SECOND DIVISION

[ G.R. No. 224099. June 21, 2017 ]

ROMMEL M. ZAMBRANO, ROMEO O. CALIPAY, JESUS L. CHIN, LYNDON B.
APOSAGA, BONIFACIO A. CASTAÑEDA, ROSEMARIE P. FALCUNIT, ROMEO A.
FINALLA, LUISITO G. GELLIDO, JOSE ALLI L. MABUHAY, VICENTE A. MORALES,
RAUL L. REANZARES, DIODITO I. TACUD, ERNAN D. TERCERO, LARRY V. MUTIA,
ROMEO A. GURON, DIOSDADO S. AZUSANO, BENEDICTO D. GIDAYAWAN, LOWIS
M. LANDRITO, NARCISO R. ASI, TEODULO BORAC, SANTOS J. CRUZADO, JR.,
ROLANDO DELA CRUZ, RAYMUNDO, MILA Y. ABLAY, ERMITY F. GABUCAY,
PABLITO M. LACANARIA, MELCHOR PEÑAFLOR, ARSENIO B. PICART III, ROMEO
M. SISON, JOSE VELASCO JR., ERWIN M. VICTORIA, PRISCO J. ABILO, WILFREDO
D. ARANDIA, ALEXANDER Y. HILADO, JAIME M. CORALES, GERALDINE C.
MAUHAY, MAURO P. MARQUEZ, JONATHAN T. BARQUIN, RICARDO M. CALDERON
JR., RENATOR. RAMIREZ, VIVIAN P. VIRTUDES, DOMINGO P. COSTANTINO JR.,
RENATO A. MANAIG, RAFAEL D. CARILLO, PETITIONERS, VS. PHILIPPINE CARPET
MANUFACTURING CORPORATION/PACIFIC CARPET MANUFACTURING
CORPORATION, DAVID E. T. LIM, AND EVELYN LIM FORBES,RESPONDENTS.

DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to
reverse and set aside the January 8, 2016 Decision[1] and April 11, 2016
Resolution[2] of the Court of Appeals (CA) in CA-G.R. SP No. 140663, which affirmed
the February 27, 2015 Decision[3] and March 31, 2015 Resolution[4] of the National
Labor Relations Commission (NLRC) in NLRC NCR Case No. 01-00109-14; 01-00230-
14; 01-00900-14; 01-01025-14; and 01-01133-14, for five (5) consolidated complaints
for illegal dismissal and unfair labor practice.

The Antecedents

The petitioners averred that they were employees of private respondent Philippine
Carpet Manufacturing Corporation (Phil Carpet). On January 3, 2011, they were
notified of the termination of their employment effective February 3, 2011 on the
ground of cessation of operation due to serious business losses. They were of the
belief that their dismissal was without just cause and in violation of due process
because the closure of Phil Carpet was a mere pretense to transfer its operations to its
wholly owned and controlled corporation, Pacific Carpet Manufacturing Corporation
(Pacific Carpet). They claimed that the job orders of some regular clients of Phil Carpet
were transferred to Pacific Carpet; and that from October to November 2011, several
machines were moved from the premises of Phil Carpet to Pacific Carpet. They
asserted that their dismissal constituted unfair labor practice as it involved the mass
dismissal of all union officers and members of the Philippine Carpet Manufacturing
Employees Association (PHILCEA).

In its defense, Phil Carpet countered that it permanently closed and totally ceased its
operations because there had been a steady decline in the demand for its products
due to global recession, stiffer competition, and the effects of a changing market.
Based on the Audited Financial Statements[5] conducted by SGV & Co., it incurred
losses of P4.1M in 2006; P12.8M in 2007; P53.28M in 2008; and P47.79M in 2009. As
of the end of October 2010, unaudited losses already amounted to P26.59M. Thus, in
order to stem the bleeding, the company implemented several cost-cutting measures,
including voluntary redundancy and early retirement programs. In 2007, the car carpet
division was closed. Moreover, from a high production capacity of about 6,000 square
meters of carpet a month in 2002, its final production capacity steadily went down to an

1
average of 350 square meters per month for 2009 and 2010. Subsequently, the Board
of Directors decided to approve the recommendation of its management to cease
manufacturing operations. The termination of the petitioners' employment was effective
as of the close of office hours on February 3, 2011. Phil Carpet likewise faithfully
complied with the requisites for closure or cessation of business under the Labor Code.
The petitioners and the Department of Labor and Employment (DOLE) were served
written notices one (1) month before the intended closure of the company. The
petitioners were also paid their separation pay and they voluntarily executed their
respective Release and Quitclaim[6] before the DOLE officials.

The LA Ruling

In the September 29, 2014 Decision,[7] the Labor Arbiter (LA) dismissed the complaints
for illegal dismissal and unfair labor practice. It ruled that the termination of the
petitioners' employment was due to total cessation of manufacturing operations of Phil
Carpet because it suffered continuous serious business losses from 2007 to 2010. The
LA added that the closure was truly dictated by economic necessity as evidenced by its
audited financial statements. It observed that written notices of termination were
served on the DOLE and on the petitioners at least one (1) month before the intended
date of closure. The LA further found that the petitioners voluntarily accepted their
separation pay and other benefits and eventually executed their individual release and
quitclaim in favor of the company. Finally, it declared that there was no showing that
the total closure of operations was motivated by any specific and clearly determinable
union activity of the employees. The dispositive portion reads:
WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the
complaint of Domingo P. Constantino, Jr. on ground of prescription of cause of action
and the consolidated complaints of the rest of complainants for lack of merit.

SO ORDERED.[8]
Unconvinced, the petitioners elevated an appeal before the NLRC.

The NLRC Ruling

In its February 27, 2015 Decision, the NLRC affirmed the findings of the LA. It held that
the Audited Financial Statements show that Phil Carpet continuously incurred net
losses starting 2007 leading to its closure in the year 2010. The NLRC added that Phil
Carpet complied with the procedural requirements of effecting the closure of business
pursuant to the Labor Code. The fallo reads:
WHEREFORE, premises considered, complainants' appeal from the Decision of the
Labor Arbiter Marita V. Padolina is hereby DISMISSED for lack of merit.

SO ORDERED.[9]
Undeterred, the petitioners filed a motion for reconsideration thereof. In its resolution,
dated March 31,2015, the NLRC denied the same.

Aggrieved, the petitioners filed a petition for certiorari with the CA.

The CA Ruling

In its assailed decision, dated January 8, 2016, the CA ruled that the total cessation of
Phil Carpet's manufacturing operations was not made in bad faith because the same
was clearly due to economic necessity. It determined that there was no convincing
evidence to show that the regular clients of Phil Carpet secretly transferred their job

2
orders to Pacific Carpet; and that Phil Carpet's machines were not transferred to
Pacific Carpet but were actually sold to the latter after the closure of business as
shown by the several sales invoices and official receipts issued by Phil Carpet. The CA
adjudged that the dismissal of the petitioners who were union officers and members of
PHILCEA did not constitute unfair labor practice because Phil Carpet was able to show
that the closure was due to serious business losses.

The CA opined that the petitioners' claim that their termination was a mere pretense
because Phil Carpet continued operation through Pacific Carpet was unfounded
because mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality. The CA disposed the petition in this
wise:
WHEREFORE, premises considered, the instant petition for certiorari is hereby
DISMISSED.

SO ORDERED.[10]
The petitioners moved for reconsideration, but their motion was denied by the CA in its
assailed resolution, dated April 11, 2016.

Hence, this present petition.

ISSUES

WHETHER THE PETITIONERS WERE DISMISSED FROM EMPLOYMENT FOR A

LAWFUL CAUSE

WHETHER THE PETITIONERS' TERMINATION FROM EMPLOYMENT

CONSTITUTES UNFAIR LABOR PRACTICE

WHETHER PACIFIC CARPET MAY BE HELD LIABLE FOR PHIL CARPET'S

OBLIGATIONS

WHETHER THE QUITCLAIMS SIGNED BY THE PETITIONERS ARE VALID AND

BINDING
The petitioners argue that Phil Carpet did not totally cease its operations; that most of
the job orders of Phil Carpet were transferred to its wholly owned subsidiary, Pacific
Carpet; and that the signing of quitclaims did not bar them from pursuing their case
because they were made to believe that the closure was legal.

In its Comment,[11] dated August 26, 2016, Phil Carpet averred that the termination of
the petitioners' employment as a consequence of its total closure and cessation of
operations was in accordance with law and supported by substantial evidence; that the
petitioners could only offer bare and self-serving claims and sham evidence such as
financial statements that did not pertain to Phil Carpet; and that under the Labor Code,
any compromise settlement voluntarily agreed upon by the parties with the assistance
of the regional office of the DOLE was final and binding upon the parties.

In their Reply,[12] dated November 8, 2016, the petitioners alleged that the losses of
Phil Carpet were almost proportionate to the net income of its subsidiary, Pacific
Carpet; and that the alleged sale, which transpired between Phil Carpet and Pacific
Carpet, was simulated.

The Court's Ruling

3
The petition is bereft of merit.

The petitioners were terminated from employment for an authorized cause

Under Article 298 (formerly Article 283) of the Labor Code, closure or cessation of
operation of the establishment is an authorized cause for terminating an
employee, viz.:
Article 298. Closure of establishment and reduction of personnel. - The employer may
also terminate the employment of any employee due to the installation of labor-saving
devices, redundancy, retrenchment to prevent losses or the closing or cessation of
operations of the establishment or undertaking unless the closing is for the
purpose of circumventing the provisions of this Title, by serving a written notice on the
workers and the Department of Labor and Employment at least one (1) month before
the intended date thereof. In case of termination due to the installation of labor-saving
devices or redundancy, the worker affected thereby shall be entitled to a separation
pay equivalent to at least one (1) month pay or to at least one (1) month pay for every
year of service, whichever is higher. In case of retrenchment to prevent losses and in
cases of closure or cessation of operations of establishment or undertaking not
due to serious business losses or financial reverses, the separation pay shall be
equivalent to at least one (1) month pay or at least one-half (1/2) month pay for
every year of service, whichever is higher. A fraction of at least six (6) months shall
be considered as one (1) whole year. [Emphases supplied]
Closure of business is the reversal of fortune of the employer whereby there is a
complete cessation of business operations and/or an actual locking-up of the doors of
establishment, usually due to financial losses. Closure of business, as an authorized
cause for termination of employment, aims to prevent further financial drain upon an
employer who cannot pay anymore his employees since business has already
stopped. In such a case, the employer is generally required to give separation benefits
to its employees, unless the closure is due to serious business losses.[13]

Further, in Industrial Timber Corporation v. Ababon,[14] the Court held:

A reading of the foregoing law shows that a partial or total closure or cessation of
operations of establishment or undertaking may either be due to serious business
losses or financial reverses or otherwise. Under the first kind, the employer must
sufficiently and convincingly prove its allegation of substantial losses, while under the
second kind, the employer can lawfully close shop anytime as long as cessation of or
withdrawal from business operations was bona fide in character and not impelled by a
motive to defeat or circumvent the tenurial rights of employees, and as long as he pays
his employees their termination pay in the amount corresponding to their length of
service. Just as no law forces anyone to go into business, no law can compel anybody
to continue the same. It would be stretching the intent and spirit of the law if a court
interferes with management's prerogative to close or cease its business operations just
because the business is not suffering from any loss or because of the desire to provide
the workers continued employment.

In sum, under Article 283 of the Labor Code, three requirements are necessary for a
valid cessation of business operations: (a) service of a written notice to the employees
and to the DOLE at least one month before the intended date thereof; (b) the cessation
of business must be bona fide in character; and (c) payment to the employees of
termination pay amounting to one month pay or at least one-half month pay for every
year of service, whichever is higher.[15] [citations omitted]

4
In this case, the LA's findings that Phil Carpet suffered from serious business losses
which resulted in its closure were affirmed in toto by the NLRC, and subsequently by
the CA. It is a rule that absent any showing that the findings of fact of the labor
tribunals and the appellate court are not supported by evidence on record or the
judgment is based on a misapprehension of facts, the Court shall not examine anew
the evidence submitted by the parties.[16] In Alfaro v. Court of Appeals,[17] the Court
explained the reasons therefor, to wit:
The Supreme Court is not a trier of facts, and this doctrine applies with greater force in
labor cases. Factual questions are for the labor tribunals to resolve. In this case, the
factual issues have already been determined by the labor arbiter and the National
Labor Relations Commission. Their findings were affirmed by the CA. Judicial review
by this Court does not extend to a reevaluation of the sufficiency of the evidence upon
which the proper labor tribunal has based its determination.

Indeed, factual findings of labor officials who are deemed to have acquired expertise in
matters within their respective jurisdictions are generally accorded not only respect, but
even finality, and are binding on the Supreme Court. Verily, their conclusions are
accorded great weight upon appeal, especially when supported by substantial
evidence. Consequently, the Supreme Court is not duty-bound to delve into the
accuracy of their factual findings, in the absence of a clear showing that the same were
arbitrary and bereft of any rational basis.[18]
Even after perusal of the records, the Court finds no reason to take exception from the
foregoing rule. Phil Carpet continuously incurred losses starting 2007, as shown by the
Audited Financial Statements[19] which were offered in evidence by the petitioners
themselves. The petitioners, in claiming that Phil Carpet continued to earn profit in
2011 and 2012, disregarded the reason for such income, which was Phil Carpet's act
of selling its remaining inventories. Notwithstanding such income, Phil Carpet
continued to incur total comprehensive losses in the amounts of 9,559,716 and
12,768,277 for the years 2011 and 2012, respectively.[20]

Further, even if the petitioners refuse to consider these losses as serious enough to
warrant Phil Carpet's total and permanent closure, it was a business judgment on the
part of the company's owners and stockholders to cease operations, a judgment which
the Court has no business interfering with. The only limitation provided by law is that
the closure must be "bona fide in character and not impelled by a motive to defeat or
circumvent the tenurial rights of employees."[21] Thus, when an employer complies with
the foregoing conditions, the Court cannot prohibit closure "just because the business
is not suffering from any loss or because of the desire to provide the workers continued
employment."[22]

Finally, Phil Carpet notified DOLE[23] and the petitioners[24] of its decision to cease
manufacturing operations on January 3, 2011, or at least one (1) month prior to the
intended date of closure on February 3, 2011. The petitioners were also given
separation pay equivalent to 100% of their monthly basic salary for every year of
service.

The dismissal of the petitioners did not amount to unfair labor practice

Article 259 (formerly Article 248) of the Labor Code enumerates the unfair labor
practices of employers, to wit:
Art. 259. Unfair Labor Practices of Employers. - It shall be unlawful for an employer to
commit any of the following unfair labor practices:

5
(a) To interfere with, restrain or coerce employees in the exercise of their right to self-
organization;

(b) To require a:s a condition of employment that a person or an employee shall not
join a labor organization or shall withdraw from one to which he belongs;

(c) To contract out services or functions being performed by union members when
such will interfere with, restrain or coerce employees in the exercise of their right to
self-organization;

(d) To initiate, dominate, assist or otherwise interfere with the formation or

administration of any labor organization, including the giving of financial or other
support to it or its organizers or supporters;

(e) To discriminate in regard to wages, hours of work and other terms and conditions of
employment in order to encourage or discourage membership in any labor
organization. Nothing in this Code or in any other law shall stop the parties from
requiring membership in a recognized collective bargaining agent as a condition for
employment, except those employees who are already members of another union at
the time of the signing of the collective bargaining agreement. Employees of an
appropriate bargaining unit who are not members of the recognized collective
bargaining agent may be assessed a reasonable fee equivalent to the dues and other
fees paid by members of the recognized collective bargaining agent, if such non-union
members accept the benefits under the collective bargaining agreement: Provided,
That the individual authorization required under Article 242, paragraph (o) of this Code
shall not apply to the non-members of the recognized collective bargaining agent;

(f) To dismiss, discharge or otherwise prejudice or discriminate against an employee

for having given or being about to give testimony under this Code;

(g) To violate the duty to bargain collectively as prescribed by this Code;

(h) To pay negotiation or attorney's fees to the union or its officers or agents as part of
the settlement of any issue in collective bargaining or any other dispute; or

(i) To violate a collective bargaining agreement.

The provisions of the preceding paragraph notwithstanding, only the officers and
agents of corporations, associations or partnerships who have actually participated in,
authorized or ratified unfair labor practices shall be held criminally liable.
Unfair labor practice refers to acts that violate the workers' right to organize.[25] There
should be no dispute that all the prohibited acts constituting unfair labor practice in
essence relate to the workers' right to self-organization.[26] Thus, an employer may only
be held liable for unfair labor practice if it can be shown that his acts affect in whatever
manner the right of his employees to self-organize.[27]

The general principle is that one who makes an allegation has the burden of proving it.
Although there are exceptions to this general rule, in the case of unfair labor practice,
the alleging party has the burden of proving it.[28] In the case of Standard Chartered
Bank Employees Union (NUBE) v. Confesor,[29] this Court elaborated:
In order to show that the employer committed ULP under the Labor Code,
substantial evidence is required to support the claim. Substantial evidence has

6
been defined as such relevant evidence as a reasonable mind might accept as
adequate to support a conclusion.[30] [Emphasis supplied]
Moreover, good faith is presumed and he who alleges bad faith has the duty to prove
the same.[31]

The petitioners miserably failed to discharge the duty imposed upon them. They did not
identify the acts of Phil Carpet which, they claimed, constituted unfair labor practice.
They did not even point out the specific provisions which Phil Carpet violated. Thus,
they would have the Court pronounce that Phil Carpet committed unfair labor practice
on the ground that they were dismissed from employment simply because they were
union officers and members. The constitutional commitment to the policy of social
justice, however, cannot be understood to mean that every labor dispute shall
automatically be decided in favor of labor.[32]

In this case, as far as the pieces of evidence offered by the petitioners are concerned,
there is no showing that the closure of the company was an attempt at union-busting.
Hence, the charge that Phil Carpet is guilty of unfair labor practice must fail for lack of
merit.

Pacific Carpet has a personality separate and distinct from Phil Carpet

The petitioners, in asking the Court to disregard the separate corporate personality of
Pacific Carpet and to make it liable for the obligations of Phil Carpet, rely heavily on the
former being a subsidiary of the latter.

A corporation is an artificial being created by operation of law. It possesses the right of

succession and such powers, attributes, and properties expressly authorized by law or
incident to its existence. 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.[33]

Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of
another corporation. 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.[34]

Hence, any application of the doctrine of piercing the corporate veil should be done
with caution. A court should be mindful of the milieu where it is to be applied. 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.[35]

Further, the Court's ruling in Philippine National Bank v. Hydro Resources Contractors
Corporation[36] is enlightening, viz.:
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely:
1) defeat of public convenience as when the corporate fiction is used as a vehicle for
the evasion of an existing obligation; 2) fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a
corporation is merely a farce since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.

7
 xxxx

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

(1) Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;

(2) Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff's legal right; and

(3) The aforesaid control and breach of duty must have proximately caused the injury
or unjust loss complained of.

The first prong is the "instrumentality" or "control" test. This test requires that the
subsidiary be completely under the control and domination of the parent. It examines
the parent corporation's relationship with the subsidiary. It inquires whether a
subsidiary corporation is so organized and controlled and its affairs are so conducted
as to make it a mere instrumentality or agent of the parent corporation such that its
separate existence as a distinct corporate entity will be ignored. It seeks to establish
whether the subsidiary corporation has no autonomy and the parent corporation,
though acting through the subsidiary in form and appearance, "is operating the
business directly for itself."

The second prong is the "fraud" test. This test requires that the parent corporation's
conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It
examines the relationship of the plaintiff to the corporation. It recognizes that piercing
is appropriate only if the parent corporation uses the subsidiary in a way that harms the
plaintiff creditor. As such, it requires a showing of "an element of injustice or
fundamental unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show that the
defendant's control, exerted in a fraudulent, illegal or otherwise unfair manner toward it,
caused the harm suffered. A causal connection between the fraudulent conduct
committed through the instrumentality of the subsidiary and the injury suffered or the
damage incurred by the plaintiff should be established. The plaintiff must prove that,
unless the corporate veil is pierced, it will have been treated unjustly by the defendant's
exercise of control and improper use of the corporate form and, thereby, suffer
damages.

To summarize, piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements: control of the corporation by the stockholder or parent
corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or
damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The
absence of any of these elements prevents piercing the corporate veil.[37] [Citations
omitted]
The Court finds that none of the tests has been satisfactorily met in this case.

Although ownership by one corporation of all or a great majority of stocks of another

8
corporation and their interlocking directorates may serve as indicia of control, by
themselves and without more, these circumstances are insufficient to establish an alter
ego relationship or connection between Phil Carpet on the one hand and Pacific
Carpet on the other hand, that will justify the puncturing of the latter's corporate
cover.[38]

This Court has declared that "mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality."[39] It has likewise
ruled that the "existence of interlocking directors, corporate officers and shareholders is
not enough justification to pierce the veil of corporate fiction in the absence of fraud or
other public policy considerations."[40]

It must be noted that Pacific Carpet was registered with the Securities and Exchange
Commission on January 29, 1999,[41] such that it could not be said that Pacific Carpet
was set up to evade Phil Carpet's liabilities. As to the transfer of Phil Carpet's
machines to Pacific Carpet, settled is the rule that "where one corporation sells or
otherwise transfers all its assets to another corporation for value, the latter is not, by
that fact alone, liable for the debts and liabilities of the transferor."[42]

All told, the petitioners failed to present substantial evidence to prove their allegation
that Pacific Carpet is a mere alter ego of Phil Carpet.

