MBMI, a corporation
composed of 100% Canadians.
G
● Used the “grandfather rule” to determine the nationality of
petitioners.
● Using the grandfather rule, the CA discovered that MBMI in
N
effect owned majority of the common stocks of the petitioners
as well as at least 60% equity interest of other majority
LO
shareholders of petitioners through joint venture agreements.
The CA found that through a “web of corporate layering, it is
clear that one common controlling investor in all mining
SA
corporations involved x x x is MBMI.”
Issue: W/N the application of the “grandfather rule” which revealed
the foreign ownership of petitioners is in accord with the law?
Ruling: Yes. There are two acknowledged tests in determining the
nationality of a corporation: the control test and the grandfather rule.
L
The DOJ Opinion that adopted the SEC Rules which implemented
AR
the requirement of the Constitution and other laws pertaining to the
controlling interests in enterprises engaged in the exploitation of
natural resources owned by Filipino citizens, provides:
C
Shares belonging to corporations or partnerships at least
60% of the capital of which is owned by Filipino citizens shall
be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of
Philippine nationality.
The first paragraph of the DOJ opinion stating “shares belonging to
corporations or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of Philippine
nationality,” pertains to the control test. On the other hand, the
second part of the DOJ Opinion which provides, “if the percentage of
the Filipino ownership in the corporation or partnership is less than
60%, only the number of shares corresponding to such percentage
shall be counted as Philippine nationality,” pertains to the
grandfather rule.
Furthermore, while “corporate layering” is allowed by the FIA; but if it
is used to circumvent the Constitution and pertinent laws, then it
becomes illegal.
Moreover, the deliberations of the 1986 Constitutional Commission
shows the intention of the framers of the Constitution to apply the
grandfather rule in cases where corporate layering is present. And
when there is conflict between the Constitution and a statute, the
Constitution will prevail.

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Based on the said SEC Rule and DOJ Opinion, the Grandfather Rule
or the second part of the SEC Rule applies only when the 60-40

AR
Filipino-foreign equity ownership is in doubt (i.e., in cases where the
joint venture corporation with Filipino and foreign stockholders with
less than 60% Filipino stockholdings [or 59%] invests in other joint
venture corporation which is either 60-40% Filipino-alien or the 59%

C
less Filipino). Stated differently, where the 60-40 Filipino-foreign
equity ownership is not in doubt, the Grandfather Rule will not apply.

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In this case, doubt is present in the 60-40 Filipino equity ownership
of petitioners Narra, McArthur and Tesoro, since their common

VI
investor, the 100% Canadian corporation — MBMI, funded them.