The quitclaims were valid and binding upon the petitioners

Where the person making the waiver has done so voluntarily, with a full understanding
thereof, and the consideration for the quitclaim is credible and reasonable, the
transaction must be recognized as being a valid and binding undertaking.[43] Not all
quitclaims are per se invalid or against policy, except (1) where there is clear proof that
the waiver was wangled from an unsuspecting or gullible person, or (2) where the
terms of settlement are unconscionable on their face; in these cases, the law will step
in to annul the questionable transactions.[44]

In this case, the petitioners question the validity of the quitclaims they signed on the
ground that Phil Carpet's closure was a mere pretense. As the closure of Phil Carpet,
however, was supported by substantial evidence, the petitioners' reason for seeking
the invalidation of the quitclaims must necessarily fail. Further, as aptly observed by
the CA, the contents of the quitclaims, which were in Filipino, were clear and simple,
such that it was unlikely that the petitioners did not understand what they were
signing.[45] Finally, the amount they received was reasonable as the same complied
with the requirements of the Labor Code.

WHEREFORE, the petition is DENIED. The January 8, 2016 Decision and April 11,
2016 Resolution of the Court of Appeals in CA-G.R. SP No. 140663,
are AFFIRMED in toto.

SO ORDERED.

9
 FIRST DIVISION
[ G.R. No. 182729. September 29, 2010 ]
KUKAN INTERNATIONAL CORPORATION, PETITIONER, VS. HON.
AMOR REYES, IN HER CAPACITY AS PRESIDING JUDGE OF THE
REGIONAL TRIAL COURT OF MANILA, BRANCH 21, AND ROMEO M.
MORALES, DOING BUSINESS UNDER THE NAME AND STYLE "RM
MORALES TROPHIES AND PLAQUES," RESPONDENTS.

DECISION
VELASCO JR., J.:
The Case

This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the
January 23, 2008 Decision[1] and the April 16, 2008 Resolution[2] rendered by the Court
of Appeals (CA) in CA-G.R. SP No. 100152.

The assailed CA decision affirmed the March 12, 2007[3] and June 7, 2007[4] Orders of
the Regional Trial Court (RTC) of Manila, Branch 21, in Civil Case No. 99-93173,
entitled Romeo M. Morales, doing business under the name and style RM Morales
Trophies and Plaques v. Kukan, Inc. In the said orders, the RTC disregarded the
separate corporate identities of Kukan, Inc. and Kukan International Corporation and
declared them to be one and the same entity. Accordingly, the RTC held Kukan
International Corporation, albeit not impleaded in the underlying complaint of Romeo
M. Morales, liable for the judgment award decreed in a Decision dated November 28,
2002[5] in favor of Morales and against Kukan, Inc.

The Facts

Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and
installation of signages in a building being constructed in Makati City. Morales tendered
the winning bid and was awarded the PhP 5 million contract. Some of the items in the
project award were later excluded resulting in the corresponding reduction of the
contract price to PhP 3,388,502. Despite his compliance with his contractual
undertakings, Morales was only paid the amount of PhP 1,976,371.07, leaving a
balance of PhP 1,412,130.93, which Kukan, Inc. refused to pay despite demands.
Shortchanged, Morales filed a Complaint[6] with the RTC against Kukan, Inc. for a sum
of money, the case docketed as Civil Case No. 99-93173 and eventually raffled to
Branch 17 of the court.

Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial
ensued. However, starting November 2000, Kukan, Inc. no longer appeared and
participated in the proceedings before the trial court, prompting the RTC to declare
Kukan, Inc. in default and paving the way for Morales to present his evidence ex parte.

On November 28, 2002, the RTC rendered a Decision finding for Morales and against
Kukan, Inc., disposing as follows:

10
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil
Procedure, and by preponderance of evidence, judgment is hereby rendered in favor of
the plaintiff, ordering Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at
12% per annum from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral

damages;

3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable

attorney's fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and
SIX CENTAVOS (P7,960.06) as litigation expenses.

For lack of factual foundation, the counterclaim is DISMISSED.

IT IS SO ORDERED.[7]

After the above decision became final and executory, Morales moved for and secured
a writ of execution[8] against Kukan, Inc. The sheriff then levied upon various personal
properties found at what was supposed to be Kukan, Inc.'s office at Unit 2205, 88
Corporate Center, Salcedo Village, Makati City. Alleging that it owned the properties
thus levied and that it was a different corporation from Kukan, Inc., Kukan International
Corporation (KIC) filed an Affidavit of Third-Party Claim. Notably, KIC was incorporated
in August 2000, or shortly after Kukan, Inc. had stopped participating in Civil Case No.
99-93173.

In reaction to the third party claim, Morales interposed an Omnibus Motion dated April
30, 2003. In it, Morales prayed, applying the principle of piercing the veil of corporate
fiction, that an order be issued for the satisfaction of the judgment debt of Kukan, Inc.
with the properties under the name or in the possession of KIC, it being alleged that
both corporations are but one and the same entity. KIC opposed Morales' motion. By
Order of May 29, 2003[9] as reiterated in a subsequent order, the court denied the
omnibus motion.

In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true
relationship between the two, Morales filed a Motion for Examination of Judgment
Debtors dated May 4, 2005. In this motion Morales sought that subponae be issued
against the primary stockholders of Kukan, Inc., among them Michael Chan, a.k.a.
Chan Kai Kit. This too was denied by the trial court in an Order dated May 24, 2005.[10]

Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who
eventually granted the motion. The case was re-raffled to Branch 21, presided by
public respondent Judge Amor Reyes.

Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of
Corporate Fiction to declare KIC as having no existence separate from Kukan, Inc.

11
This time around, the RTC, by Order dated March 12, 2007, granted the motion, the
dispositive portion of which reads:

WHEREFORE, premises considered, the motion is hereby GRANTED. The Court

hereby declares as follows:

1. defendant Kukan, Inc. and newly created Kukan International Corp. as one
and the same corporation;

2. the levy made on the properties of Kukan International Corp. is hereby valid;

3. Kukan International Corp. and Michael Chan are jointly and severally liable to
pay the amount awarded to plaintiff pursuant to the decision of November [28],
2002 which has long been final and executory.

SO ORDERED.

From the above order, KIC moved but was denied reconsideration in another Order
dated June 7, 2007.

KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and
June 7, 2007 RTC Orders.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of
which states:

WHEREFORE, premises considered, the petition is hereby DENIED and the assailed
Orders dated March 12, 2007 and June 7, 2007 of the court a quo are both
AFFIRMED. No costs.

SO ORDERED.[11]

The CA later denied KIC's motion for reconsideration in the assailed resolution.

Hence, the instant petition for review, with the following issues KIC raises for the
Court's consideration:

1. There is no legal basis for the [CA] to resolve and declare that petitioner's
Constitutional Right to Due Process was not violated by the public respondent
in rendering the Orders dated March 12, 2007 and June 7, 2007 and in
declaring petitioner to be liable for the judgment obligations of the corporation
"Kukan, Inc." to private respondent - as petitioner is a stranger to the case and
was never made a party in the case before the trial court nor was it ever
served a summons and a copy of the complaint.

2. There is no legal basis for the [CA] to resolve and declare that the Orders
dated March 12, 2007 and June 7, 2007 rendered by public respondent
declaring the petitioner liable to the judgment obligations of the corporation
"Kukan, Inc." to private respondent are valid as said orders of the public
respondent modify and/or amend the trial court's final and executory decision
rendered on November 28, 2002.

12
 3. There is no legal basis for the [CA] to resolve and declare that the Orders
dated March 12, 2007 and June 7, 2007 rendered by public respondent
declaring the petitioner [KIC] and the corporation "Kukan, Inc." as one and the
same, and, therefore, the Veil of Corporate Fiction between them be pierced -
as the procedure undertaken by public respondent which the [CA] upheld is
not sanctioned by the Rules of Court and/or established jurisprudence
enunciated by this Honorable Supreme Court.[12]

In gist, the issues to be resolved boil down to the question of, first, whether the trial
court can, after the judgment against Kukan, Inc. has attained finality, execute it
against the property of KIC; second, whether the trial court acquired jurisdiction over
KIC; and third, whether the trial and appellate courts correctly applied, under the
premises, the principle of piercing the veil of corporate fiction.

The Ruling of the Court

The petition is meritorious.

First Issue: Against Whom Can a Final and

Executory Judgment Be Executed

The preliminary question that must be answered is whether or not the trial court can,
after adjudging Kukan, Inc. liable for a sum of money in a final and executory
judgment, execute such judgment debt against the property of KIC.

The poser must be answered in the negative.

In Carpio v. Doroja,[13] the Court ruled that the deciding court has supervisory control
over the execution of its judgment:

A case in which an execution has been issued is regarded as still pending so that all
proceedings on the execution are proceedings in the suit. There is no question that the
court which rendered the judgment has a general supervisory control over its process
of execution, and this power carries with it the right to determine every question of fact
and law which may be involved in the execution.

We reiterated the above holding in Javier v. Court of Appeals[14] in this wise: "The said
branch has a general supervisory control over its processes in the execution of its
judgment with a right to determine every question of fact and law which may be
involved in the execution."

The court's supervisory control does not, however, extend as to authorize the alteration
or amendment of a final and executory decision, save for certain recognized
exceptions, among which is the correction of clerical errors. Else, the court violates the
principle of finality of judgment and its immutability, concepts which the Court, in Tan v.
Timbal,[15] defined:

As we held in Industrial Management International Development Corporation vs.

NLRC:

It is an elementary principle of procedure that the resolution of the court in a given

13
issue as embodied in the dispositive part of a decision or order is the controlling factor
as to settlement of rights of the parties. Once a decision or order becomes final and
executory, it is removed from the power or jurisdiction of the court which
rendered it to further alter or amend it. It thereby becomes immutable and
unalterable and any amendment or alteration which substantially affects a final
and executory judgment is null and void for lack of jurisdiction, including the
entire proceedings held for that purpose. An order of execution which varies the
tenor of the judgment or exceeds the terms thereof is a nullity. (Emphasis
supplied.)

Republic v. Tango[16] expounded on the same principle and its exceptions:

Deeply ingrained in our jurisprudence is the principle that a decision that has
acquired finality becomes immutable and unalterable. As such, it may no longer
be modified in any respect even if the modification is meant to correct erroneous
conclusions of fact or law and whether it will be made by the court that rendered it or
by the highest court of the land. x x x

The doctrine of finality of judgment is grounded on the fundamental principle of public

policy and sound practice that, at the risk of occasional error, the judgment of courts
and the award of quasi-judicial agencies must become final on some definite date fixed
by law. The only exceptions to the general rule are the correction of clerical errors,
the so-called nunc pro tunc entries which cause no prejudice to any party, void
judgments, and whenever circumstances transpire after the finality of the decision
which render its execution unjust and inequitable. None of the exceptions obtains here
to merit the review sought. (Emphasis added.)

So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment,
order the execution of its final decision in a manner as would amount to its prohibited
alteration or modification?

We repair to the dispositive portion of the final and executory RTC decision.
Pertinently, it provides:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil

Procedure, and by preponderance of evidence, judgment is hereby rendered in favor of
the plaintiff, ordering Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at
12% per annum from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral

damages;
3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable
attorney's fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and
SIX CENTAVOS (P7,960.06) as litigation expenses.

14
x x x x (Emphasis supplied.)

As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay
the aforementioned awards to Morales. Thus, making KIC, thru the medium of a writ of
execution, answerable for the above judgment liability is a clear case of altering a
decision, an instance of granting relief not contemplated in the decision sought to be
executed. And the change does not fall under any of the recognized exceptions to the
doctrine of finality and immutability of judgment. It is a settled rule that a writ of
execution must conform to the fallo of the judgment; as an inevitable corollary, a writ
beyond the terms of the judgment is a nullity.[17]

Thus, on this ground alone, the instant petition can already be granted. Nonetheless,
an examination of the other issues raised by KIC would be proper.

Second Issue: Propriety of the RTC

Assuming Jurisdiction over KIC

The next issue turns on the validity of the execution the trial court authorized against
KIC and its property, given that it was neither made a party nor impleaded in Civil Case
No. 99-93173, let alone served with summons. In other words, did the trial court
acquire jurisdiction over KIC?

In the assailed decision, the appellate court deemed KIC to have voluntarily submitted
itself to the jurisdiction of the trial court owing to its filing of four (4) pleadings adverted
to earlier, namely: (a) the Affidavit of Third-Party Claim;[18] (b) the Comment and
Opposition to Plaintiff's Omnibus Motion;[19] (c) the Motion for Reconsideration of the
RTC Order dated March 12, 2007;[20] and (d) the Motion for Leave to Admit Reply.[21]
The CA, citing Section 20, Rule 14 of the Rules of Court, stated that "the procedural
rule on service of summons can be waived by voluntary submission to the court's
jurisdiction through any form of appearance by the party or its counsel."[22]

We cannot give imprimatur to the appellate court's appreciation of the thrust of Sec. 20,
Rule 14 of the Rules in concluding that the trial court acquired jurisdiction over KIC.

Orion Security Corporation v. Kalfam Enterprises, Inc.[23] explains how courts acquire
jurisdiction over the parties in a civil case:

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the
other hand, jurisdiction over the defendants in a civil case is acquired either
through the service of summons upon them or through their voluntary
appearance in court and their submission to its authority. (Emphasis supplied.)

In the fairly recent Palma v. Galvez,[24] the Court reiterated its holding in Orion Security
Corporation, stating: "[I]n civil cases, the trial court acquires jurisdiction over the person
of the defendant either by the service of summons or by the latter's voluntary
appearance and submission to the authority of the former."

15
The court's jurisdiction over a party-defendant resulting from his voluntary submission
to its authority is provided under Sec. 20, Rule 14 of the Rules, which states:

Section 20. Voluntary appearance. - The defendant's voluntary appearance in the

actions shall be equivalent to service of summons. The inclusion in a motion to dismiss
of other grounds aside from lack of jurisdiction over the person of the defendant shall
not be deemed a voluntary appearance.

To be sure, the CA's ruling that any form of appearance by the party or its counsel is
deemed as voluntary appearance finds support in the kindred Republic v. Ker & Co.,
Ltd.[25] and De Midgely v. Ferandos.[26]

Republic and De Midgely, however, have already been modified if not altogether
superseded[27] by La Naval Drug Corporation v. Court of Appeals,[28] wherein the Court
essentially ruled and elucidated on the current view in our jurisdiction, to wit: "[A]
special appearance before the court--challenging its jurisdiction over the person
through a motion to dismiss even if the movant invokes other grounds--is not
tantamount to estoppel or a waiver by the movant of his objection to jurisdiction over
his person; and such is not constitutive of a voluntary submission to the jurisdiction of
the court."[29]

In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173.
Even if it is conceded that it raised affirmative defenses through its aforementioned
pleadings, KIC never abandoned its challenge, however implicit, to the RTC's
jurisdiction over its person. The challenge was subsumed in KIC's primary assertion
that it was not the same entity as Kukan, Inc. Pertinently, in its Comment and
Opposition to Plaintiff's Omnibus Motion dated May 20, 2003, KIC entered its "special
but not voluntary appearance" alleging therein that it was a different entity and has a
separate legal personality from Kukan, Inc. And KIC would consistently reiterate this
assertion in all its pleadings, thus effectively resisting all along the RTC's jurisdiction of
its person. It cannot be overemphasized that KIC could not file before the RTC a
motion to dismiss and its attachments in Civil Case No. 99-93173, precisely because
KIC was neither impleaded nor served with summons. Consequently, KIC could only
assert and claim through its affidavits, comments, and motions filed by special
appearance before the RTC that it is separate and distinct from Kukan, Inc.

Following La Naval Drug Corporation,[30] KIC cannot be deemed to have waived its
objection to the court's lack of jurisdiction over its person. It would defy logic to say that
KIC unequivocally submitted itself to the jurisdiction of the RTC when it strongly
asserted that it and Kukan, Inc. are different entities. In the scheme of things obtaining,
KIC had no other option but to insist on its separate identity and plead for relief
consistent with that position.

Third Issue: Piercing the

Veil of Corporate Fiction

The third and main issue in this case is whether or not the trial and appellate courts
correctly applied the principle of piercing the veil of corporate entity--called also as
disregarding the fiction of a separate juridical personality of a corporation--to support a
conclusion that Kukan, Inc. and KIC are but one and the same corporation with respect

16
to the contract award referred to at the outset. This principle finds its context on the
postulate that a corporation is an artificial being invested with a personality separate
and distinct from those of the stockholders and from other corporations to which it may
be connected or related.[31]

In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations

Commission,[32] the Court revisited the subject principle of piercing the veil of corporate
fiction and wrote:

Under the doctrine of "piercing the veil of corporate fiction," the court looks at the
corporation as a mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate juridical personality of the
corporation unifying the group. Another formulation of this doctrine is that when two
business enterprises are owned, conducted and controlled by the same parties,
both law and equity will, when necessary to protect the rights of third parties,
disregard the legal fiction that two corporations are distinct entities and treat
them as identical or as one and the same.

Whether the separate personality of the corporation should be pierced hinges on

obtaining facts appropriately pleaded or proved. However, any piercing of the
corporate veil has to be done with caution, albeit the Court will not hesitate to disregard
the corporate veil when it is misused or when necessary in the interest of justice. x x x
(Emphasis supplied.)

The same principle was the subject and discussed in Rivera v. United Laboratories,
Inc.:

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 the
legitimate issues, or where a corporation is the mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing

must be established clearly and convincingly. It cannot be presumed.[33] (Emphasis
supplied.)

Now, as before the appellate court, petitioner KIC maintains that the RTC violated its
right to due process when, in the execution of its November 28, 2002 Decision, the
court authorized the issuance of the writ against KIC for Kukan, Inc.'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 November 28, 2002 Decision would be mooted if it were
established that KIC and Kukan, Inc. are indeed one and the same corporation.

17
Morales' contention is untenable.

The principle of piercing the veil of corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical person with respect to a given
transaction, is basically applied only to determine established liability;[34] it is not
available to confer on the court a jurisdiction it has not acquired, in the first place, over
a party not impleaded in a case. Elsewise put, a corporation not impleaded in a suit
cannot be subject to the court's process of piercing the veil of its corporate fiction. In
that situation, the court has not acquired jurisdiction over the corporation and, hence,
any proceedings taken against that corporation and its property would infringe on its
right to due process. Aguedo Agbayani, a recognized authority on Commercial Law,
stated as much:

23. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. x x x

This is so because the doctrine of piercing the veil of corporate fiction comes to
play only during the trial of the case after the court has already acquired
jurisdiction over the corporation. Hence, before this doctrine can be applied, based
on the evidence presented, it is imperative that the court must first have jurisdiction
over the corporation.[35] x x x (Emphasis supplied.)

The implication of the above comment is twofold: (1) the court must first acquire
jurisdiction over the corporation or corporations involved before its or their separate
personalities are disregarded; and (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 court by way of
service of summons or what passes as such service.

The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent
the matter of the time and manner of raising the principle in question, it is undisputed
that no full-blown trial involving KIC was had when the RTC disregarded the corporate
veil of KIC. The reason for this actuality is simple and undisputed: KIC was not
impleaded in Civil Case No. 99-93173 and that the RTC did not acquire jurisdiction
over it. It was dragged to the case after it reacted to the improper execution of its
properties and veritably hauled to court, not thru the usual process of service of
summons, but by mere motion of a party with whom it has no privity of contract and
after the decision in the main case had already become final and executory. As to the
propriety of a plea for the application of the principle by mere motion, the following
excerpts are instructive:

Generally, a motion is appropriate only in the absence of remedies by regular

pleadings, and is not available to settle important questions of law, or to dispose
of the merits of the case. A motion is usually a proceeding incidental to an
action, but it may be a wholly distinct or independent proceeding. A motion in this
sense is not within this discussion even though the relief demanded is denominated an
"order."

A motion generally relates to procedure and is often resorted to in order to correct

errors which have crept in along the line of the principal action's progress. Generally,

18
where there is a procedural defect in a proceeding and no method under statute or rule
of court by which it may be called to the attention of the court, a motion is an
appropriate remedy. In many jurisdictions, the motion has replaced the common-law
pleas testing the sufficiency of the pleadings, and various common-law writs, such as
writ of error coram nobis and audita querela. In some cases, a motion may be one of
several remedies available. For example, in some jurisdictions, a motion to vacate an
order is a remedy alternative to an appeal therefrom.

Statutes governing motions are given a liberal construction.[36] (Emphasis supplied.)

The bottom line issue of whether Morales can proceed against KIC for the judgment
debt of Kukan, Inc.--assuming hypothetically that he can, applying the piercing the
corporate veil principle--resolves itself into the question of whether a mere motion is
the appropriate vehicle for such purpose.

Verily, Morales espouses the application of the principle of piercing the corporate veil to
hold KIC liable on theory that Kukan, Inc. was out to defraud him through the use of the
separate and distinct personality of another corporation, KIC. In net effect, Morales'
adverted motion to pierce the veil of corporate fiction dated January 3, 2007 stated a
new cause of action, i.e., for the liability of judgment debtor Kukan, Inc. to be borne by
KIC on the alleged identity of the two corporations. This new cause of action should be
properly ventilated in another complaint and subsequent trial where the doctrine of
piercing the corporate veil can, if appropriate, be applied, based on the evidence
adduced. Establishing the claim of Morales and the corresponding liability of KIC for
Kukan Inc.'s indebtedness could hardly be the subject, under the premises, of a mere
motion interposed after the principal action against Kukan, Inc. alone had peremptorily
been terminated. After all, a complaint is one where the plaintiff alleges causes of
action.

In any event, the principle of piercing the veil of corporate fiction finds no application to
the instant case.

As a general rule, courts should be wary of lifting the corporate veil between
corporations, however related. Philippine National Bank v. Andrada Electric
Engineering Company[37] explains why:

A corporation is an artificial being created by operation of law. x x x 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. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of
another corporation. 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 the corporate veil should be
done with caution. A court should be mindful of the milieu where it is to be applied. It
must be certain that the corporate fiction was misused to such an extent that

19
injustice, fraud, or crime was committed against another, in disregard of its
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.

This Court has pierced the corporate veil to ward off a judgment credit, to avoid
inclusion of corporate assets as part of the estate of the decedent, to escape liability
arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to
promote or to shield unfair objectives or to cover up an otherwise blatant violation of
the prohibition against forum-shopping. Only in these and similar instances may
the veil be pierced and disregarded. (Emphasis supplied.)

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear
and convincing proof that the separate and distinct personality of the corporation was
purposefully employed to evade a legitimate and binding commitment and perpetuate a
fraud or like wrongdoings. To be sure, the Court has, on numerous
occasions,[38] applied the principle where a corporation is dissolved and its assets are
transferred to another to avoid a financial liability of the first corporation with the result
that the second corporation should be considered a continuation and successor of the
first entity.

In those instances when the Court pierced the veil of corporate fiction of two
corporations, there was a confluence of the following factors:

1. A first corporation is dissolved;

2. The assets of the first corporation is transferred to a second corporation to

avoid a financial liability of the first corporation; and

3. Both corporations are owned and controlled by the same persons such that the
second corporation should be considered as a continuation and successor of
the first corporation.

In the instant case, however, the second and third factors are conspicuously absent.
There is, therefore, no compelling justification for disregarding the fiction of corporate
entity separating Kukan, Inc. from KIC. In applying the principle, both the RTC and the
CA miserably failed to identify the presence of the abovementioned factors. Consider:

The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC
based on the following premises and arguments:

While it is true that a corporation has a separate and distinct personality from its
stockholder, director and officers, the law expressly provides for an exception. When
Michael Chan, the Managing Director of defendant Kukan, Inc. (majority stockholder of
the newly formed corporation [KIC]) confirmed the award to plaintiff to supply and
install interior signages in the Enterprise Center he (Michael Chan, Managing Director
of defendant Kukan, Inc.) knew that there was no sufficient corporate funds to pay its
obligation/account, thus implying bad faith on his part and fraud in contracting the
obligation. Michael Chan neither returned the interior signages nor tendered payment
to the plaintiff. This circumstance may warrant the piercing of the veil of corporation
fiction. Having been guilty of bad faith in the management of corporate matters

20
the corporate trustee, director or officer may be held personally liable. x x x

Since fraud is a state of mind, it need not be proved by direct evidence but may be
inferred from the circumstances of the case. x x x [A]nd the circumstances are: the
signature of Michael Chan, Managing Director of Kukan, Inc. appearing in the
confirmation of the award sent to the plaintiff; signature of Chan Kai Kit, a British
National appearing in the Articles of Incorporation and signature of Michael Chan also
a British National appearing in the Articles of Incorporation [of] Kukan International
Corp. give the impression that they are one and the same person, that Michael Chan
and Chan Kai Kit are both majority stockholders of Kukan International Corp. and
Kukan, Inc. holding 40% of the stocks; that Kukan International Corp. is practically
doing the same kind of business as that of Kukan, Inc.[39] (Emphasis supplied.)

As is apparent from its disquisition, the RTC brushed aside the separate corporate
existence of Kukan, Inc. and KIC on the main argument that Michael Chan owns 40%
of the common shares of both corporations, obviously oblivious that overlapping stock
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,
Inc. or of Michael Chan for that matter. Mere ownership by a single stockholder or by
another corporation of a substantial block of shares of a corporation does not, standing
alone, provide sufficient justification for disregarding the separate corporate
personality.[40] For this ground to hold sway in this case, there must be proof that Chan
had control or complete dominion of Kukan and KIC's finances, policies, and business
practices; he used such control to commit fraud; and the control was the proximate
cause of the financial loss complained of by Morales. The absence of any of the
elements prevents the piercing of the corporate veil.[41] And indeed, the records do not
show the presence of these elements.

On the other hand, the CA held:

In the present case, the facts disclose that Kukan, Inc. entered into a contractual
obligation x x x worth more than three million pesos although it had only Php5,000.00
paid-up capital; [KIC] was incorporated shortly before Kukan, Inc. suddenly ceased to
appear and participate in the trial; [KIC's] purpose is related and somewhat akin to that
of Kukan, Inc.; and in [KIC] Michael Chan, a.k.a., Chan Kai Kit, holds forty percent of
the outstanding stocks, while he formerly held the same amount of stocks in Kukan
Inc. These would lead to the inescapable conclusion that Kukan, Inc. committed
fraudulent representation by awarding to the private respondent the contract
with full knowledge that it was not in a position to comply with the obligation it
had assumed because of inadequate paid-up capital. It bears stressing that
shareholders should in good faith put at the risk of the business, unencumbered capital
reasonably adequate for its prospective liabilities. The capital should not be illusory or
trifling compared with the business to be done and the risk of loss.

Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael
Chan, a.k.a. Chan Kai Kit has the largest block of shares in both business enterprises.
The emergence of the former was cleverly timed with the hasty withdrawal of the latter
during the trial to avoid the financial liability that was eventually suffered by the latter.
The two companies have a related business purpose. Considering these

21
circumstances, the obvious conclusion is that the creation of Kukan
International Corporation served as a device to evade the obligation incurred by
Kukan, Inc. and yet profit from the goodwill attained by the name "Kukan" by
continuing to engage in the same line of business with the same list of
clients.[42] (Emphasis supplied.)

Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the
similarity of the business activities in which both corporations are engaged as a
jumping board to its conclusion that the creation of KIC "served as a device to evade
the obligation incurred by Kukan, Inc." The appellate court, however, left a gaping hole
by failing to demonstrate that Kukan, Inc. and its stockholders defrauded Morales. In
fine, there is no showing that the incorporation, and the separate and distinct
personality, of KIC was used to defeat Morales' right to recover from Kukan, Inc.
Judging from the records, no serious attempt was made to levy on the properties of
Kukan, Inc. Morales could not, thus, validly argue that Kukan, Inc. tried to avoid
liability or had no property against which to proceed.

Morales further contends that Kukan, Inc.'s closure is evidenced by its failure to file its
2001 General Information Sheet (GIS) with the Securities and Exchange Commission.
However, such fact does not necessarily mean that Kukan, Inc. had altogether ceased
operations, as Morales would have this Court believe, for it is stated on the face of the
GIS that it is only upon a failure to file the corporate GIS for five (5) consecutive
years that non-operation shall be presumed.

The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a
paid-up capital of PhP 5,000 is not an indication of the intent on the part of its
management to defraud creditors. Paid-up capital is merely seed money to start a
corporation or a business entity. As in this case, it merely represented the
capitalization upon incorporation in 1997 of Kukan, Inc. Paid-up capitalization of PhP
5,000 is not and should not be taken as a reflection of the firm's capacity to meet its
recurrent and long-term obligations. It must be borne in mind that the equity portion
cannot be equated to the viability of a business concern, for the best test is the working
capital which consists of the liquid assets of a given business relating to the nature of
the business concern.

Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be
viewed as a badge of fraud, for it is in compliance with Sec. 13 of the Corporation
Code,[43] which only requires a minimum paid-up capital of PhP 5,000.

The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and
controlled as they are by the same stockholders, stands without factual basis. It is true
that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock of
both corporations. But such circumstance, standing alone, is insufficient to establish
identity. There must be at least a substantial identity of stockholders for both
corporations in order to consider this factor to be constitutive of corporate identity.

It would not avail Morales any to rely[44] on General Credit Corporation v. Alsons
Development and Investment Corporation.[45] General Credit Corporation is factually
not on all fours with the instant case. There, the common stockholders of the

22
corporations represented 90% of the outstanding capital stock of the companies, unlike
here where Michael Chan merely represents 40% of the outstanding capital stock of
both KIC and Kukan, Inc., not even a majority of it. In that case, moreover, evidence
was adduced to support the finding that the funds of the second corporation came from
the first. Finally, there was proof in General Credit Corporation of complete control,
such that one corporation was a mere dummy or alter ego of the other, which is absent
in the instant case.

Evidently, the aforementioned case relied upon by Morales cannot justify the
application of the principle of piercing the veil of corporate fiction to the instant case.
As shown by the records, the name Michael Chan, the similarity of business activities
engaged in, and incidentally the word "Kukan" appearing in the corporate names
provide the nexus between Kukan, Inc. and KIC. As illustrated, these circumstances
are insufficient to establish the identity of KIC as the alter ego or successor of Kukan,
Inc.

It bears reiterating that piercing the veil of corporate fiction is frowned upon.
Accordingly, those who seek to pierce the veil must clearly establish that the separate
and distinct personalities of the corporations are set up to justify a wrong, protect fraud,
or perpetrate a deception. In the concrete and on the assumption that the RTC has
validly acquired jurisdiction over the party concerned, Morales ought to have proved by
convincing evidence that Kukan, Inc. was collapsed and thereafter KIC purposely
formed and operated to defraud him. Morales has not to us discharged his burden.

WHEREFORE, the petition is hereby GRANTED. The CA's January 23, 2008 Decision
and April 16, 2008 Resolution in CA-G.R. SP No. 100152 are
hereby REVERSED and SET ASIDE. The levy placed upon the personal properties of
Kukan International Corporation is hereby ordered lifted and the personal properties
ordered returned to Kukan International Corporation. The RTC of Manila, Branch 21 is
hereby directed to execute the RTC Decision dated November 28, 2002 against
Kukan, Inc. with reasonable dispatch.

No costs.

SO ORDERED.

FIRST DIVISION
[ G.R. No. 191525. December 13, 2017 ]
INTERNATIONAL ACADEMY OF MANAGEMENT AND ECONOMICS
(I/AME), PETITIONER, V. LITTON AND COMPANY, INC., RESPONDENT.

DECISION
SERENO, C.J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Court of Appeals (CA) Decision[1] and Resolution[2] in CA-G.R. SP No.
107727.

23
The CA affirmed the Judgment[3] and Order[4] of the Regional Trial Court (RTC) of
Manila in Special Civil Action No. 06-115547 reinstating the Order[5] of the Metropolitan
Trial Court (MeTC) of Manila in favor of Litton and Company, Inc. (Litton).
THE FACTS
The facts, as culled from the records, are as follows:

Atty. Emmanuel T. Santos (Santos), a lessee to two (2) buildings owned by Litton,
owed the latter rental arrears as well as his share of the payment of realty taxes.[6]
Consequently, Litton filed a complaint for unlawful detainer against Santos before the
MeTC of Manila. The MeTC ruled in Litton's favor and ordered Santos to vacate A.I.D.
Building and Litton Apartments and to pay various sums of money representing unpaid
arrears, realty taxes, penalty, and attorney's fees.[7]
It appears however that the judgment was not executed. Litton subsequently filed an
action for revival of judgment, which was granted by the RTC.[8] Santos then appealed
the RTC decision to the CA, which nevertheless affirmed the RTC.[9] The said CA
decision became final and executory on 22 March 1994.[10]
On 11 November 1996, the sheriff of the MeTC of Manila levied on a piece of real
property covered by Transfer Certificate of Title (TCT) No. 187565 and registered in
the name of International Academy of Management and Economics Incorporated
(I/AME), in order to execute the judgment against Santos.[11] The annotations on TCT
No. 187565 indicated that such was "only up to the extent of the share of Emmanuel T.
Santos."[12]
I/AME filed with MeTC a "Motion to Lift or Remove Annotations Inscribed in TCT No.
187565 of the Register of Deeds of Makati City."[13] I/AME claimed that it has a
separate and distinct personality from Santos; hence, its properties should not be
made to answer for the latter's liabilities. The motion was denied in an Order dated 29
October 2004.
Upon motion for reconsideration of I/AME, the MeTC reversed its earlier ruling and
ordered the cancellation of the annotations of levy as well as the writ of execution.
Litton then elevated the case to the RTC, which in turn reversed the Order granting
I/AME's motion for reconsideration and reinstated the original Order dated 29 October
2004.

I/AME then filed a petition with the CA to contest the judgment of the RTC, which was
eventually denied by the appellate court.

THE CA RULING
The CA upheld the Judgment and Order of the RTC and held that no grave abuse of
discretion was committed when the trial court pierced the corporate veil of I/AME.[14]
It took note of how Santos had utilized I/AME to insulate the Makati real property
covered by TCT No. 187565 from the execution of the judgment rendered against him,
for the following reasons:

First, the Deed of Absolute Sale dated 31 August 1979 indicated that Santos, being
the .President, was representing I/AME as the vendee.[15] However, records show that
it was only in 1985 that I/AME was organized as a juridical entity.[16] Obviously, Santos
could not have been President of a non-existent corporation at that time.[17]
Second, the CA noted that the subject real property was transferred to I/AME during
the pendency of the appeal for the revival of the judgment in the ejectment case in the
CA.[18]
Finally, the CA observed that the Register of Deeds of Makati City issued TCT No.
187565 only on 17 November 1993, fourteen (14) years after the execution of the
Deed of Absolute Sale and more than eight (8) years after I/AME was incorporated. [19]

24
Thus, the CA concluded that Santos merely used I/AME as a shield to protect his
property from the coverage of the writ of execution; therefore, piercing the veil of
corporate fiction is proper.[20]
THE ISSUES
The issues boil down to the alleged denial of due process when the court pierced the
corporate veil of I/AME and its property was made to answer for the liability of Santos.

OUR RULING
We deny the petition.

There was no violation of due process against

I/AME
Petitioner avers that its right to due process was violated when it was dragged into the
case and its real property made an object of a writ of execution in a judgment against
Santos. It argues that since it was not impleaded in the main case, the court a quo
never acquired jurisdiction over it. Indeed, compliance with the recognized modes of
acquisition of jurisdiction cannot be dispensed with even in piercing the veil of
corporation.[21]
In a petition for review on certiorari under Rule 45, only questions of law shall be
entertained. This Court considers the determination of the existence of any of the
circumstances that would warrant the piercing of the veil of corporate fiction as a
question of fact which ordinarily cannot be the subject of a petition for review on
certiorari under Rule 45. We will only take cognizance of factual issues if the findings of
the lower court are not supported by the evidence on record or are based on a
misapprehension of facts.[22] Once the CA affirms the factual findings of the trial court,
such findings are deemed final and conclusive and thus, may not be reviewed on
appeal, unless the judgment of the CA depends on a misapprehension of facts, which
if properly considered, would justify a different conclusion.[23] Such exception however,
is not applicable in this case.
The 29 October 2004 MeTC judgment, the RTC judgment, and the CA decision are
one in accord on the matters presented before this Court.

In general, corporations, whether stock or non-stock, are treated as separate and

distinct legal entities from the natural persons composing them. The privilege of being
considered a distinct and separate entity is confined to legitimate uses, and is subject
to equitable limitations to prevent its being exercised for fraudulent, unfair or illegal
purposes.[24] However, once equitable limitations are breached using the coverture of
the corporate veil, courts may step in to pierce the same.
As we held in Lanuza, Jr. v. BF Corporation:[25]
Piercing the corporate veil is warranted when "[the separate personality of a
corporation] is used as a means to perpetrate fraud or an illegal act, or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, or to confuse
legitimate issues." It is also warranted in alter ego cases "where a corporation is merely
a farce since it is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another corporation."

When [the] corporate veil is pierced, the corporation and persons who are normally
treated as distinct from the corporation are treated as one person, such that when the
corporation is adjudged liable, these persons, too, become liable as if they were the
corporation.

25
The piercing of the corporate veil is premised on the fact that the corporation
concerned must have been properly served with summons or properly subjected to the
jurisdiction of the court a quo. Corollary thereto, it cannot be subjected to a writ of
execution meant for another in violation of its right to due process.[26]
There exists, however, an exception to this rule: if it is shown "by clear and convincing
proof that the separate and distinct personality of the corporation was purposefully
employed to evade a legitimate and binding commitment and perpetuate a fraud or like
wrongdoings."[27]
The resistance of the Court to offend the right to due process of a corporation that is a
nonparty in a main case, may disintegrate not only when its director, officer,
shareholder, 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.[28]
Thus, as the Court has already ruled, a party whose corporation is vulnerable to
piercing of its corporate veil cannot argue violation of due process.[29]
In this case, the Court confirms the lower courts' findings that Santos had an existing
obligation based on a court judgment that he owed monthly rentals and unpaid realty
taxes under a lease contract he entered into as lessee with the Littons as lessor. He
was not able to comply with this particular obligation, and in fact, refused to comply
therewith.

This Court agrees with the CA that Santos used I/AME as a means to defeat judicial
processes and to evade his obligation to Litton.[30] Thus, even while I/AME was not
impleaded in the main case and yet 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. We
will further expound on this matter.
Piercing the Corporate Veil may Apply to Non-
stock Corporations
Petitioner I/AME argues that the doctrine of piercing the corporate veil applies only to
stock corporations, and not to non-stock, nonprofit corporations such as I/AME since
there are no stockholders to hold liable in such a situation but instead only members.
Hence, they do not have investments or shares of stock or assets to answer for
possible liabilities. Thus, no one in a non-stock corporation can be held liable in case
the corporate veil is disregarded or pierced.[31]
The CA disagreed. It ruled that since the law does not make a distinction between a
stock and non-stock corporation, neither should there be a distinction in case the
doctrine of piercing the veil of corporate fiction has to be applied. While I/AME is an
educational institution, the CA further ruled, it still is a registered corporation
conducting its affairs as such.[32]
This Court agrees with the CA.

In determining the propriety of applicability of piercing the veil of corporate fiction, this
Court, in a number of cases, did not put in issue whether a corporation is a stock or
non-stock corporation. In Sulo ng Bayan, Inc. v. Gregorio Araneta, Inc.,[33] we
considered but ultimately refused to pierce the corporate veil of a non-stock non-profit
corporation which sought to institute an action for reconveyance of real property on
behalf of its members. This Court held that the non-stock corporation had no
personality to institute a class suit on behalf of its members, considering that the non-
stock corporation was not an assignee or transferee of the real property in question,
and did not have an identity that was one and the same as its members.
In another case, this Court did not put in issue whether the corporation is a non-stock,
non-profit, non-governmental corporation in considering the application of the doctrine
of piercing of corporate veil. In Republic of the Philippines v. Institute for Social

26
Concern,[34] while we did not allow the piercing of the corporate veil, this Court affirmed
the finding of the CA that the Chairman of the Institute for Social Concern cannot be
held jointly and severally liable with the aforesaid non-governmental organization
(NGO) at the time the Memorandum of Agreement was entered into with the Philippine
Government. We found no fraud in that case committed by the Chairman that would
have justified the piercing of the corporate veil of the NGO.[35]
In the United States, from which we have adopted our law on corporations, non-profit
corporations are not immune from the doctrine of piercing the corporate veil. Their
courts view piercing of the corporation as an equitable remedy, which justifies said
courts to scrutinize any organization however organized and in whatever manner it
operates. Moreover, control of ownership does not hinge on stock ownership.

As held in Barineau v. Barineau:[36]

[t]he mere fact that the corporation involved is a nonprofit corporation does not by itself
preclude a court from applying the equitable remedy of piercing the corporate veil. The
equitable character of the remedy permits a court to look to the substance of the
organization, and its decision is not controlled by the statutory framework under which
the corporation was formed and operated. While it may appear to be impossible for a
person to exercise ownership control over a nonstock, not-for-profit corporation, a
person can be held personally liable under the alter ego theory if the evidence shows
that the person controlling the corporation did in fact exercise control, even though
there was no stock ownership.

In another U.S. case, Public Interest Bounty Hunters v. Board of Governors of Federal
Reserve System,[37] the U.S. Court allowed the piercing of the corporate veil of the
Foundation headed by the plaintiff, in order to avoid inequitable results. Plaintiff was
found to be the sole trustee, the sole member of the board, and the sole financial
contributor to the Foundation. In the end, the Court found that the plaintiff used the
Foundation to avoid paying attorneys' fees.
The concept of equitable ownership, for stock or non-stock corporations, in piercing of
the corporate veil scenarios, may also be considered. An equitable owner is an
individual who is a non-shareholder defendant, who exercises sufficient control or
considerable authority over the corporation to the point of completely disregarding the
corporate form and acting as though its assets are his or her alone to manage and
distribute.[38]
Given the foregoing, this Court sees no reason why a non-stock corporation such as
I/AME, may not be scrutinized for purposes of piercing the corporate veil or fiction.