AR
A,
G
N
LO
SA
14. ROY v. HERBOSA
Tickler: Public utility corporation; beneficial owner; 60-40 rule; stock
corporations; preferred shares voting rights;
Facts:
● June 28, 2011, the SC issued the Gamboa Decision, which
reads:
“The term “capital” in the Constitution refers only to shares
entitled to vote in the election of directors, and thus only to
common shares, and not to the total OCS which includes
preferred shares. The SEC is DIRECTED to apply this
N
definition of capital in determining the extent of allowable
foreign ownership in PLDT”
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● The Gamboa decision attained finality on Oct 18, 2012 and
AR
entry of judgment was made on Dec 11, 2012.
● SEC posted a notice inviting the public to attend a public
dialogue and submit comments on the draft memorandum
circular on the guidelines to be followed in determining
compliance with Filipino ownership required in public utilities
●
A,
under the Constitution pursuant to the Gamboa decision.
SEC held the dialogue and more than 100 representatives from
G
different organizations, gov’t agencies, academe, and the
private sector attended.
● Jan 8, 2013, SEC received a copy of the entry of judgment of
N
the Gamboa decision.
● March 25, 2013, SEC posted another notice asking from the
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public, comments and suggestions on the draft guidelines.
● April 22, 2013, Atty. Roy submitted his comments.
● May 20, 2013, SEC issued MC no. 8 (MC8) entitled “Guidlines
SA
on Compliance with the Filipino-foreign Ownership
Requirements Prescribed in the Constitution and/or existing
Laws by Corps Engaged in Nationalized and Partly Nationalized
Activities.” It was published in Inquirer and Business Mirror.
● Sec 2 of MC8 provides:
“All covered corps shall, at all times, observe the
constitutional or statutory ownership requirement. For
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purposes of determining compliance therewith, the required
percentage of Filipino ownership shall be applied to
AR
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.
C
Corporations covered by special laws which provide specific
citizenship requirements shall comply with the provisions of
said law.”
● Roy, as a taxpayer, filed a Petition with he SC assailing the
validity of MC8 for not conforming to the letter and spirit of the
Gamboa Decision. He seeks to apply the 60-40 Filipino
ownership requirement separately to each class of shares of a
public utility, whether common, preferred, nonvoting, preferred
voting, or any class of shares.
● Roy also questions the SEC ruling that PLDT is compliant with
the constitutional rule on foreign ownership.
● Intervenors Gamboa et al., filed a motion for lead to file petition
in intervention. The petition mirrored the issues, arguments and
prayer of Roy.
● PLDT filed its comment and posited, among others, that Roys
petition should be dismissed because SEC merely implemented
the Gamboa Decision.
● SEC filed their comment and sought the dismissal of the
petitions alleging, among others, that the issue regarding
PLDT’s compliance with the capital requirement as stated in the
Gamboa ruling is premature since SEC has not yet issued a
definitive ruling thereon.
● PSE filed its motion to intervene and alleged that in the
Gamboa ruling, “capital” refers only to shares entitled to vote in
the election of directors, and excludes those not so entitled.
 That adopting a new interpretation of the Constitution violates
the policy of conclusiveness of judgment.
● Shareholders Association of the Philippines (SAP) moved to
intervene.
Issue: W/N SEC abused its discretion in issuing MC8 in light of the
Gamboa Decision?
Ruling: No. SEC issued MC8 in accordance with the Gamboa ruling.
The Gamboa ruling provides that:
N
“The term “capital” in the Constitution refers only to shares
entitled to vote in the election of directors, and thus only to
VI
common shares, and not to the total OCS which includes
preferred shares. The SEC is DIRECTED to apply this
AR
definition of capital in determining the extent of allowable
foreign ownership in PLDT”
The Gamboa resolution provides that:
A,
In any event, the SEC has expressly manifested that it will
abide by the Court’s decision and defer to the Court’s
G
definition of the term “capital”. Further, the SEC entered its
special appearance indicating its submission to the Court’s
jurisdiction. It is clear, therefore, that there exists no legal
N
impediment against the proper and immediate
implementation of the Court’s directive to the SEC.
LO
The SC’s ruling is addressed not to PLDT but solely to the SEC,
which is the administrative agency tasked to enforce the 60-40
SA
ownership requirement in favor of Filipino citizens in the Constitution.
The sole issue in the Gamboa case was: “whether the term
‘capital’ in the Constitution refers to the total common shares
only or to the total outstanding capital stock (combined total of
common and nonvoting preferred shares) of PLDT, a public utility.”
L
The SC consistently defined the term “capital” as follows:
AR
The term “capital” in the Constitution refers only to shares
of stock entitled to vote in the election of directors, and
thus in the present case only to common shares, and not to
the total outstanding capital stock comprising both
C
common and nonvoting preferred shares.
Considering that common shares have voting rights
which translate to control, as opposed to preferred
shares which usually have no voting rights, the term
“capital” in the Constitution refers only to common
shares. However, if the preferred shares also have the
right to vote in the election of directors, then the term
“capital” shall include such preferred shares because
the right to participate in the control or management of
the corporation is exercised through the right to vote in
the election of directors. In short, the term “capital” in the
Constitution refers only to shares of stock that can vote in
the election of directors.
The Court adopted the foregoing definition of the term “capital” in
Constitution in furtherance of “the intent and letter of the Constitution
that the ‘State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos’ [because a] broad