Piercing the Corporate Veil may Apply to

Natural Persons
The petitioner also insists that the piercing of the corporate veil cannot be applied to a
natural person - in this case, Santos - simply because as a human being, he has no
corporate veil shrouding or covering his person.[39]
a) When the Corporation is the Alter Ego of a Natural Person
As cited in Sulo ng Bayan, Inc. v. Araneta, Inc.,[40] "[t]he doctrine of alter ego is based
upon the misuse of a corporation by an individual for wrongful or inequitable
purposes, and in such case the court merely disregards the corporate entity and holds
the individual responsible for acts knowingly and intentionally done in the name of the
corporation." This, Santos has done in this case. Santos formed I/AME, using the non-
stock corporation, to evade paying his judgment creditor, Litton.
The piercing of the corporate veil may apply to corporations as well as natural persons
involved with corporations. This Court has held that the "corporate mask may be lifted

27
and the corporate veil may be pierced when a corporation is just but the alter ego of a
person or of another corporation.”[41]
We have considered a deceased natural person as one and the same with his
corporation to protect the succession rights of his legal heirs to his estate. In Cease v.
Court of Appeals,[42] the predecessor-in-interest organized a close corporation which
acquired properties during its existence. When he died intestate, trouble ensued
amongst his children on whether or not to consider his company one and the same
with his person. The Court agreed with the trial court when it pierced the corporate veil
of the decedent's corporation. It found that said corporation was his business conduit
and alter ego. Thus, the acquired properties were actually properties of the decedent
and as such, should be divided among the decedent's legitimate children in the
partition of his estate.[43]
In another instance, this Court allowed the piercing of the corporate veil against
another natural person, in Arcilla v. Court of Appeals.[44] The case stemmed from a
complaint for sum of money against Arcilla for his failure to pay his loan from the
private respondent. Arcilla, in his defense, alleged that the loan was in the name of his
family corporation, CSAR Marine Resources, Inc. He further argued that the CA erred
in holding CSAR Marine Resources liable to the private respondent since the latter was
not impleaded as a party in the case. This Court allowed the piercing of the corporate
veil and held that Arcilla used "his capacity as President, x x x [as] a sanctuary for a
defense x x x to avoid complying with the liability adjudged against him x x x.''[45] We
held that his liability remained attached even if he was impleaded as a party, and not
the corporation, to the collection case and even if he ceased to be corporate
president.[46] Indeed, even if Arcilla had ceased to be corporate president, he remained
personally liable for the judgment debt to pay his personal loan, for we treated him and
the corporation as one and the same. CSAR Marine was deemed his alter ego.
We find similarities with Arcilla and the instant case. Like Arcilla, Santos: (1) was
adjudged liable to pay on a judgment against him; (2) he became President of a
corporation; (3) he formed a corporation to conceal assets which were supposed to
pay for the judgment against his favor; (4) the corporation which has Santos as its
President, is being asked by the court to pay on the judgment; and (5) he may not use
as a defense that he is no longer President of I/AME (although a visit to the website of
the school shows he is the current President).[47]
This Court agrees with the CA that I/AME is the alter ego of Santos and Santos - the
natural person - is the alter ego of I/AME. Santos falsely represented himself as
President of I/AME in the Deed of Absolute Sale when he bought the Makati real
property, at a time when I/AME had not yet existed. Uncontroverted facts in this case
also reveal the findings of MeTC showing Santos and I/AME as being one and the
same person:

(1) Santos is the conceptualizer and implementor of I/AME;

(2) Santos' contribution is P1,200,000.00 (One Million Two Hundred Thousand Pesos)
out of the P1,500,000.00 (One Million Five Hundred Thousand Pesos), making him the
majority contributor of I/AME; and,

(3) The building being occupied by I/AME is named after Santos using his known
nickname (to date it is called, the "Noli Santos International Tower").[48]
This Court deems I/AME and Santos as alter egos of each other based on the former's
own admission in its pleadings before the trial court. In its Answer (to Amended
Petition) with the RTC entitled Litton and Company, Inc. v. Hon. Hernandez-Calledo,
Civil Case No. 06-115547, I/AME admitted the allegations found in paragraphs 2, 4
and 5 of the amended petition of Litton, particularly paragraph number 4 which states:

28
4. Respondent, International Academy of Management and Economics
Inc. (hereinafter referred to as Respondent I/AME), is a corporation organized and
existing under Philippine laws with address at 1061 Metropolitan Avenue, San Antonio
Village, Makati City, where it may be served with summons and other judicial
processes. It is the corporate entity used by Respondent Santos as his alter ego
for the purpose of shielding his assets from the reach of his creditors, one of
which is herein Petitioner.[49] (Emphases ours)
Hence, I/AME is the alter ego of the natural person, Santos, which the latter used to
evade the execution on the Makati property, thus frustrating the satisfaction of the
judgment won by Litton.

b) Reverse Piercing of the Corporate Veil

This Court in Arcilla pierced the corporate veil of CSAR Marine Resources to satisfy a
money judgment against its erstwhile President, Arcilla.
We borrow from American parlance what is called reverse piercing or reverse
corporate piercing or piercing the corporate veil "in reverse."
As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited Partnership,[50] "in a
traditional veil-piercing action, a court disregards the existence of the corporate entity
so a claimant can reach the assets of a corporate insider. In a reverse piercing action,
however, the plaintiff seeks to reach the assets of a corporation to satisfy claims
against a corporate insider."
"Reverse-piercing flows in the opposite direction (of traditional corporate veil-piercing)
and makes the corporation liable for the debt of the shareholders."[51]
It has two (2) types: outsider reverse piercing and insider reverse piercing. Outsider
reverse piercing occurs when a party with a claim against an individual or corporation
attempts to be repaid with assets of a corporation owned or substantially controlled by
the defendant.[52] In contrast, in insider reverse piercing, the controlling members will
attempt to ignore the corporate fiction in order to take advantage of a benefit available
to the corporation, such as an interest in a lawsuit or protection of personal assets.[53]
Outsider reverse veil-piercing is applicable in the instant case. Litton, as judgment
creditor, seeks the Court's intervention to pierce the corporate veil of I/AME in order to
make its Makati real property answer for a judgment against Santos, who formerly
owned and still substantially controls I/AME.

In the U.S. case Acree v. McMahan,[54] the American court held that "[o]utsider reverse
veil-piercing extends the traditional veil-piercing doctrine to permit a third-party creditor
to pierce the veil to satisfy the debts of an individual out of the corporation's assets."
The Court has pierced the corporate veil in a reverse manner in the instances when
the scheme was to avoid corporate assets to be included in the estate of a decedent
as in the Cease case and when the corporation was used to escape a judgment to pay
a debt as in the Arcilla case.
In a 1962 Philippine case, this Court also employed what we now call reverse-piercing
of the corporate veil. In Palacio v. Fely Transportation Co.,[55] we found that the
president and general manager of the private respondent company formed the
corporation to evade his subsidiary civil liability resulting from the conviction of his
driver who ran over the child of the petitioner, causing injuries and medical expenses.
The Court agreed with the plaintiffs that the president and general manager, and Fely
Transportation, may be regarded as one and the same person. Thus, even if the
president and general manager was not a party to the case, we reversed the lower
court and declared both him and the private respondent company, jointly and severally
liable to the plaintiffs. Thus, this Court allowed the outsider-plaintiffs to pierce the
corporate veil of Fely Transportation to run after its corporate assets and pay the
subsidiary civil liability of the company's president and general manager.

29
This notwithstanding, the equitable remedy of reverse corporate piercing or reverse
piercing was not meant to encourage a creditor's failure to undertake such remedies
that could have otherwise been available, to the detriment of other creditors.[56]
Reverse corporate piercing is an equitable remedy which if utilized cavalierly, may lead
to disastrous consequences for both stock and non-stock corporations. We are aware
that ordinary judgment collection procedures or other legal remedies are preferred over
that which would risk damage to third parties (for instance, innocent stockholders or
voluntary creditors) with unprotected interests in the assets of the beleaguered
corporation.[57]
Thus, this Court would recommend the application of the current 1997 Rules on Civil
Procedure on Enforcement of Judgments. Under the current Rules of Court on Civil
Procedure, when it comes to satisfaction by levy, a judgment obligor is given the option
to immediately choose which property or part thereof may be levied upon to satisfy the
judgment. If the judgment obligor does not exercise the option, personal properties, if
any, shall be first levied and then on real properties if the personal properties are
deemed insufficient to answer for the judgment.[58]
In the instant case, it may be possible for this Court to recommend that Litton run after
the other properties of Santos that could satisfy the money judgment - first personal,
then other real properties other than that of the school. However, if we allow this, we
frustrate the decades-old yet valid MeTC judgment which levied on the real property
now titled under the name of the school. Moreover, this Court will unwittingly condone
the action of Santos in hiding all these years behind the corporate form to evade
paying his obligation under the judgment in the court a quo. This we cannot
countenance without being a party to the injustice.
Thus, the reverse piercing of the corporate veil of I/AME to enforce the levy on
execution of the Makati real property where the school now stands is applied.

WHEREFORE, in view of the foregoing, the instant petition is DENIED. The CA

Decision in CA-G.R. SP No. 107727 dated 30 October 2009 and its Resolution on 12
March 2010 are hereby AFFIRMED. The MeTC Order dated 29 October 2004 is
hereby REINSTATED.
Accordingly, the MeTC of Manila, Branch 2, is hereby DIRECTED to execute with
dispatch the MeTC Order dated 29 October 2004 against Santos.
SO ORDERED.

FIRST DIVISION
[ G.R. No. 210032. April 25, 2017]
DUTCH MOVERS, INC. CESAR LEE AND YOLANDA LEE, PETITIONERS,
VS. EDILBERTO[1] LEQUIN, CHRISTOPHER R. SALVADOR,
REYNALDO[2] L. SINGSING, AND RAFFY B. MASCARDO, RESPONDENTS.

DECISION
DEL CASTILLO, J.:
Before the Court is a Petition for Review on Certiorari assailing the July 1, 2013
Decision[3] of the Court of Appeals in CA-G.R. SP No. 113774. The CA reversed and
set aside the October 29, 2009[4] and January 29, 2010[5] Resolutions of the National
Labor Relations Commission (NLRC), which in turn reversed and set aside the
Order[6] dated September 4, 2009 of Labor Arbiter Lilia S. Savari (LA Savari).

30
Also challenged is the November 13, 2013 CA Resolution.[7] which denied the Motion
for Reconsideration on the assailed Decision.

Factual Antecedents

This case is an offshoot of the illegal dismissal Complaint[8] filed by Edilberto Lequin
(Lequin), Christopher Salvador, Reynaldo Singsing, and Raffy Mascardo (respondents)
against Dutch Movers, Inc. (DMI), and/or spouses Cesar Lee and Yolanda Lee
(petitioners), its alleged President/Owner, and Manager respectively.

In their Amended Complaint and Position Paper,[9] respondents stated that DMI, a
domestic corporation engaged in hauling liquefied petroleum gas, employed Lequin as
truck driver and the rest of respondents as helpers; on December 28, 2004, Cesar Lee,
through the Supervisor Nazario Furio, informed them that DMI would cease its hauling
operation for no reason; as such, they requested DMI to issue a formal notice
regarding the matter but to no avail. Later, upon respondents' request, the DOLE
NCR[10] issued a certification[11] revealing that DMI did not file any notice of business
closure. Thus, respondents argued that they were illegally dismissed as their
termination was without cause and only on the pretext of closure.

On October 28, 2005, LA Aliman D. Mangandog dismissed[12] the case for lack of
cause of action.

On November 23, 2007, the NLRC reversed and set aside the LA Decision. It ruled that
respondents were illegally dismissed because DMI simply placed them on standby, and
no longer provide them with work. The dispositive portion of the NLRC
Decision[13] reads:
WHEREFORE, the Decision dated October 28, 2005 is hereby REVERSED and SET
ASIDE and a new judgment is hereby rendered ordering respondent Dutch Movers,
Inc. to reinstate complainants to their former positions without loss of seniority rights
and other privileges. Respondent corporation is also hereby ordered to pay
complainants their full backwages from the time they were illegally dismissed up to the
date of their actual reinstatement and ten (10%) percent of the monetary award as for
attorney's fees.

SO ORDERED.[14]
The NLRC Decision became final and executory on December 30, 2007.[15] And, on
February 14, 2008, the NLRC issued an Entry of Judgment[16] on the case.

Consequently, respondents filed a Motion for Writ of Execution.[17] Later, they submitted
a Reiterating Motion for Writ of Execution with Updated Computation of Full
Backwages.[18] Pending resolution of these motions, respondents filed a Manifestation
and Motion to Implead[19] stating that upon investigation, they discovered that DMI no
longer operates. They, nonetheless, insisted that petitioners - who managed and
operated DMI, and consistently represented to respondents that they were the owners
of DMI - continue to work at Toyota Alabang, which they (petitioners) also own and
operate. They further averred that the Articles of Incorporation (AOI) of DMI ironically
did not include petitioners as its directors or officers; and those named directors and

31
officers were persons unknown to them. They likewise claimed that per inquiry with the
SEC[20] and the DOLE, they learned that DMI did not file any notice of business
closure; and the creation and operation of DMI was attended with fraud making it
convenient for petitioners to evade their legal obligations to them.

Given these developments, respondents prayed that petitioners, and the officers
named in DMI's AOI, which included Edgar N. Smith and Millicent C. Smith (spouses
Smith), be impleaded, and be held solidarity liable with DMI in paying the judgment
awards.

In their Opposition to Motion to Implead,[21] spouses Smith alleged that as part of their
services as lawyers, they lent their names to petitioners to assist them in incorporating
DMI. Allegedly, after such undertaking, spouses Smith promptly transferred their
supposed rights in DMI in favor of petitioners.

Spouses Smith stressed that they never participated in the management and
operations of DMI, and they were not its stockholders, directors, officers or managers
at the time respondents were terminated. They further insisted that they were not
afforded due process as they were not impleaded from the inception of the illegal
dismissal case; and hence, they cannot be held liable for the liabilities of DMI.

On April 1, 2009, LA Savari issued an Order[22] holding petitioners liable for the
judgment awards. LA Savari decreed that petitioners represented themselves to
respondents as the owners of DMI; and were the ones who managed the same. She
further noted that petitioners were afforded due process as they were impleaded from
the beginning of this case.

Later, respondents filed anew a Reiterating Motion for Writ of Execution and
Approve[d) Updated Computation of Full Backwages.[23]

On July 31, 2009, LA Savari issued a Writ of Execution, the pertinent portion of which
reads:
NOW THEREFORE, you [Deputy Sheriff] are commanded to proceed to respondents
DUTCH MOVERS and/or CESAR LEE and YOLANDA LEE with address at c/o Toyota
Alabang, Alabang Zapote Road, Las Piñas City or wherever they may be found within
the jurisdiction of the Republic of the Philippines and collect from said respondents the
amount of THREE MILLION EIGHT HUNDRED EIGHTEEN THOUSAND ONE
HUNDRED EIGHTY SIX PESOS & 66/100 (Php3,818,186.66) representing
Complainants' awards plus 10%, Attorney's fees in the amount of THREE HUNDRED
EIGHTY ONE THOUSAND EIGHT HUNDRED EIGHTEEN PESOS & 66/100
(Php381,818.66) and execution fee in the amount of FORTY THOUSAND FIVE
HUNDRED PESOS (Php40,500.00) or a total of FOUR MILLION TWO HUNDRED
FORTY THOUSAND FIVE HUNDRED FIVE PESOS & 32/100 (Php4,240,505.32) x x
x[24]
Petitioners moved[25] to quash the Writ of Execution contending that the April 1, 2009
LA Order was void because the LA has no jurisdiction to modify the final and executory
NLRC Decision and the same cannot anymore be altered or modified since there was
no finding of bad faith against them.

32
Ruling of the Labor Arbiter

On September 4, 2009, LA Savari denied petitioners' Motion to Quash because it did

not contain any ground that must be set forth in such motion.

Thus, petitioners appealed to the NLRC.

Ruling of the National Labor Relations Commission

On October 29, 2009, the NLRC quashed the Writ of Execution insofar as it held
petitioners liable to pay the judgment awards. The decretal portion of the NLRC
Resolution reads:
WHEREFORE, in view of the foregoing, the assailed Order dated September 4, 2009
denying respondents' Motion to Quash Writ is hereby REVERSED and SET ASIDE.
The Writ of Execution dated July 13,[26] 2009 is hereby QUASHED insofar as it holds
individual respondents Cesar Lee and Yolanda Lee liable for the judgment award
against the complainants.

Let the entire record of the case be forwarded to the Labor Arbiter of origin for
appropriate proceedings.

SO ORDERED.[27]
The NLRC ruled that the Writ of Execution should only pertain to DMI since petitioners
were not held liable to pay the awards under the final and executory NLRC Decision. It
added that petitioners could not be sued personally for the acts of DMI because the
latter had a separate and distinct personality from the persons comprising it; and, there
was no showing that petitioners were stockholders or officers of DMI; or even granting
that they were, they were not shown to have acted in bad faith against respondents.

On January 29, 2010, the NLRC denied respondents' Motion for Reconsideration.

Undaunted, respondents filed a Petition for Certiorari with the CA ascribing grave
abuse of discretion against the NLRC in quashing the Writ of Execution insofar as it
held petitioners liable to pay the judgment awards.

Ruling of the Court of Appeals

On July 1, 2013, the CA reversed and set aside the NLRC Resolutions, and
accordingly affirmed the Writ of Execution impleading petitioners as party-respondents
liable to answer for the judgment awards.

The CA ratiocinated that as a rule, once a judgment becomes final and executory, it
cannot anymore be altered or modified; however, an exception to this rule is when
there is a supervening event, which renders the execution of judgment unjust or
impossible. It added that petitioners were afforded due process as they were
impleaded from the beginning of the case; and, respondents identified petitioners as
the persons who hired them, and were the ones behind DMI. It also noted that such

33
participation of petitioners was confirmed by DIVII's two incorporators who attested that
they lent their names to petitioners to assist the latter in incorporating DMI; and, after
their undertaking, these individuals relinquished their purported interests in DMI in
favor of petitioners.

On November 13, 2013, the CA denied the Motion for Reconsideration on the assailed
Decision.

Thus, petitioners filed this Petition raising the following grounds:

THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN
RULING THAT RESPONDENTS SHOULD BE LIABLE FOR THE JUDGMENT AWARD
TO RESPONDENTS BASED ON THE FOLLOWING:

THE VALDERAMA VS. NLRC AND DAVID VS. CA ARE NOT APPLICABLE IN THE
INSTANT CASE.

II

THERE IS NO LEGAL BASIS TO PIERCE THE VEIL OF CORPORATE FICTION OF

DUTCH MOVERS, INC.[28]
Petitioners argue that the circumstances in Valderrama v. National Labor Relations
Commission[29] differ with those of the instant case. They explain that in Valderrama,
the LA therein granted a motion for clarification. In this case, however, the LA made
petitioners liable through a mere manifestation and motion to implead filed by
respondents. They further stated that in Valderrama, the body of the decision pointed
out the liability of the individual respondents therein while here, there was no mention
in the November 23, 2007 NLRC Decision regarding petitioners' liability. As such they
posit that they cannot be held liable under said NLRC Decision.

In addition, petitioners claim that there is no basis to pierce the veil of corporate fiction
because DMI had a separate and distinct personality from the officers comprising it.
They also insist that there was no showing that the termination of respondents was
attended by bad faith.

In fine, petitioners argue that despite the allegation that they operated and managed
the affairs of DMI, they cannot be held accountable for its liability in the absence of any
showing of bad faith on their part.

Respondents, on their end, counter that petitioners were identified as the ones who
owned and managed DMI and therefore, they should be held liable to pay the
judgment awards. They also stress that petitioners were consistently impleaded since
the filing of the complaint and thus, they were given the opportunity to be heard.

Issue

34
Whether petitioners are personally liable to pay the judgment awards in favor of
respondents

Our Ruling

The Court denies the Petition.

To begin with, the Court is not a trier of facts and only questions of law may be raised
in a petition under Rule 45 of the Rules of Court. This rule, nevertheless, allows certain
exceptions, which include such instance where the factual findings of the CA are
contrary to those of the lower court or tribunal. Considering the divergent factual
findings of the CA and the NLRC in this case, the Court deems it necessary to
examine, review and evaluate anew the evidence on record.[30]

Moreover, after a thorough review of the records, the Court finds that contrary to
petitioners' claim, Valderrama v. National Labor Relations Commission,[31] and David v.
Court of Appeals[32] are applicable here. In said cases, the Court held that the principle
of immutability of judgment, or the rule that once a judgment has become final and
executory, the same can no longer be altered or modified and the court's duty is only to
order its execution, is not absolute. One of its exceptions is when there is a
supervening event occurring after the judgment becomes final and executory, which
renders the decision unenforceable.[33]

To note, a supervening event refers to facts that transpired after a judgment has
become final and executory, or to new situation that developed after the same attained
finality. Supervening events include matters that the parties were unaware of before or
during trial as they were not yet existing during that time.[34]

In Valderrama, the supervening event was the closure of Commodex, the company
therein, after the decision became final and executory, and without any showing that it
filed any proceeding for bankruptcy. The Court held that therein petitioner, the owner of
Commodex, was personally liable for the judgment awards because she controlled the
company.

Similarly, supervening events transpired in this case after the NLRC Decision became
final and executory, which rendered its execution impossible and unjust. Like
in Valderrama, during the execution stage, DMI ceased its operation, and the same did
not file any formal notice regarding it. Added to this, in their Opposition to the Motion to
Implead, spouses Smith revealed that they only lent their names to petitioners, and
they were included as incorporators just to assist the latter in forming DMI; after such
undertaking, spouses Smith immediately transferred their rights in DMI to petitioners,
which proved that petitioners were the ones in control of DMI, and used the same in
furthering their business interests.

In considering the foregoing events, the Court is not unmindful of the basic tenet that a
corporation has a separate and distinct personality from its stockholders, and from
other corporations it may be connected with. However, such personality may be
disregarded, or the veil of corporate fiction may be pierced attaching personal liability

35
against responsible 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."[35] By responsible person, we refer 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. Also, piercing the veil of corporate fiction is allowed where a corporation is
a mere alter ego or a conduit of a person, or another corporation.[36]

Here, the veil of corporate fiction must be pierced and accordingly, petitioners should
be held personally liable for judgment awards because the peculiarity of the situation
shows that 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. As will be
shown be shown below, petitioners controlled DMI by making it appear to have no
mind of its own,[37] and used DMI as shield in evading legal liabilities, including
payment of the judgment awards in favor of respondents.[38]

First, petitioners and DMI jointly filed their Position Paper,[39] Reply,[40] and
Rejoinder[41] in contesting respondents' illegal dismissal. Perplexingly, petitioners
argued that they were not part of DMI and were not privy to its dealings;[42] yet,
petitioners, along with DMI, collectively raised arguments on the illegal dismissal case
against them.

Stated differently, petitioners denied having any participation in the management and
operation of DMI; however, they were aware of and disclosed the circumstances
surrounding respondents' employment, and propounded arguments refuting that
respondents were illegally dismissed.

To note, petitioners revealed the annual compensation of respondents and their length
of service; they also set up the defense that respondents were merely project
employees, and were not terminated but that DMI's contract with its client was
discontinued resulting in the absence of hauling projects for respondents.

If only to prove that they were not part of DMI, petitioners could have revealed who
operated it, and from whom they derived the information embodied in their pleadings.
Such failure to reveal thus gives the Court reasons to give credence to respondents'
firm stand that petitioners are no strangers to DMI, and that they were the ones who
managed and operated it.

Second, the declarations made by spouses Smith further bolster that petitioners and
no other controlled DMI, to wit:
Complainants [herein respondents] in their own motion admit that they never saw
[spouses Smith] at the office of [DMI], and do not know them at all. This is because
[spouses Smith's] services as lawyers had long been dispensed by the Spouses Lee
and had no hand whatsoever in the management of the company. The Smiths, as
counsel of the spouses at [that] time, [lent] their names as incorporators to facilitate the
[incorporation of DMI.] Respondent Edgard Smith was then counsel of Toyota Alabang
and acts as its corporate secretary and as favor to his former client and employer,
Respondent Cesar Lee, agreed to help incorporate [DMI] and even asked his wife

36
Respondent, Millicent Smith, to act as incorporator also [to] complete the required 5
man incorporators. After the incorporation they assigned and transferred all their
purported participation in the company to the Respondents Spouses Cesar and
Yolanda Lee, who acted as managers and are the real owners of the corporation. Even
at the time complainant[s were] fired from [their] employment respondents Spouses
Smith had already given up their shares. The failure to an1end the Articles of
Incorporation of [DMI], and to apply for closure is the fault of the new board, if any was
constituted subsequently, and not of Respondents Smiths. Whatever fraud committed
was not committed by the Respondents Smiths, hence they could not be made
solidarily liable with Respondent Corporation or with the spouses Lee. If bad faith or
fraud did attend the termination of complainant[s], respondents Smiths would know
nothing of it because they had ceased any connection with [DMI] even prior to such
time. And they had at the inception of the corporation never exercised management
prerogatives in the selection, hiring, and firing of employees of [DMI].[43]
Spouses Smith categorically identified petitioners as the owners and managers of DMI.
In their Motion to Quash, however, petitioners neither denied the allegation of spouses
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 separate and
distinct personality of DMI.

Furthermore, the assailed CA Decision heavily relied on the declarations of spouses

Smith but still petitioners did not address the matters raised by spouses Smith in the
instant Petition with the Court.

Indeed, despite sufficient opportunity to clarify matters and/or to refute them,

petitioners simply brushed aside the allegations of spouses Smith that petitioners
owned and managed DMI. Petitioners just maintain that they did not act in bad faith;
that the NLRC Decision is final and executory; and that DMI has a distinct and
separate personality. Hence, for failure to address, clarify, or deny the declarations of
spouses Smith, the Court finds respondents' position that petitioners owned, and
operated DMI with merit.

Third, piercing the veil of corporate fiction 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.[44]

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 to
respondents.

While it is true that 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

37
evasion of legal duties to its employees, and as such, the piercing of the corporate veil
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, which "equitable piercing
doctrine was formulated to address and prevent."[45]

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. While such device to defeat labor
laws may be deemed ingenious and imaginative, the Court will not hesitate to draw the
line, and protect the right of workers to security of tenure, including ensuring that they
will receive the benefits they deserve when they fall victims of illegal dismissal.[46]

Finally, it appearing that respondents' reinstatement is no longer feasible by reason of

the closure of DMI, then separation pay should be awarded to respondents instead.[47]

WHEREFORE, the Petition is DENIED. The July 1, 2013 Decision and November 13,
2013 Resolution of the Court of Appeals in CA-G.R. SP 113774 are AFFIRMED with
MODIFICATION that instead of reinstatement, Dutch Movers, Inc. and spouses Cesar
Lee and Yolanda Lee are solidarily liable to pay respondents' separation pay for every
year of service.

SO ORDERED.

FIRST DIVISION

[ G.R. No. 205548. February 07, 2018 ]

DE LA SALLE MONTESSORI INTERNATIONAL OF MALOLOS, INC., PETITIONER,

VS. DE LA SALLE BROTHERS, INC., DE LA SALLE UNIVERSITY, INC., LA SALLE
ACADEMY, INC., DE LA SALLE-SANTIAGO ZOBEL SCHOOL, INC. (FORMERLY
NAMED DE LA SALLE-SOUTH INC.), DE LA SALLE CANLUBANG, INC.
(FORMERLY NAMED DE LA SALLE UNIVERSITY-CANLUBANG, INC.),
RESPONDENTS.

DECISION

JARDELEZA, J.:

Petitioner De La Salle Montessori International of Malolos, Inc. filed this petition for
review on certiorari1 under Rule 45 of the Rules of Court to challenge the Decision2 of
the Court of Appeals (CA) dated September 27, 2012 in CA-G.R. SP No. 116439 and
its Resolution3 dated January 21, 2013 which denied petitioner's motion for
reconsideration. The CA affirmed the Decision4 of the Securities and Exchange
Commission (SEC) En Banc dated September 30, 2010, which in turn affirmed the
Order5 of the SEC Office of the General Counsel (OGC) dated May 12, 2010 directing
petitioner to change or modify its corporate name.

Petitioner reserved with the SEC its corporate name De La Salle Montessori
International Malolos, Inc. from June 4 to August 3, 2007,6 after which the SEC
indorsed petitioner's articles of incorporation and by-laws to the Department of

38
Education (DepEd) for comments and recommendation.7 The DepEd returned the
indorsement without objections.8 Consequently, the SEC issued a certificate of
incorporation to petitioner.9

Afterwards, DepEd Region III, City of San Fernando, Pampanga granted petitioner
government recognition for its pre-elementary and elementary courses on June 30,
2008,10 and for its secondary courses on February 15, 2010.11

On January 29, 2010, respondents De La Salle Brothers, Inc., De La Salle

University, Inc., La Salle Academy, Inc., De La Salle-Santiago Zobel School, Inc.
(formerly De La Salle-South, Inc.), and De La Salle Canlubang, Inc. (formerly De La
Salle University-Canlubang, Inc.) filed a petition with the SEC seeking to compel
petitioner to change its corporate name. Respondents claim that petitioner's corporate
name is misleading or confusingly similar to that which respondents have acquired a
prior right to use, and that respondents' consent to use such name was not
obtained.(awÞhi( According to respondents, petitioner's use of the dominant phrases
"La Salle" and "De La Salle" gives an erroneous impression that De La Salle
Montessori International of Malolos, Inc. is part of the "La Salle" group, which violates
Section 18 of the Corporation Code of the Philippines. Moreover, being the prior
registrant, respondents have acquired the use of said phrases as part of their
corporate names and have freedom from infringement of the same.12

On May 12, 2010, the SEC OGC issued an Order13 directing petitioner to change
or modify its corporate name. It held, among others, that respondents have acquired
the right to the exclusive use of the name "La Salle" with freedom from infringement by
priority of adoption, as they have all been incorporated using the name ahead of
petitioner. Furthermore, the name "La Salle" is not generic in that it does not
particularly refer to the basic or inherent nature of the services provided by
respondents. Neither is it descriptive in the sense that it does not forthwith and clearly
convey an immediate idea of what respondents' services are. In fact, it merely gives a
hint, and requires imagination, thought and perception to reach a conclusion as to the
nature of such services. Hence, the SEC OGC concluded that respondents' use of the
phrase "De La Salle" or "La Salle" is arbitrary, fanciful, whimsical and distinctive, and
thus legally protectable. As regards petitioner's argument that its use of the name does
not result to confusion, the SEC OGC held otherwise, noting that confusion is probably
or likely to occur considering not only the similarity in the parties' names but also the
business or industry they are engaged in, which is providing courses of study in pre-
elementary, elementary and secondary education.14 The SEC OGC disagreed with
petitioner's argument that the case of Lyceum of the Philippines, Inc. v. Court of
Appeals15 (Lyceum of the Philippines) applies since the word "lyceum" is clearly
descriptive of the very being and defining purpose of an educational corporation, unlike
the term "De La Salle" or "La Salle."16 Hence, the Court held in that case that the
Lyceum of the Philippines, Inc. cannot claim exclusive use of the name "lyceum."

Petitioner filed an appeal before the SEC En Banc, which rendered a Decision17 on
September 30, 2010 affirming the Order of the SEC OGC. It held, among others, that
the Lyceum of the Philippines case does not apply since the word "lyceum" is a generic
word that pertains to a category of educational institutions and is widely used around
the world. Further, the Lyceum of the Philippines failed to prove that "lyceum" acquired
secondary meaning capable of exclusive appropriation. Petitioner also failed to
establish that the term "De La Salle" is generic for the principle enunciated in Lyceum
of the Philippines to apply.18

39
 Petitioner consequently filed a petition for review with the CA. On September 27,
2012, the CA rendered its Decision19 affirming the Order of the SEC OGC and the
Decision of the SEC En Banc in toto.

Hence, this petition, which raises the lone issue of "[w]hether or not the [CA] acted
with grave abuse of discretion amounting to lack or in excess of jurisdiction when it
erred in not applying the doctrine laid down in the case of [Lyceum of the
Philippines], that LYCEUM is not attended with exclusivity."20

The Court cannot at the outset fail to note the erroneous wording of the issue.
Petitioner alleged grave abuse of discretion while also attributing error of judgment on
the part of the CA in not applying a certain doctrine. Certainly, these grounds do not
coincide in the same remedy. A petition for review on certiorari under Rule 45 of the
Rules of Court is a separate remedy from a petition for certiorari under Rule 65. A
petition for review on certiorari under Rule 45 brings up for review errors of judgment,
while a petition for certiorari under Rule 65 covers errors of jurisdiction or grave abuse
of discretion amounting to excess or lack of jurisdiction. Grave abuse of discretion is
not an allowable ground under Rule 45.21 Nonetheless, as the petition argues on the
basis of errors of judgment allegedly committed by the CA, the Court will excuse the
error in terminology.

The main thrust of the petition is that the CA erred in not applying the ruling in
the Lyceum of the Philippines case which petitioner argues have "the same facts and
events"22 as in this case.

We DENY the petition and uphold the Decision of the CA.

As early as Western Equipment and Supply Co. v. Reyes,23 the Court declared that
a corporation's right to use its corporate and trade name is a property right, a right in
rem, which it may assert and protect against the world in the same manner as it may
protect its tangible property, real or personal, against trespass or conversion.24 It is
regarded, to a certain extent, as a property right and one which cannot be impaired or
defeated by subsequent appropriation by another corporation in the same
field.25 Furthermore, in Philips Export B.V. v. Court of Appeals,26 we held:

A name is peculiarly important as necessary to the very

existence of a corporation x x x. Its name is one of its
attributes, an element of its existence, and essential to its
identity x x x. The general rule as to corporations is that each
corporation must have a name by which it is to sue and be
sued and do all legal acts. The name of a corporation in this
respect designates the corporation in the same manner as the
name of an individual designates the person x x x; and the right
to use its corporate name is as much a part of the corporate
franchise as any other privilege granted x x x.

A corporation acquires its name by choice and need not

select a name identical with or similar to one already
appropriated by a senior corporation while an individual's name
is thrust upon him x x x. A corporation can no more use a
corporate name in violation of the rights of others than an
individual can use his nan1e legally acquired so as to mislead
the public and injure another x x x.27

40
 Recognizing the intrinsic importance of corporate names, our Corporation Code
established a restrictive rule insofar as corporate names are concerned.28 Thus,
Section 18 thereof provides:

Sec. 18. Corporate name. - No corporate name may be

allowed by the Securities and Exchange Commission if the
proposed name is identical or deceptively or confusingly similar
to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary
to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate
of incorporation under the amended name.

The policy underlying the prohibition in Section 18 against the registration of a

corporate name which is "identical or deceptively or confusingly similar" to that of any
existing corporation or which is "patently deceptive" or "patently confusing" or "contrary
to existing laws," 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 corporations.29

Indeed, parties organizing a corporation must choose a name at their peril; and the
use of a name similar to one adopted by another corporation, whether a business or a
non-profit organization, if misleading or likely to injure in the exercise of its corporate
functions, regardless of intent, may be prevented by the corporation having a prior
right, by a suit for injunction against the new corporation to prevent the use of the
name.30

In Philips Export B.V. v. Court of Appeals,31 the Court held that to fall within the
prohibition of Section 18, two requisites must be proven, to wit: (1) that the complainant
corporation acquired a prior right over the use of such corporate name; and (2) the
proposed name is either: (a) identical, or (b) deceptively or confusingly similar to that of
any existing corporation or to any other name already protected by law; or (c) patently
deceptive, confusing or contrary to existing law.32

With respect to the first requisite, the Court has held that the right to the exclusive
use of a corporate name with freedom from infringement by similarity is determined by
priority of adoption.33

In this case, respondents' corporate names were registered on the following dates:
(1) De La Salle Brothers, Inc. on October 9, 1961 under SEC Registration No. 19569;
(2) De La Salle University, Inc. on December 19, 1975 under SEC Registration No.
65138; (3) La Salle Academy, Inc. on January 26, 1960 under SEC Registration No.
16293; (4) De La SalleSantiago Zobel School, Inc. on October 7, 1976 under SEC
Registration No. 69997; and (5) De La Salle Canlubang, Inc. on August 5, 1998 under
SEC Registration No. Al998-01021.34

On the other hand, petitioner was issued a Certificate of Registration only on July 5,
2007 under Company Registration No. CN200710647.35 It being clear that
respondents are the prior registrants, they certainly have acquired the right to use the
words "De La Salle" or "La Salle" as part of their corporate names.

The second requisite is also satisfied since there is a confusing similarity between
petitioner'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.

41
 Petitioner asserts that it has the right to use the phrase "De La Salle" in its corporate
name as respondents did not obtain the right to its exclusive use, nor did the words
acquire secondary meaning. It endeavoured to demonstrate that no confusion will arise
from its use of the said phrase by stating that its complete name, "De La Salle
Montessori International of Malolos, Inc.," contains four other distinctive words that are
not found in respondents' corporate names. Moreover, 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. Petitioner also compared its
logo to that of respondent De La Salle University and argued that they are different.
Further, petitioner argued that it does not charge as much fees as respondents, that its
clients knew that it is not part of respondents' schools, and that it never misrepresented
nor claimed to be an affiliate of respondents. Additionally, it has gained goodwill and a
name worthy of trust in its own right.36

We are not persuaded.

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. In so doing, the Court must look to the record as well as the names
themselves.37

Petitioner's assertion that the words "Montessori International of 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,38 does not avail. As correctly held by the SEC OGC, 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.39

Petitioner'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,40 similarly does not hold water. We quote with
approval the ruling of the SEC En Banc on this matter. Thus:

Generic terms are those which constitute "the common

descriptive name of an article or substance," or comprise the
"genus of which the particular product is a species," or are
"commonly used as the name or description of a kind of
goods," or "characters," or "refer to the basic nature of the
wares or services provided rather than to the more
idiosyncratic characteristics of a particular product," and are
not legally protectable. It has been held that if a mark is so
commonplace that it cannot be readily distinguished from
others, then it is apparent that it cannot identify a particular
business; and he who first adopted it cannot be injured by any
subsequent appropriation or imitation by others, and the public
will not be deceived.

Contrary to [petitioner's] claim, the word salle only means

"room" in French. The word la, on the other hand, is a definite
article ("the") used to modify salle. Thus, since salle is nothing
more than a room, [respondents'] use of the term is actually
suggestive.

42
 A suggestive mark is therefore a word, picture, or other
symbol that suggests, but does not directly describe something
about the goods or services in connection with which it is used
as a mark and gives a hint as to the quality or nature of the
product. Suggestive trademarks therefore can be distinctive
and are registrable.

The appropriation of the term "la salle" to associate the

words with the lofty ideals of education and learning is in fact
suggestive because roughly translated, the words only mean
"the room." Thus, the room could be anything - a room in a
house, a room in a building, or a room in an office.

xxx

In fact, the appropriation by [respondents] is fanciful,

whimsical and arbitrary because there is no inherent
connection between the words la salle and education, and it is
through [respondents'] painstaking efforts that the term has
become associated with one of the top educational institutions
in the country. Even assuming arguendo that la salle means
"classroom" in French, imagination is required in order to
associate the term with an educational institution and its
particular brand of service.41

We affirm that 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.42 Petitioner'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.43 As aptly observed by the SEC En Banc, petitioner's name gives the
impression that it is a branch or affiliate of respondents.44 It is settled that proof of
actual confusion need not be shown. It suffices that confusion is probable or likely to
occur.45

Finally, the Court's ruling in Lyceum of the Philippines46 does not apply.

In that case, the Lyceum of the Philippines, Inc., an educational institution

registered with the SEC, commenced proceedings before the SEC to compel therein
private respondents who were all educational institutions, to delete the word "Lyceum"
from their corporate names and permanently enjoin them from using the word as part
of their respective names.

The Court there held that the word "Lyceum" today generally refers to a school or
institution of learning. It is as generic in character as the word "university." Since
"Lyceum" denotes a school or institution of learning, it is not unnatural to use this word
to designate an entity which is organized and operating as an educational institution.
Moreover, the Lyceum of the Philippines, Inc.'s use of the word "Lyceum" for a long
period of time did not amount to mean that the word had acquired secondary meaning
in its favor because it failed to prove that it had been using the word all by itself to the
exclusion of others. More so, there was no evidence presented to prove that the word
has been so identified with the Lyceum of the Philippines, Inc. as an educational

43
institution that confusion will surely arise if the same word were to be used by other
educational institutions.47

Here, the phrase "De La Salle" is not generic in relation to respondents. It is not
descriptive of respondent's business as institutes of learning, unlike the meaning
ascribed to "Lyceum." Moreover, respondent De La Salle Brothers, Inc. was registered
in 1961 and the De La Salle group had been using the name decades before
petitioner's corporate registration. In contrast, there was no evidence of the Lyceum of
the Philippines, Inc.'s exclusive use of the word "Lyceum," as in fact another
educational institution had used the word 17 years before the former registered its
corporate name with the SEC. Also, at least nine other educational institutions included
the word in their corporate names. There is thus no similarity between the Lyceum of
the Philippines case and this case that would call for a similar ruling.

The enforcement of the protection accorded by Section 18 of the Corporation Code

to corporate names is lodged exclusively in the SEC. By express mandate, the SEC
has absolute jurisdiction, supervision and control over all corporations. It is the SEC's
duty to prevent confusion in the use of corporate names not only for the protection of
the corporations involved, but more so for the protection of the public. It has authority
to de-register at all times, and under all circumstances, corporate names which in its
estimation are likely to generate confusion.48

Clearly, the only determination relevant to this case is that one made by the SEC in
the exercise of its express mandate under the law.49

Time and again, we have held that findings of fact of quasi-judicial agencies, like the
SEC, are generally accorded respect and even finality by this Court, if supported by
substantial evidence, in recognition of their expertise on the specific matters under
their consideration, more so if the same has been upheld by the appellate court, as in
this case.50

WHEREFORE, the Petition is DENIED. The assailed Decision of the

CA dated September 27, 2012 is AFFIRMED.1a⍵⍴h!1

SO ORDERED.