definition unjustifiably disregards who owns the all-important voting
stock, which necessarily equates to control of the public utility.” The
Court, recognizing that the provision is an express recognition of the
sensitive and vital position of public utilities both in the national
economy and for national security, also pronounced that the evident
purpose of the citizenship requirement is to prevent aliens from
assuming control of public utilities, which may be inimical to the
national interest. Further, the Court noted that the foregoing
interpretation is consistent with the intent of the framers of the
Constitution to place in the hands of Filipino citizens the control and
management of public utilities; and, as revealed in the deliberations
of the Constitutional Commission, “capital” refers to the voting stock
or controlling interest of a corporation.
In this regard, it would be appropriate to state that since Filipinos
own at least 60% of the outstanding shares of stock entitled to vote
directors, which is what the Constitution precisely requires, then the
Filipino stockholders control the corporation, i.e., they dictate
corporate actions and decisions, and they have all the rights of
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ownership. Surely, these “true owners” will not allow any dilution of
their ownership and control if such move will not be beneficial to
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them.
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As owners of the corporation, the economic benefits will necessarily
accrue to them. There is thus no logical reason why Filipino
shareholders will allow foreigners to have greater economic benefits
than them. It is illogical to speculate that they will create shares
which have features that will give greater economic interests or
A,
benefits than they are holding and not benefit from such offering, or
that they will allow foreigners to profit more than them from their own
G
corporation — unless they are dummies. Notably, even if the shares
of a particular public utility were owned 100% Filipino, that does not
discount the possibility of a dummy situation from arising. Hence,
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even if the 60-40 ownership in favor of Filipinos rule is applied
separately to each class of shares of a public utility corporation, as
LO
the petitioners insist, the rule can easily be side-stepped by a dummy
relationship. In other words, even applying the 60-40 Filipino foreign
ownership rule to each class of shares will not assure the lofty
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purpose enunciated by petitioners.
The Court observed further in the Gamboa Decision that reinforcing
this interpretation of the term “capital,” as referring to interests or
shares entitled to vote, is the definition of a Philippine national in the
Foreign Investments Act (FIA), which is explained in the IRR of FIA
(“FIA-IRR”). The FIA-IRR provides:
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Compliance with the required Filipino ownership of a
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corporation shall be determined on the basis of outstanding
capital stock whether fully paid or not, but only such stocks
which are generally entitled to vote are considered.
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For stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate
voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens, cannot
be considered held by Philippine citizens or Philippine
nationals.
Mere legal title is insufficient to meet the 60 percent
Filipino­-owned “capital” required in the Constitution.
Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is
required. The legal and beneficial ownership of 60 percent of
the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is “considered as
non-Philippine national[s].”
Both the Voting Control Test and the Beneficial
Ownership Test must be applied to determine whether a
corporation is a “Philippine national” and that a “Philippine
national,” as defined in the FIA, is “a Filipino citizen, or a
domestic corporation “at least 60% of the capital stock
outstanding and entitled to vote,” is owned by Filipino
citizens. A domestic corporation is a “Philippine national”
 only if at least 60% of its voting stock is owned by Filipino
citizens.”

L
As to the MC8 which provides that:

AR
“All covered corps 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

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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

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entitled to vote in the election of directors.

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MC8 clearly incorporates the Voting Control Test or the controlling
interest requirement. In fact, it goes beyond requiring a 60-40 ratio in

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favor of Filipino nationals in the voting stocks; it moreover requires
the 60-40 percentage ownership in the total number of outstanding
shares of stock, whether voting or not. The SEC formulated MC8 to
adhere to the Court’s unambiguous pronouncement that “[f]ull
beneficial ownership of 60 percent of the outstanding capital stock,
A,
coupled with 60 percent of the voting rights is required.” Clearly, MC8
cannot be said to have been issued with grave abuse of discretion.
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“[B]eneficial owner or beneficial ownership means any person who,
directly or indirectly, through any contract, arrangement,
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understanding, relationship or otherwise, has or shares voting power

(which includes the power to vote or direct the voting of such
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security) and/or investment returns or power (which includes the

power to dispose of, or direct the disposition of such security) x x x.”
SA

The restrictive reinterpretation of “capital”, that the 60% rule must be

applied to each class of shares, as insisted by Roy is unwarranted.
Enough safeguards has been put in place to ensure compliance with
the Constitution.