THIRD DIVISION

September 23, 2015

G.R. NO. 175278

GSIS FAMILY BANK - THRIFT BANK [Formerly Inc.], Petitioner,

vs.
BPI FAMILY BANK, Respondent.

DECISION

JARDELEZA, J.:

This is a Petition for Review on Certiorari filed by GSIS Family Bank - Thrift
Bank1 assailing the Court of Appeals Decision2 dated March 29, 2006 (Decision) and

44
Resolution3 dated October 23, 2006 which denied petitioner's petition for review of the
Securities and Ex.change Commission Decision dated February 22, 2005 (SEC En
Banc Decision). The SEC En Banc Decision4 prohibited petitioner from using the word
"Family" as part of its corporate name and ordered petitioner to delete the word from its
name.5

Facts

Petitioner was originally organized as Royal Savings Bank and started operations in
1971. Beginning 1983 and 1984, petitioner encountered liquidity problems. On July 9,
1984, it was placed under receivership and later temporarily closed by the Central
Bank of the Philippines. Two (2) months after its closure, petitioner reopened and was
renamed Comsavings Bank, Inc. under the management of the Commercial Bank of
Manila.6

In 1987, the Government Service Insurance System (GSIS) acquired petitioner from
the Commercial Bank of Manila. Petitioner's management and control was thus
transferred to GSIS.7 To improve its marketability to the public, especially to the
members of the GSIS, petitioner sought Securities and Exchange Commission (SEC)
approval to change its corporate name to "GSIS Family Bank, a Thrift
Bank."8 Petitioner likewise applied with the Department of Trade and Industry (DTI) and
Bangko Sentral ng Pilpinas (BSP) for authority to use "GSIS Family Bank, a Thrift
Bank" as its business name. The DTI and the BSP approved the applications.9 Thus,
petitioner operates under the corporate name "GSIS Family Bank – a Thrift Bank,"
pursuant to the DTI Certificate of Registration No. 741375 and the Monetary Board
Circular approval.10

Respondent BPI Family Bank was a product of the merger between the Family Bank
and Trust Company (FBTC) and the Bank of the Philippine Islands (BPI).11 On June
27, 1969, the Gotianum family registered with the SEC the corporate name "Family
First Savings Bank," which was amended to "Family Savings Bank," and then later to
"Family Bank and Trust Company."12 Since its incorporation, the bank has been
commonly known as "Family Bank." In 1985, Family Bank merged with BPI, and the
latter acquired all the rights, privileges, properties, and interests of Family Bank,
including the right to use names, such as "Family First Savings Bank,"

"Family Bank," and "Family Bank and Trust Company." BPI Family Savings Bank was
registered with the SEC as a wholly-owned subsidiary of BPI. BPI Family Savings
Bank then registered with the Bureau of Domestic Trade the trade or business name
"BPI Family Bank," and acquired a reputation and goodwill under the name.13

Proceedings before the SEC

Eventually, it reached respondent’s attention that petitioner is using or attempting to

use the name "Family Bank." Thus, on March 8, 2002, respondent petitioned the SEC
Company Registration and Monitoring Department (SEC CRMD) to disallow or prevent
the registration of the name "GSIS Family Bank" or any other corporate name with the
words "Family Bank" in it. Respondent claimed exclusive ownership to the name
"Family Bank," having acquired the name since its purchase and merger with Family
Bank and Trust Company way back 1985.14 Respondent also alleged that through the
years, it has been known as "BPI Family Bank" or simply "Family Bank" both locally
and internationally. As such, it has acquired a reputation and goodwill under the name,
not only with clients here and abroad, but also with correspondent and competitor
banks, and the public in general.15

45
Respondent prayed the SEC CRMD to disallow or prevent the registration of the name
"GSIS Family Bank" or any other corporate name with the words "Family Bank" should
the same be presented for registration.

Respondent likewise prayed the SEC CRMD to issue an order directing petitioner or
any other corporation to change its corporate name if the names have already been
registered with the SEC.16

The SEC CRMD was thus confronted with the issue of whether the names BPI Family
Bank and GSIS Family Bank are confusingly similar as to require the amendment of
the name of the latter corporation.

The SEC CRMD declared that upon the merger of FBTC with the BPI in 1985, the
latter acquired the right to the use of the name of the absorbed corporation. Thus, BPI
Family Bank has a prior right to the use of the name

Family Bank in the banking industry, arising from its long and extensive nationwide
use, coupled with its registration with the Intellectual Property Office (IPO) of the name
"Family Bank" as its trade name. Applying the rule of "priority in registration" based on
the legal maxim first in time, first in right, the SEC CRMD concluded that BPI has the
preferential right to the use of the name "Family Bank." More, GSIS and Comsavings
Bank were then fully aware of the existence and use of the name "Family Bank" by
FBTC prior to the latter's merger with BPI.17

The SEC CRMD also held that there exists a confusing similarity between the
corporate names BPI Family Bank and GSIS Family Bank. It explained that although
not identical, the corporate names are indisputably similar, as to cause confusion in the
public mind, even with the exercise of reasonable care and observation, especially so
since both corporations are engaged in the banking business.18

In a decision19 dated May 19, 2003, the SEC CRMD said, PREMISES CONSIDERED
respondent GSIS FAMILY BANK is hereby directed to refrain from using the word
"Family" as part of its name and make good its commitment to change its name by
deleting or dropping the subject word from its corporate name within [thirty (30) days]
from the date of actual receipt hereof.20

Petitioner appealed21 the decision to the SEC En Banc, which denied the appeal, and
upheld the SEC CRMD in the SEC En Banc Decision.22 Petitioner elevated the SEC En
Banc Decision to the Court of Appeals, raising the following issues:

1. Whether the use by GSIS Family Bank of the words "Family Bank" is
deceptively and confusingly similar to the name BPI Family Bank;

2. Whether the use by Comsavings Bank of "GSIS Family Bank" as its business
constitutes unfair competition;

3. Whether BPI Family Bank is guilty of forum shopping;

4. Whether the approval of the DTI and the BSP of petitioner's application to use
the name GSIS Family Bank constitutes its authority to the lawful and valid use of
such trade name or trade mark;

5. Whether the application of respondent BPI Family Bank for the exclusive use
of the name "Family Bank," a generic name, though not yet approved by IPO of

46
 the Bureau of Patents, has barred the GSIS Family Bank from using such trade
mark or name.23

Court of Appeals Ruling

The Court of Appeals ruled that the approvals by the BSP and by the DTI of petitioner’s
application to use the name "GSIS Family Bank" do not constitute authority for its
lawful and valid use. It said that the SEC has absolute jurisdiction, supervision and
control over all corporations.24 The Court of Appeals held that respondent was entitled
to the exclusive use of the corporate name because of its prior adoption of the name
"Family Bank" since 1969.25 There is confusing similarity in the corporate names
because "[c]onfusion as to the possible association with GSIS might arise if we were to
allow Comsavings Bank to add its parent company’s acronym, ‘GSIS’ to ‘Family Bank.’
This is true especially considering both companies belong to the banking industry.
Proof of actual confusion need not be shown. It suffices that confusion is probably or
likely to occur."26The Court of Appeals also ruled out forum shopping because not all
the requirements of litis pendentia are present.27

The dispositive portion of the decision read,

WHEREFORE, the instant petition for review is hereby DISMISSED for lack of merit.28

After its Motion for Reconsideration was denied,29 petitioner brought the decision to this
Court via a Petition for Review on Certiorari.30

Issues in the Petition

Petitioner raised the following issues in its petition:

I. The Court of Appeals gravely erred in affirming the SEC Resolution finding the
word "Family" not generic despite its unregistered status with the IPO of the
Bureau of Patents and the use by GSIS-Family Bank in its corporate name of the
words "[F]amily [B]ank" as deceptive and [confusingly similar] to the name BPI
Family Bank;31

II. The Court of Appeals gravely erred when it ruled that the respondent is not
guilty of forum shopping despite the filing of three (3) similar complaints before
the DTI and BSP and with the SEC without the requisite certification of non-forum
shopping attached thereto;32

III. The Court of Appeals gravely erred when it completely disregarded the
opinion of the Banko Sentral ng Pilipinas that the use by the herein petitioner of
the trade name GSIS Family Bank – Thrift Bank is not similar or does not deceive
or likely cause any deception to the public.33

Court's Ruling

We uphold the decision of the Court of Appeals.

Section 18 of the Corporation Code provides,

Section 18. Corporate name. – No corporate name may be allowed by the Securities
and Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws. When

47
a change in the corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name.

In Philips Export B.V. v. Court of Appeals,34 this Court ruled that to fall within the
prohibition of the law on the right to the exclusive use of a corporate name, two
requisites must be proven, namely:

(1) that the complainant corporation acquired a prior right over the use of such
corporate name; and

(2) the proposed name is either

(a) identical or

(b) deceptive or confusingly similar to that of any existing corporation or to

any other name already protected by law; or

(c) patently deceptive, confusing or contrary to existing law.35

These two requisites are present in this case. On the first requisite of a prior right,
Industrial Refractories Corporation of the Philippines v. Court of Appeals (IRCP
case)36 is instructive. In that case, Refractories Corporation of the Philippines (RCP)
filed before the SEC a petition to compel Industrial Refractories Corporation of the
Philippines (IRCP) to change its corporate name on the ground that its corporate name
is confusingly similar with that of RCP’s such that the public may be confused into
believing that they are one and the same corporation. The SEC and the Court of
Appeals found for petitioner, and ordered IRCP to delete or drop from its corporate
name the word "Refractories." Upon appeal of IRCP, this Court upheld the decision of
the CA.

Applying the priority of adoption rule to determine prior right, this Court said that RCP
has acquired the right to use the word "Refractories" as part of its corporate name,
being its prior registrant. In arriving at this conclusion, the Court considered that RCP
was incorporated on October 13, 1976 and since then continuously used the corporate
name "Refractories Corp. of the Philippines." Meanwhile, IRCP only started using its
corporate name "Industrial Refractories Corp. of the Philippines" when it amended its
Articles of Incorporation on August 23, 1985.37

In this case, respondent was incorporated in 1969 as Family Savings Bank and in 1985
as BPI Family Bank. Petitioner, on the other hand, was incorporated as GSIS Family –
Thrift Bank only in 2002,38 or at least seventeen (17) years after respondent started
using its name. Following the precedent in the IRCP case, we rule that respondent has
the prior right over the use of the corporate name.

The second requisite in the Philips Export case likewise obtains on two points: the
proposed name is (a) identical or (b) deceptive or confusingly similar to that of any
existing corporation or to any other name already protected by law.

On the first point (a), the words "Family Bank" present in both petitioner and
respondent's corporate name satisfy the requirement that there be identical names in
the existing corporate name and the proposed one.

Respondent cannot justify its claim under Section 3 of the Revised Guidelines in the
Approval of Corporate and Partnership Names,39 to wit:

48
3. The name shall not be identical, misleading or confusingly similar to one already
registered by another corporation or partnership with the Commission or a sole
proprietorship registered with the Department of Trade and Industry.

If the proposed name is similar to the name of a registered firm, the proposed name
must contain at least one distinctive word different from the name of the company
already registered.

Section 3 states that if there be identical, misleading or confusingly similar name to one
already registered by another corporation or partnership with the SEC, the proposed
name must contain at least one distinctive word different from the name of the
company already registered. To show contrast with respondent's corporate name,
petitioner used the words "GSIS" and "thrift." But these are not sufficiently distinct
words that differentiate petitioner's corporate name from respondent's. While "GSIS" is
merely an acronym of the proper name by which petitioner is identified, the word "thrift"
is simply a classification of the type of bank that petitioner is. Even if the classification
of the bank as "thrift" is appended to petitioner's proposed corporate name, it will not
make the said corporate name distinct from respondent's because the latter is likewise
engaged in the banking business.

This Court used the same analysis in Ang mga Kaanib sa Iglesia ng Dios Kay Kristo
Hesus, H.S.K. sa Bansang Pilipinas, Inc. v. Iglesia ng Dios Kay Cristo Jesus, Haligi at
Suhay ng Katotohanan.40 In that case, Iglesia ng Dios Kay Cristo Jesus filed a case
before the SEC to compel Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus to
change its corporate name, and to prevent it from using the same or similar name on
the ground that the same causes confusion among their members as well as the
public. Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus claimed that it complied
with SEC Memorandum Circular No. 14-2000 by adding not only two, but eight words
to their registered name, to wit: "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.,"
which effectively distinguished it from Iglesia ng Dios Kay Cristo Jesus. This Court
rejected the argument, thus:

The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in
petitioner's name are, as correctly observed by the SEC, merely descriptive of
and also referring to the members, or kaanib, of respondent who are likewise
residing in the Philippines. These words can hardly serve as an effective
differentiating medium necessary to avoid confusion or difficulty in distinguishing
petitioner from respondent. This is especially so, since both petitioner and
respondent corporations are using the same acronym – H.S.K.; not to mention
the fact that both are espousing religious beliefs and operating in the same place.
Xxx41

On the second point (b), there is a deceptive and confusing similarity between
petitioner's proposed name and respondent's corporate name, as found by the
SEC.42 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.43 And even without such proof of actual confusion between the two
corporate names, it suffices that confusion is probable or likely to occur.44

Petitioner's corporate name is "GSIS Family Bank—A Thrift Bank" and respondent's
corporate name is "BPI Family Bank." The only words that distinguish the two are
"BPI," "GSIS," and "Thrift." The first two words are merely the acronyms of the proper
names by which the two corporations identify themselves; and the third word simply
describes the classification of the bank. The overriding consideration in determining

49
whether a person, using ordinary care and discrimination, might be misled is the
circumstance that both petitioner and respondent are engaged in the same business of
banking. "The likelihood of confusion is accentuated in cases where the goods or
business of one corporation are the same or substantially the same to that of another
corporation."45

Respondent alleged that upon seeing a Comsavings Bank branch with the signage
"GSIS Family Bank" displayed at its premises, some of the respondent’s officers and
their clients began asking questions. These include whether GSIS has acquired Family
Bank; whether there is a joint arrangement between GSIS and Family Bank; whether
there is a joint arrangement between BPI and GSIS regarding Family Bank; whether
Comsavings Bank has acquired Family Bank; and whether there is there an
arrangement among Comsavings Bank, GSIS, BPI, and Family Bank regarding BPI
Family Bank and GSIS Family Bank.46 The SEC made a finding that "[i]t is not a
remote possibility that the public may entertain the idea that a relationship or
arrangement indeed exists between BPI and GSIS due to the use of the term ‘Family
Bank’ in their corporate names."47

Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded
respect and even finality by this Court, if supported by substantial evidence, in
recognition of their expertise on the specific matters under their consideration, more so
if the same has been upheld by the appellate court, as in this case.48

Petitioner cannot argue that the word "family" is a generic or descriptive name, which
cannot be appropriated exclusively by respondent. "Family," as used in respondent's
corporate name, is not generic. Generic marks are commonly used as the name or
description of a kind of goods, such as "Lite" for beer or "Chocolate Fudge" for
chocolate soda drink. Descriptive marks, on the other hand, convey the characteristics,
function, qualities or ingredients of a product to one who has never seen it or does not
know it exists, such as "Arthriticare" for arthritis medication.49

Under the facts of this case, the word "family" cannot be separated from the word
"bank."50 In asserting their claims before the SEC up to the Court of Appeals, both
petitioner and respondent refer to the phrase "Family Bank" in their submissions. This
coined phrase, neither being generic nor descriptive, is merely suggestive and may
properly be regarded as arbitrary. Arbitrary marks are "words or phrases used as a
mark that appear to be random in the context of its use. They are generally considered
to be easily remembered because of their arbitrariness. They are original and
unexpected in relation to the products they endorse, thus, becoming themselves
distinctive."51 Suggestive marks, on the other hand, "are marks which merely suggest
some quality or ingredient of goods. xxx The strength of the suggestive marks lies on
how the public perceives the word in relation to the product or service."52

In Ang v. Teodoro,53 this Court ruled that the words "Ang Tibay" is not a descriptive
term within the meaning of the Trademark Law but rather a fanciful or coined
phrase.54 In so ruling, this Court considered the etymology and meaning of the Tagalog
words, "Ang Tibay" to determine whether they relate to the quality or description of the
merchandise to which respondent therein applied them as trademark, thus:

We find it necessary to go into the etymology and meaning of the Tagalog words "Ang
Tibay" to determine whether they are a descriptive term, i.e., whether they relate to the
quality or description of the merchandise to which respondent has applied them as a
trade-mark. The word "ang" is a definite article meaning "the" in English. It is also used
as an adverb, a contraction of the word "anong" (what or how). For instance, instead of

50
saying, "Anong ganda!" ("How beautiful!"), we ordinarily say, "Ang ganda!" Tibay is a
root word from which are derived the verb magpatibay (to strengthen); the nouns
pagkamatibay (strength, durability), katibayan (proof, support, strength), katibaytibayan
(superior strength); and the adjectives matibay (strong, durable, lasting), napakatibay
(very strong), kasintibay or magkasintibay (as strong as, or of equal strength). The
phrase "Ang Tibay" is an exclamation denoting admiration of strength or durability. For
instance, one who tries hard but fails to break an object exclaims, "Ang tibay!" ("How
strong!") It may also be used in a sentence thus, "Ang tibay ng sapatos mo!" ("How
durable your shoes are!") The phrase "ang tibay" is never used adjectively to define or
describe an object. One does not say, "ang tibay sapatos" or "sapatos ang tibay" to
mean "durable shoes," but "matibay na sapatos" or "sapatos na matibay."

From all of this we deduce that "Ang Tibay" is not a descriptive term within the meaning
of the Trade-Mark Law but rather a fanciful or coined phrase which may properly and
legally be appropriated as a trade-mark or trade-name. xxx55 (Underscoring supplied).

The word "family" is defined as "a group consisting of parents and children living
together in a household" or "a group of people related to one another by blood or
marriage."56 Bank, on the other hand, is defined as "a financial establishment that
invests money deposited by customers, pays it out when requested, makes loans at
interest, and exchanges currency."57 By definition, there can be no expected relation
between the word "family" and the banking business of respondent. Rather, the words
suggest that respondent’s bank is where family savings should be deposited. More, as
in the Ang case, the phrase "family bank" cannot be used to define an object.

Petitioner’s argument that the opinion of the BSP and the certificate of registration
granted to it by the DTI constitute authority for it to use "GSIS Family Bank" as
corporate name is also untenable.

The enforcement of the protection accorded by Section 18 of the Corporation Code to

corporate names is lodged exclusively in the SEC. The jurisdiction of the SEC is not
merely confined to the adjudicative functions provided in Section 5 of the SEC
Reorganization Act,58 as amended.59 By express mandate, the SEC has absolute
jurisdiction, supervision and control over all corporations.60 It is the SEC’s duty to
prevent confusion in the use of corporate names not only for the protection of the
corporations involved, but more so for the protection of the public. It has authority to
de-register at all times, and under all circumstances corporate names which in its
estimation are likely to generate confusion.61

The SEC62 correctly applied Section 18 of the Corporation Code, and Section 15 of
SEC Memorandum Circular No. 14-2000, pertinent portions of which provide:

In implementing Section 18 of the Corporation Code of the Philippines (BP 69), the
following revised guidelines in the approval of corporate and partnership names are
hereby adopted for the information and guidance of all concerned:

xxx

15. Registrant corporations or partnership shall submit a letter undertaking to change

their corporate or partnership name in case another person or firm has acquired a prior
right to the use of the said firm name or the same is deceptively or confusingly similar
to one already registered unless this undertaking is already included as one of the
provisions of the articles of incorporation or partnership of the registrant.

51
The SEC, after finding merit in respondent's claims, can compel petitioner to abide by
its commitment "to change its corporate name in the event that another person, firm or
entity has acquired a prior right to use of said name or one similar to it."63

Clearly, the only determination relevant to this case is that one made by the SEC in the
exercise of its express mandate under the law. The BSP opinion invoked by petitioner
even acknowledges that "the issue on whether a proposed name is identical or
deceptively similar to that of any of existing corporation is matter within the official
jurisdiction and competence of the SEC."64

Judicial notice65 may also be taken of the action of the IPO in approving respondent’s
registration of the trademark "BPI Family Bank" and its logo on October 17, 2008. The
certificate of registration of a mark shall be prima facie evidence of the validity of the
registration, the registrant’s ownership of the mark, and of the registrant’s exclusive
right to use the same in connection with the goods or services and those that are
related thereto specified in the certificate.66

Finally, we uphold the Court of Appeals' finding that the issue of forum shopping was
belatedly raised by petitioner and, thus, cannot anymore be considered at the appellate
stage of the proceedings. Petitioner raised the issue of forum shopping for the first time
only on appeal.67 Petitioner argued that the complaints filed by respondent did not
contain certifications against non-forum shopping, in violation of Section 5, Rule 7 of
the Rules of Court.68

In S.C. Megaworld Construction and Development Corporation vs. Parada,69 this Court
said that objections relating to non-compliance with the verification and certification of
non-forum shopping should be raised in the proceedings below, and not for the first
time on appeal. In that case, S.C. Megaworld argued that the complaint for collection of
sum of money should have been dismissed outright by the trial court on account of an
invalid nonforum shopping certification. It alleged that the Special Power of Attorney
granted to Parada did not specifically include an authority for the latter to sign the
verification and certification of non-forum shopping, thus rendering the complaint
defective for violation of Sections 4 and 5 of Rule 7 of the Rules of Court. On motion
for reconsideration of the decision of the Court of Appeals, petitioner raised for the first
time, the issue of forum shopping. The Court ruled against S.C. Megaworld, thus:

It is well-settled that no question will be entertained on appeal unless it has been

raised in the proceedings below. Points of law, theories, issues and arguments not
brought to the attention of the lower court, administrative agency or quasi-judicial body,
need not be considered by a reviewing court, as they cannot be raised for the first time
at that late stage. Basic considerations of fairness and due process impel this rule. Any
issue raised for the first time on appeal is barred by estoppel.70

In this case, the fact that respondent filed a case before the DTI was made known to
petitioner71 long before the SEC rendered its decision. Yet, despite its knowledge,
petitioner failed to question the alleged forum shopping before the SEC. The
exceptions to the general rule that forum shopping should be raised in the earliest
opportunity, as explained in the cited case of Young v. Keng Seng,72 do not obtain in
this case.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals

dated March 29, 2006 is hereby AFFIRMED.

SO ORDERED.

52
 EN BANC

G.R. No. L-45911 April 11, 1979

JOHN GOKONGWEI, JR., petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M.
SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO,
WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL
CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R.
VISAYA, respondents.

De Santos, Balgos & Perez for petitioner.

Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos

Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.

R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

The instant petition for certiorari, mandamus and injunction, with prayer for issuance of
writ of preliminary injunction, arose out of two cases filed by petitioner with the
Securities and Exchange Commission, as follows:

SEC CASE NO 1375

On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation,

filed with the Securities and Exchange Commission (SEC) a petition for "declaration of
nullity of amended by-laws, cancellation of certificate of filing of amended by- laws,
injunction and damages with prayer for a preliminary injunction" against the majority of
the members of the Board of Directors and San Miguel Corporation as an unwilling
petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M.
Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel
Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No.
1375.

As a first cause of action, petitioner alleged that on September 18, 1976, individual
respondents amended by bylaws of the corporation, basing their authority to do so on
a resolution of the stockholders adopted on March 13, 1961, when the outstanding
capital stock of respondent corporation was only P70,139.740.00, divided into
5,513,974 common shares at P10.00 per share and 150,000 preferred shares at

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P100.00 per share. At the time of the amendment, the outstanding and paid up shares
totalled 30,127,047 with a total par value of P301,270,430.00. It was contended that
according to section 22 of the Corporation Law and Article VIII of the by-laws of the
corporation, the power to amend, modify, repeal or adopt new by-laws may be
delegated to the Board of Directors only by the affirmative vote of stockholders
representing not less than 2/3 of the subscribed and paid up capital stock of the
corporation, which 2/3 should have been computed on the basis of the capitalization at
the time of the amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted without authority and in
usurpation of the power of the stockholders.

As a second cause of action, it was alleged that the authority granted in 1961 had
already been exercised in 1962 and 1963, after which the authority of the Board
ceased to exist.

As a third cause of action, petitioner averred that the membership of the Board of
Directors had changed since the authority was given in 1961, there being six (6) new
directors.

As a fourth cause of action, it was claimed that prior to the questioned amendment,
petitioner had all the qualifications to be a director of respondent corporation, being a
Substantial stockholder thereof; that as a stockholder, petitioner had acquired rights
inherent in stock ownership, such as the rights to vote and to be voted upon in the
election of directors; and that in amending the by-laws, respondents purposely
provided for petitioner's disqualification and deprived him of his vested right as afore-
mentioned hence the amended by-laws are null and void. 1

As additional causes of action, it was alleged that corporations have no inherent power
to disqualify a stockholder from being elected as a director and, therefore, the
questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M.
Soriano, while representing other corporations, entered into contracts (specifically a
management contract) with respondent corporation, which was allowed because the
questioned amendment gave the Board itself the prerogative of determining whether
they or other persons are engaged in competitive or antagonistic business; that the
portion of the amended bylaws which states that in determining whether or not a
person is engaged in competitive business, the Board may consider such factors as
business and family relationship, is unreasonable and oppressive and, therefore, void;
and that the portion of the amended by-laws which requires that "all nominations for
election of directors ... shall be submitted in writing to the Board of Directors at least
five (5) working days before the date of the Annual Meeting" is likewise unreasonable
and oppressive.

It was, therefore, prayed that the amended by-laws be declared null and void and the
certificate of filing thereof be cancelled, and that individual respondents be made to
pay damages, in specified amounts, to petitioner.

On October 28, 1976, in connection with the same case, petitioner filed with the
Securities and Exchange Commission an "Urgent Motion for Production and Inspection
of Documents", alleging that the Secretary of respondent corporation refused to allow
him to inspect its records despite request made by petitioner for production of certain
documents enumerated in the request, and that respondent corporation had been
attempting to suppress information from its stockholders despite a negative reply by
the SEC to its query regarding their authority to do so. Among the documents
requested to be copied were (a) minutes of the stockholder's meeting field on March

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13, 1961, (b) copy of the management contract between San Miguel Corporation and
A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San Miguel
International, Inc.; (d) authority of the stockholders to invest the funds of respondent
corporation in San Miguel International, Inc.; and (e) lists of salaries, allowances,
bonuses, and other compensation, if any, received by Andres M. Soriano, Jr. and/or its
successor-in-interest.

The "Urgent Motion for Production and Inspection of Documents" was opposed by
respondents, alleging, among others that the motion has no legal basis; that the
demand is not based on good faith; that the motion is premature since the materiality
or relevance of the evidence sought cannot be determined until the issues are joined,
that it fails to show good cause and constitutes continued harrasment, and that some
of the information sought are not part of the records of the corporation and, therefore,
privileged.

During the pendency of the motion for production, respondents San Miguel
Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to
the petition, denying the substantial allegations therein and stating, by way of
affirmative defenses that "the action taken by the Board of Directors on September 18,
1976 resulting in the ... amendments is valid and legal because the power to "amend,
modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961 and
long prior thereto has never been revoked of SMC"; that contrary to petitioner's claim,
"the vote requirement for a valid delegation of the power to amend, repeal or adopt
new by-laws is determined in relation to the total subscribed capital stock at the time
the delegation of said power is made, not when the Board opts to exercise said
delegated power"; that petitioner has not availed of his intra-corporate remedy for the
nullification of the amendment, which is to secure its repeal by vote of the stockholders
representing a majority of the subscribed capital stock at any regular or special
meeting, as provided in Article VIII, section I of the by-laws and section 22 of the
Corporation law, hence the, petition is premature; that petitioner is estopped from
questioning the amendments on the ground of lack of authority of the Board. since he
failed, to object to other amendments made on the basis of the same 1961
authorization: that the power of the corporation to amend its by-laws is broad, subject
only to the condition that the by-laws adopted should not be respondent corporation
inconsistent with any existing law; that respondent corporation should not be precluded
from adopting protective measures to minimize or eliminate situations where its
directors might be tempted to put their personal interests over t I hat of the corporation;
that the questioned amended by-laws is a matter of internal policy and the judgment of
the board should not be interfered with: That the by-laws, as amended, are valid and
binding and are intended to prevent the possibility of violation of criminal and civil laws
prohibiting combinations in restraint of trade; and that the petition states no cause of
action. It was, therefore, prayed that the petition be dismissed and that petitioner be
ordered to pay damages and attorney's fees to respondents. The application for writ of
preliminary injunction was likewise on various grounds.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the
petition, denying the material averments thereof and stating, as part of their affirmative
defenses, that in August 1972, the Universal Robina Corporation (Robina), a
corporation engaged in business competitive to that of respondent corporation, began
acquiring shares therein. until September 1976 when its total holding amounted to
622,987 shares: that in October 1972, the Consolidated Foods Corporation (CFC)
likewise began acquiring shares in respondent (corporation. until its total holdings
amounted to P543,959.00 in September 1976; that on January 12, 1976, petitioner,

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who is president and controlling shareholder of Robina and CFC (both closed
corporations) purchased 5,000 shares of stock of respondent corporation, and
thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious
publicity campaign against SMC" to generate support from the stockholder "in his effort
to secure for himself and in representation of Robina and CFC interests, a seat in the
Board of Directors of SMC", that in the stockholders' meeting of March 18, 1976,
petitioner was rejected by the stockholders in his bid to secure a seat in the Board of
Directors on the basic issue that petitioner was engaged in a competitive business and
his securing a seat would have subjected respondent corporation to grave
disadvantages; that "petitioner nevertheless vowed to secure a seat in the Board of
Directors at the next annual meeting; that thereafter the Board of Directors amended
the by-laws as afore-stated.

As counterclaims, actual damages, moral damages, exemplary damages, expenses of

litigation and attorney's fees were presented against petitioner.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production
and inspection of documents was filed by all the respondents. This was duly opposed
by petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R.
Visaya were allowed to intervene as oppositors and they accordingly filed their
oppositions-intervention to the petition.

On December 29, 1976, the Securities and Exchange Commission resolved the motion
for production and inspection of documents by issuing Order No. 26, Series of 1977,
stating, in part as follows:

Considering the evidence submitted before the Commission by the

petitioner and respondents in the above-entitled case, it is hereby ordered:

1. That respondents produce and permit the inspection, copying and

photographing, by or on behalf of the petitioner-movant, John Gokongwei,
Jr., of the minutes of the stockholders' meeting of the respondent San
Miguel Corporation held on March 13, 1961, which are in the possession,
custody and control of the said corporation, it appearing that the same is
material and relevant to the issues involved in the main case. Accordingly,
the respondents should allow petitioner-movant entry in the principal office
of the respondent Corporation, San Miguel Corporation on January 14,
1977, at 9:30 o'clock in the morning for purposes of enforcing the rights
herein granted; it being understood that the inspection, copying and
photographing of the said documents shall be undertaken under the direct
and strict supervision of this Commission. Provided, however, that other
documents and/or papers not heretofore included are not covered by this
Order and any inspection thereof shall require the prior permission of this
Commission;

2. As to the Balance Sheet of San Miguel International, Inc. as well as the

list of salaries, allowances, bonuses, compensation and/or remuneration
received by respondent Jose M. Soriano, Jr. and Andres Soriano from San
Miguel International, Inc. and/or its successors-in- interest, the Petition to
produce and inspect the same is hereby DENIED, as petitioner-movant is
not a stockholder of San Miguel International, Inc. and has, therefore, no
inherent right to inspect said documents;

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 3. In view of the Manifestation of petitioner-movant dated November 29,
1976, withdrawing his request to copy and inspect the management
contract between San Miguel Corporation and A. Soriano Corporation and
the renewal and amendments thereof for the reason that he had already
obtained the same, the Commission takes note thereof; and

4. Finally, the Commission holds in abeyance the resolution on the matter

of production and inspection of the authority of the stockholders of San
Miguel Corporation to invest the funds of respondent corporation in San
Miguel International, Inc., until after the hearing on the merits of the
principal issues in the above-entitled case.

This Order is immediately executory upon its approval. 2

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent
corporation issued a notice of special stockholders' meeting for the purpose of
"ratification and confirmation of the amendment to the By-laws", setting such meeting
for February 10, 1977. This prompted petitioner to ask respondent Commission for a
summary judgment insofar as the first cause of action is concerned, for the alleged
reason that by calling a special stockholders' meeting for the aforesaid purpose, private
respondents admitted the invalidity of the amendments of September 18, 1976. The
motion for summary judgment was opposed by private respondents. Pending action on
the motion, petitioner filed an "Urgent Motion for the Issuance of a Temporary
Restraining Order", praying that pending the determination of petitioner's application for
the issuance of a preliminary injunction and/or petitioner's motion for summary
judgment, a temporary restraining order be issued, restraining respondents from
holding the special stockholder's meeting as scheduled. This motion was duly opposed
by respondents.

On February 10, 1977, respondent Commission issued an order denying the motion for
issuance of temporary restraining order. After receipt of the order of denial,
respondents conducted the special stockholders' meeting wherein the amendments to
the by-laws were ratified. On February 14, 1977, petitioner filed a consolidated motion
for contempt and for nullification of the special stockholders' meeting.

A motion for reconsideration of the order denying petitioner's motion for summary
judgment was filed by petitioner before respondent Commission on March 10, 1977.
Petitioner alleges that up to the time of the filing of the instant petition, the said motion
had not yet been scheduled for hearing. Likewise, the motion for reconsideration of the
order granting in part and denying in part petitioner's motion for production of record
had not yet been resolved.

In view of the fact that the annul stockholders' meeting of respondent corporation had
been scheduled for May 10, 1977, petitioner filed with respondent Commission a
Manifestation stating that he intended to run for the position of director of respondent
corporation. Thereafter, respondents filed a Manifestation with respondent
Commission, submitting a Resolution of the Board of Directors of respondent
corporation disqualifying and precluding petitioner from being a candidate for director
unless he could submit evidence on May 3, 1977 that he does not come within the
disqualifications specified in the amendment to the by-laws, subject matter of SEC
Case No. 1375. By reason thereof, petitioner filed a manifestation and motion to
resolve pending incidents in the case and to issue a writ of injunction, alleging that

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private respondents were seeking to nullify and render ineffectual the exercise of
jurisdiction by the respondent Commission, to petitioner's irreparable damage and
prejudice, Allegedly despite a subsequent Manifestation to prod respondent
Commission to act, petitioner was not heard prior to the date of the stockholders'
meeting.

Petitioner alleges that there appears a deliberate and concerted inability on the part of
the SEC to act hence petitioner came to this Court.

SEC. CASE NO. 1423

Petitioner likewise alleges that, having discovered that respondent corporation has
been investing corporate funds in other corporations and businesses outside of the
primary purpose clause of the corporation, in violation of section 17 1/2 of the
Corporation Law, he filed with respondent Commission, on January 20, 1977, a petition
seeking to have private respondents Andres M. Soriano, Jr. and Jose M. Soriano, as
well as the respondent corporation declared guilty of such violation, and ordered to
account for such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private respondents, to which a

consolidated motion to strike and to declare individual respondents in default and an
opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that
said motions were filed as early as February 4, 1977, the commission acted thereon
only on April 25, 1977, when it denied respondents' motion to dismiss and gave them
two (2) days within which to file their answer, and set the case for hearing on April 29
and May 3, 1977.

Respondents issued notices of the annual stockholders' meeting, including in the

Agenda thereof, the following:

6. Re-affirmation of the authorization to the Board of Directors by the

stockholders at the meeting on March 20, 1972 to invest corporate funds in
other companies or businesses or for purposes other than the main
purpose for which the Corporation has been organized, and ratification of
the investments thereafter made pursuant thereto.

By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent
motion for the issuance of a writ of preliminary injunction to restrain private
respondents from taking up Item 6 of the Agenda at the annual stockholders' meeting,
requesting that the same be set for hearing on May 3, 1977, the date set for the
second hearing of the case on the merits. Respondent Commission, however,
cancelled the dates of hearing originally scheduled and reset the same to May 16 and
17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of
urging the Commission to act, petitioner filed an urgent manifestation on May 3, 1977,
but this notwithstanding, no action has been taken up to the date of the filing of the
instant petition.

With respect to the afore-mentioned SEC cases, it is petitioner's contention before this
Court that respondent Commission gravely abused its discretion when it failed to act
with deliberate dispatch on the motions of petitioner seeking to prevent illegal and/or
arbitrary impositions or limitations upon his rights as stockholder of respondent
corporation, and that respondent are acting oppressively against petitioner, in gross
derogation of petitioner's rights to property and due process. He prayed that this Court
direct respondent SEC to act on collateral incidents pending before it.

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On May 6, 1977, this Court issued a temporary restraining order restraining private
respondents from disqualifying or preventing petitioner from running or from being
voted as director of respondent corporation and from submitting for ratification or
confirmation or from causing the ratification or confirmation of Item 6 of the Agenda of
the annual stockholders' meeting on May 10, 1977, or from Making effective the
amended by-laws of respondent corporation, until further orders from this Court or until
the Securities and Ex-change Commission acts on the matters complained of in the
instant petition.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a
restraining order had been issued by this Court, or on May 9, 1977, the respondent
Commission served upon petitioner copies of the following orders:

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion
for reconsideration, with its supplement, of the order of the Commission denying in part
petitioner's motion for production of documents, petitioner's motion for reconsideration
of the order denying the issuance of a temporary restraining order denying the
issuance of a temporary restraining order, and petitioner's consolidated motion to
declare respondents in contempt and to nullify the stockholders' meeting;

(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a
director of respondent corporation but stating that he should not sit as such if elected,
until such time that the Commission has decided the validity of the bylaws in dispute,
and denying deferment of Item 6 of the Agenda for the annual stockholders' meeting;
and

(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion
for reconsideration of the order of respondent Commission denying petitioner's motion
for summary judgment;

It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission
acted with indecent haste and without circumspection in issuing the aforesaid orders to
petitioner's irreparable damage and injury; (2) that it acted without jurisdiction and in
violation of petitioner's right to due process when it decided en banc an issue not
raised before it and still pending before one of its Commissioners, and without hearing
petitioner thereon despite petitioner's request to have the same calendared for hearing
, and (3) that the respondents acted oppressively against the petitioner in violation of
his rights as a stockholder, warranting immediate judicial intervention.

It is prayed in the supplemental petition that the SEC orders complained of be declared
null and void and that respondent Commission be ordered to allow petitioner to
undertake discovery proceedings relative to San Miguel International. Inc. and
thereafter to decide SEC Cases No. 1375 and 1423 on the merits.

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed
their comment, alleging that the petition is without merit for the following reasons:

(1) that the petitioner the interest he represents are engaged in business competitive
and antagonistic to that of respondent San Miguel Corporation, it appearing that the
owns and controls a greater portion of his SMC stock thru the Universal Robina
Corporation and the Consolidated Foods Corporation, which corporations are engaged
in business directly and substantially competing with the allied businesses of
respondent SMC and of corporations in which SMC has substantial investments.
Further, when CFC and Robina had accumulated investments. Further, when CFC and

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Robina had accumulated shares in SMC, the Board of Directors of SMC realized the
clear and present danger that competitors or antagonistic parties may be elected
directors and thereby have easy and direct access to SMC's business and trade
secrets and plans;

(2) that the amended by law were adopted to preserve and protect respondent SMC
from the clear and present danger that business competitors, if allowed to become
directors, will illegally and unfairly utilize their direct access to its business secrets and
plans for their own private gain to the irreparable prejudice of respondent SMC, and,
ultimately, its stockholders. Further, it is asserted that membership of a competitor in
the Board of Directors is a blatant disregard of no less that the Constitution and
pertinent laws against combinations in restraint of trade;

(3) that by laws are valid and binding since a corporation has the inherent right and
duty to preserve and protect itself by excluding competitors and antogonistic parties,
under the law of self-preservation, and it should be allowed a wide latitude in the
selection of means to preserve itself;

(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423
was due to petitioner's own acts or omissions, since he failed to have the petition to
suspend, pendente lite the amended by-laws calendared for hearing. It was
emphasized that it was only on April 29, 1977 that petitioner calendared the aforesaid
petition for suspension (preliminary injunction) for hearing on May 3, 1977. The instant
petition being dated May 4, 1977, it is apparent that respondent Commission was not
given a chance to act "with deliberate dispatch", and

(5) that, even assuming that the petition was meritorious was, it has become moot and
academic because respondent Commission has acted on the pending incidents,
complained of. It was, therefore, prayed that the petition be dismissed.

On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging
that the petition has become moot and academic for the reason, among others that the
acts of private respondent sought to be enjoined have reference to the annual meeting
of the stockholders of respondent San Miguel Corporation, which was held on may 10,
1977; that in said meeting, in compliance with the order of respondent Commission,
petitioner was allowed to run and be voted for as director; and that in the same
meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed.
Further it was averred that the questions and issues raised by petitioner are pending in
the Securities and Exchange Commission which has acquired jurisdiction over the
case, and no hearing on the merits has been had; hence the elevation of these issues
before the Supreme Court is premature.

Petitioner filed a reply to the aforesaid comments, stating that the petition presents
justiciable questions for the determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and oppresively against petitioner,
warranting the intervention of this Court; (2) a derivative suit, such as the instant case,
is not rendered academic by the act of a majority of stockholders, such that the
discussion, ratification and confirmation of Item 6 of the Agenda of the annual
stockholders' meeting of May 10, 1977 did not render the case moot; that the
amendment to the bylaws which specifically bars petitioner from being a director is void
since it deprives him of his vested rights.

Respondent Commission, thru the Solicitor General, filed a separate comment,

alleging that after receiving a copy of the restraining order issued by this Court and

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noting that the restraining order did not foreclose action by it, the Commission en
banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375.

In answer to the allegation in the supplemental petition, it states that Order No. 450
which denied deferment of Item 6 of the Agenda of the annual stockholders' meeting of
respondent corporation, took into consideration an urgent manifestation filed with the
Commission by petitioner on May 3, 1977 which prayed, among others, that the
discussion of Item 6 of the Agenda be deferred. The reason given for denial of
deferment was that "such action is within the authority of the corporation as well as
falling within the sphere of stockholders' right to know, deliberate upon and/or to
express their wishes regarding disposition of corporate funds considering that their
investments are the ones directly affected." It was alleged that the main petition has,
therefore, become moot and academic.

On September 29,1977, petitioner filed a second supplemental petition with prayer for
preliminary injunction, alleging that the actuations of respondent SEC tended to
deprive him of his right to due process, and "that all possible questions on the facts
now pending before the respondent Commission are now before this Honorable Court
which has the authority and the competence to act on them as it may see fit." (Reno,
pp. 927-928.)

Petitioner, in his memorandum, submits the following issues for resolution;

(1) whether or not the provisions of the amended by-laws of respondent corporation,
disqualifying a competitor from nomination or election to the Board of Directors are
valid and reasonable;

(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International, Inc., a fully
owned subsidiary of San Miguel Corporation; and

(3) whether or not respondent SEC committed grave abuse of discretion in allowing
discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10,
1977, and the ratification of the investment in a foreign corporation of the corporate
funds, allegedly in violation of section 17-1/2 of the Corporation Law.

Whether or not amended by-laws are valid is purely a legal question which public
interest requires to be resolved —

It is the position of the petitioner that "it is not necessary to remand the case to
respondent SEC for an appropriate ruling on the intrinsic validity of the amended by-
laws in compliance with the principle of exhaustion of administrative remedies",
considering that: first: "whether or not the provisions of the amended by-laws are
intrinsically valid ... is purely a legal question. There is no factual dispute as to what the
provisions are and evidence is not necessary to determine whether such amended by-
laws are valid as framed and approved ... "; second: "it is for the interest and guidance
of the public that an immediate and final ruling on the question be made ... "; third:
"petitioner was denied due process by SEC" when "Commissioner de Guzman had
openly shown prejudice against petitioner ... ", and "Commissioner Sulit ... approved
the amended by-laws ex-parte and obviously found the same intrinsically valid; and
finally: "to remand the case to SEC would only entail delay rather than serve the ends
of justice."

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Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court
resolve the legal issues raised by the parties in keeping with the "cherished rules of
procedure" that "a court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future ligiation",
citing Gayong v. Gayos. 3 To the same effect is the prayer of San Miguel Corporation
that this Court resolve on the merits the validity of its amended by laws and the rights
and obligations of the parties thereunder, otherwise "the time spent and effort exerted
by the parties concerned and, more importantly, by this Honorable Court, would have
been for naught because the main question will come back to this Honorable Court for
final resolution." Respondent Eduardo R. Visaya submits a similar appeal.

It is only the Solicitor General who contends that the case should be remanded to the
SEC for hearing and decision of the issues involved, invoking the latter's primary
jurisdiction to hear and decide case involving intra-corporate controversies.

It is an accepted rule of procedure that the Supreme Court should always strive to
settle the entire controversy in a single proceeding, leaving nor root or branch to bear
the seeds of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved
to decide the case on the merits instead of remanding it to the trial court for further
proceedings since the ends of justice would not be subserved by the remand of the
case. In Republic v. Security Credit and Acceptance Corporation, et al., 6 this Court,
finding that the main issue is one of law, resolved to decide the case on the merits
"because public interest demands an early disposition of the case", and in Republic v.
Central Surety and Insurance Company, 7 this Court denied remand of the third-party
complaint to the trial court for further proceedings, citing precedent where this Court, in
similar situations resolved to decide the cases on the merits, instead of remanding
them to the trial court where (a) the ends of justice would not be subserved by the
remand of the case; or (b) where public interest demand an early disposition of the
case; or (c) where the trial court had already received all the evidence presented by
both parties and the Supreme Court is now in a position, based upon said evidence, to
decide the case on its merits. 8 It is settled that the doctrine of primary jurisdiction has
no application where only a question of law is involved. 8a Because uniformity may be
secured through review by a single Supreme Court, questions of law may appropriately
be determined in the first instance by courts. 8b In the case at bar, there are facts
which cannot be denied, viz.: that the amended by-laws were adopted by the Board of
Directors of the San Miguel Corporation in the exercise of the power delegated by the
stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special
meeting on February 10, 1977 held specially for that purpose, the amended by-laws
were ratified by more than 80% of the stockholders of record; that the foreign
investment in the Hongkong Brewery and Distellery, a beer manufacturing company in
Hongkong, was made by the San Miguel Corporation in 1948; and that in the
stockholders' annual meeting held in 1972 and 1977, all foreign investments and
operations of San Miguel Corporation were ratified by the stockholders.

II

Whether or not the amended by-laws of SMC of disqualifying a competitor from

nomination or election to the Board of Directors of SMC are valid and reasonable —

The validity or reasonableness of a by-law of a corporation in purely a question of

law. 9 Whether the by-law is in conflict with the law of the land, or with the charter of the
corporation, or is in a legal sense unreasonable and therefore unlawful is a question of
law. 10 This rule is subject, however, to the limitation that where the reasonableness of

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a by-law is a mere matter of judgment, and one upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of
the judgment of those who are authorized to make by-laws and who have exercised
their authority. 11

Petitioner claims that the amended by-laws are invalid and unreasonable because they
were tailored to suppress the minority and prevent them from having representation in
the Board", at the same time depriving petitioner of his "vested right" to be voted for
and to vote for a person of his choice as director.

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San
Miguel Corporation content that ex. conclusion of a competitor from the Board is
legitimate corporate purpose, considering that being a competitor, petitioner cannot
devote an unselfish and undivided Loyalty to the corporation; that it is essentially a
preventive measure to assure stockholders of San Miguel Corporation of reasonable
protective from the unrestrained self-interest of those charged with the promotion of the
corporate enterprise; that access to confidential information by a competitor may result
either in the promotion of the interest of the competitor at the expense of the San
Miguel Corporation, or the promotion of both the interests of petitioner and respondent
San Miguel Corporation, which may, therefore, result in a combination or agreement in
violation of Article 186 of the Revised Penal Code by destroying free competition to the
detriment of the consuming public. It is further argued that there is not vested right of
any stockholder under Philippine Law to be voted as director of a corporation. It is
alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two
corporations owned or controlled by him, control over the following shareholdings in
San Miguel Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b) Universal
Robina Corporation — 738,647 shares; (c) CFC Corporation — 658,313 shares, or a
total of 1,403,285 shares. Since the outstanding capital stock of San Miguel
Corporation, as of the present date, is represented by 33,139,749 shares with a par
value of P10.00, the total shares owned or controlled by petitioner represents 4.2344%
of the total outstanding capital stock of San Miguel Corporation. It is also contended
that petitioner is the president and substantial stockholder of Universal Robina
Corporation and CFC Corporation, both of which are allegedly controlled by petitioner
and members of his family. It is also claimed that both the Universal Robina
Corporation and the CFC Corporation are engaged in businesses directly and
substantially competing with the alleged businesses of San Miguel Corporation, and of
corporations in which SMC has substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS

AND SAN MIGUEL CORPORATION

According to respondent San Miguel Corporation, the areas of, competition are
enumerated in its Board the areas of competition are enumerated in its Board
Resolution dated April 28, 1978, thus:

Product Line Estimated Market Share Total

1977 SMC Robina-CFC

Table Eggs 0.6% 10.0% 10.6%

Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%

63
 Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC
involved product sales of over P400 million or more than 20% of the P2 billion total
product sales of SMC. Significantly, the combined market shares of SMC and CFC-
Robina in layer pullets dressed chicken, poultry and hog feeds ice cream, instant
coffee and woven fabrics would result in a position of such dominance as to affect the
prevailing market factors.

It is further asserted that in 1977, the CFC-Robina group was in direct competition on
product lines which, for SMC, represented sales amounting to more than ?478 million.
In addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a
subsidiary of SMC, which product line represented sales for SMC amounting to more
than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills recently
acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc.,
subsidiary of SMC, in product sales amounting to more than P95 million. The areas of
competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC,
product sales of more than P849 million.

According to private respondents, at the Annual Stockholders' Meeting of March 18,

1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or
more than 90% of the total outstanding shares of SMC, rejected petitioner's candidacy
for the Board of Directors because they "realized the grave dangers to the corporation
in the event a competitor gets a board seat in SMC." On September 18, 1978, the
Board of Directors of SMC, by "virtue of powers delegated to it by the stockholders,"
approved the amendment to ' he by-laws in question. At the meeting of February 10,
1977, these amendments were confirmed and ratified by 5,716 shareholders owning
24,283,945 shares, or more than 80% of the total outstanding shares. Only 12
shareholders, representing 7,005 shares, opposed the confirmation and ratification. At
the Annual Stockholders' Meeting of May 10, 1977, 11,349 shareholders, owning
27,257.014 shares, or more than 90% of the outstanding shares, rejected petitioner's
candidacy, while 946 stockholders, representing 1,648,801 shares voted for him. On
the May 9, 1978 Annual Stockholders' Meeting, 12,480 shareholders, owning more
than 30 million shares, or more than 90% of the total outstanding shares. voted against
petitioner.

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF

DIRECTORS EXPRESSLY CONFERRED BY LAW

Private respondents contend that the disputed amended by laws were adopted by the
Board of Directors of San Miguel Corporation a-, a measure of self-defense to protect
the corporation from the clear and present danger that the election of a business
competitor to the Board may cause upon the corporation and the other stockholders
inseparable prejudice. Submitted for resolution, therefore, is the issue — whether or
not respondent San Miguel Corporation could, as a measure of self- protection,
disqualify a competitor from nomination and election to its Board of Directors.

It is recognized by an authorities that 'every corporation has the inherent power to

adopt by-laws 'for its internal government, and to regulate the conduct and prescribe
the rights and duties of its members towards itself and among themselves in reference
to the management of its affairs. 12 At common law, the rule was "that the power to
make and adopt by-laws was inherent in every corporation as one of its necessary and
inseparable legal incidents. And it is settled throughout the United States that in the

64
absence of positive legislative provisions limiting it, every private corporation has this
inherent power as one of its necessary and inseparable legal incidents, independent of
any specific enabling provision in its charter or in general law, such power of self-
government being essential to enable the corporation to accomplish the purposes of its
creation. 13

In this jurisdiction, under section 21 of the Corporation Law, a corporation may

prescribe in its by-laws "the qualifications, duties and compensation of directors,
officers and employees ... " This must necessarily refer to a qualification in addition to
that specified by section 30 of the Corporation Law, which provides that "every director
must own in his right at least one share of the capital stock of the stock corporation of
which he is a director ... " In Government v. El Hogar, 14 the Court sustained the validity
of a provision in the corporate by-law requiring that persons elected to the Board of
Directors must be holders of shares of the paid up value of P5,000.00, which shall be
held as security for their action, on the ground that section 21 of the Corporation Law
expressly gives the power to the corporation to provide in its by-laws for the
qualifications of directors and is "highly prudent and in conformity with good practice. "

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person "who buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majority of the stockholders and that he impliedly contracts that the
will of the majority shall govern in all matters within the limits of the act of incorporation
and lawfully enacted by-laws and not forbidden by law." 15 To this extent, therefore, the
stockholder may be considered to have "parted with his personal right or privilege to
regulate the disposition of his property which he has invested in the capital stock of the
corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It
cannot therefore be justly said that the contract, express or implied, between the
corporation and the stockholders is infringed ... by any act of the former which is
authorized by a majority ... ." 16

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles
of incorporation by a vote or written assent of the stockholders representing at least
two-thirds of the subscribed capital stock of the corporation If the amendment changes,
diminishes or restricts the rights of the existing shareholders then the disenting minority
has only one right, viz.: "to object thereto in writing and demand payment for his
share." Under section 22 of the same law, the owners of the majority of the subscribed
capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said,
therefore, that petitioner has a vested right to be elected director, in the face of the fact
that the law at the time such right as stockholder was acquired contained the
prescription that the corporate charter and the by-law shall be subject to amendment,
alteration and modification. 17

It being settled that the corporation has the power to provide for the qualifications of its
directors, the next question that must be considered is whether the disqualification of a
competitor from being elected to the Board of Directors is a reasonable exercise of
corporate authority.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND

ITS SHAREHOLDERS

Although in the strict and technical sense, directors of a private corporation are not
regarded as trustees, there cannot be any doubt that their character is that of a
fiduciary insofar as the corporation and the stockholders as a body are concerned. As

65
agents entrusted with the management of the corporation for the collective benefit of
the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one
of trust." 18 "The ordinary trust relationship of directors of a corporation and
stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or
technical law. It springs from the fact that directors have the control and guidance of
corporate affairs and property and hence of the property interests of the stockholders.
Equity recognizes that stockholders are the proprietors of the corporate interests and
are ultimately the only beneficiaries thereof * * *.

Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary

obligation of the directors of corporations, thus:

A director is a fiduciary. ... Their powers are powers in trust. ... He who is in
such fiduciary position cannot serve himself first and his cestuis second. ...
He cannot manipulate the affairs of his corporation to their detriment and in
disregard of the standards of common decency. He cannot by the
intervention of a corporate entity violate the ancient precept against serving
two masters ... He cannot utilize his inside information and strategic
position for his own preferment. He cannot violate rules of fair play by doing
indirectly through the corporation what he could not do so directly. He
cannot violate rules of fair play by doing indirectly though the corporation
what he could not do so directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and creditors no matter
how absolute in terms that power may be and no matter how meticulous he
is to satisfy technical requirements. For that power is at all times subject to
the equitable limitation that it may not be exercised for the aggrandizement,
preference or advantage of the fiduciary to the exclusion or detriment of the
cestuis.

And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:

... A person cannot serve two hostile and adverse master, without detriment
to one of them. A judge cannot be impartial if personally interested in the
cause. No more can a director. Human nature is too weak -for this. Take
whatever statute provision you please giving power to stockholders to
choose directors, and in none will you find any express prohibition against
a discretion to select directors having the company's interest at heart, and it
would simply be going far to deny by mere implication the existence of such
a salutary power

... If the by-law is to be held reasonable in disqualifying a stockholder in a competing

company from being a director, the same reasoning would apply to disqualify the wife
and immediate member of the family of such stockholder, on account of the supposed
interest of the wife in her husband's affairs, and his suppose influence over her. It is
perhaps true that such stockholders ought not to be condemned as selfish and
dangerous to the best interest of the corporation until tried and tested. So it is also true
that we cannot condemn as selfish and dangerous and unreasonable the action of the
board in passing the by-law. The strife over the matter of control in this corporation as
in many others is perhaps carried on not altogether in the spirit of brotherly love and
affection. The only test that we can apply is as to whether or not the action of the
Board is authorized and sanctioned by law. ... . 22

These principles have been applied by this Court in previous cases.23

66
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A
STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A
CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE
OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID

It is a settled state law in the United States, according to Fletcher, that corporations
have the power to make by-laws declaring a person employed in the service of a rival
company to be ineligible for the corporation's Board of Directors. ... (A)n amendment
which renders ineligible, or if elected, subjects to removal, a director if he be also a
director in a corporation whose business is in competition with or is antagonistic to the
other corporation is valid." 24 This is based upon the principle that where the director is
so employed in the service of a rival company, he cannot serve both, but must betray
one or the other. Such an amendment "advances the benefit of the corporation and is
good." An exception exists in New Jersey, where the Supreme Court held that the
Corporation Law in New Jersey prescribed the only qualification, and therefore the
corporation was not empowered to add additional qualifications. 25 This is the exact
opposite of the situation in the Philippines because as stated heretofore, section 21 of
the Corporation Law expressly provides that a corporation may make by-laws for the
qualifications of directors. Thus, it has been held that an officer of a corporation cannot
engage in a business in direct competition with that of the corporation where he is a
director by utilizing information he has received as such officer, under "the established
law that a director or officer of a corporation may not enter into a competing enterprise
which cripples or injures the business of the corporation of which he is an officer or
director. 26

It is also well established that corporate officers "are not permitted to use their position
of trust and confidence to further their private interests." 27 In a case where directors of
a corporation cancelled a contract of the corporation for exclusive sale of a foreign
firm's products, and after establishing a rival business, the directors entered into a new
contract themselves with the foreign firm for exclusive sale of its products, the court
held that equity would regard the new contract as an offshoot of the old contract and,
therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the
fruits of his misconduct to the exclusion of his principal. 28

The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that

the fiduciary standards could not be upheld where the fiduciary was acting for two
entities with competing interests. This doctrine rests fundamentally on the unfairness,
in particular circumstances, of an officer or director taking advantage of an opportunity
for his own personal profit when the interest of the corporation justly calls for
protection. 30

It is not denied that a member of the Board of Directors of the San Miguel Corporation
has access to sensitive and highly confidential information, such as: (a) marketing
strategies and pricing structure; (b) budget for expansion and diversification; (c)
research and development; and (d) sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms.

It is obviously to prevent the creation of an opportunity for an officer or director of San

Miguel Corporation, who is also the officer or owner of a competing corporation, from
taking advantage of the information which he acquires as director to promote his
individual or corporate interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial sense, it would seem

67
improbable, if not impossible, for the director, if he were to discharge effectively his
duty, to satisfy his loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.

Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained
as valid and reasonable an amendment to the by-laws of a bank, requiring that its
directors should not be directors, officers, employees, agents, nominees or attorneys of
any other banking corporation, affiliate or subsidiary thereof. Chief Judge Parker,
in McKee, explained the reasons of the court, thus:

... A bank director has access to a great deal of information concerning the
business and plans of a bank which would likely be injurious to the bank if
known to another bank, and it was reasonable and prudent to enlarge this
minimum disqualification to include any director, officer, employee, agent,
nominee, or attorney of any other bank in California. The Ashkins case,
supra, specifically recognizes protection against rivals and others who
might acquire information which might be used against the interests of the
corporation as a legitimate object of by-law protection. With respect to
attorneys or persons associated with a firm which is attorney for another
bank, in addition to the direct conflict or potential conflict of interest, there is
also the danger of inadvertent leakage of confidential information through
casual office discussions or accessibility of files. Defendant's directors
determined that its welfare was best protected if this opportunity for
conflicting loyalties and potential misuse and leakage of confidential
information was foreclosed.

In McKee the Court further listed qualificational by-laws upheld by the courts, as
follows:

(1) A director shall not be directly or indirectly interested as a stockholder in

any other firm, company, or association which competes with the subject
corporation.

(2) A director shall not be the immediate member of the family of any
stockholder in any other firm, company, or association which competes with
the subject corporation,

(3) A director shall not be an officer, agent, employee, attorney, or trustee

in any other firm, company, or association which compete with the subject
corporation.

(4) A director shall be of good moral character as an essential qualification

to holding office.

(5) No person who is an attorney against the corporation in a law suit is

eligible for service on the board. (At p. 7.)

These are not based on theorical abstractions but on human experience — that a
person cannot serve two hostile masters without detriment to one of them.

The offer and assurance of petitioner that to avoid any possibility of his taking unfair
advantage of his position as director of San Miguel Corporation, he would absent
himself from meetings at which confidential matters would be discussed, would not
detract from the validity and reasonableness of the by-laws here involved. Apart from

68
the impractical results that would ensue from such arrangement, it would be
inconsistent with petitioner's primary motive in running for board membership — which
is to protect his investments in San Miguel Corporation. More important, such a
proposed norm of conduct would be against all accepted principles underlying a
director's duty of fidelity to the corporation, for the policy of the law is to encourage and
enforce responsible corporate management. As explained by Oleck: 31 "The law win
not tolerate the passive attitude of directors ... without active and conscientious
participation in the managerial functions of the company. As directors, it is their duty to
control and supervise the day to day business activities of the company or to
promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it
that these policies are carried out. It is only then that directors may be said to have
fulfilled their duty of fealty to the corporation."

Sound principles of corporate management counsel against sharing sensitive

information with a director whose fiduciary duty of loyalty may well require that he
disclose this information to a competitive arrival. These dangers are enhanced
considerably where the common director such as the petitioner is a controlling
stockholder of two of the competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to appropriate for the benefit of his
own corporation the corporate plans and policies of the corporation where he sits as
director.

Indeed, access by a competitor to confidential information regarding marketing

strategies and pricing policies of San Miguel Corporation would subject the latter to a
competitive disadvantage and unjustly enrich the competitor, for advance knowledge
by the competitor of the strategies for the development of existing or new markets of
existing or new products could enable said competitor to utilize such knowledge to his
advantage. 32

There is another important consideration in determining whether or not the amended

by-laws are reasonable. The Constitution and the law prohibit combinations in restraint
of trade or unfair competition. Thus, section 2 of Article XIV of the Constitution
provides: "The State shall regulate or prohibit private monopolies when the public
interest so requires. No combinations in restraint of trade or unfair competition shall be
snowed."

Article 186 of the Revised Penal Code also provides:

Art. 186. Monopolies and combinations in restraint of trade. —The penalty

of prision correccional in its minimum period or a fine ranging from two
hundred to six thousand pesos, or both, shall be imposed upon:

1. Any person who shall enter into any contract or agreement or shall take
part in any conspiracy or combination in the form of a trust or otherwise, in
restraint of trade or commerce or to prevent by artificial means free
competition in the market.

2. Any person who shag monopolize any merchandise or object of trade or

commerce, or shall combine with any other person or persons to
monopolize said merchandise or object in order to alter the price thereof by
spreading false rumors or making use of any other artifice to restrain free
competition in the market.

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 3. Any person who, being a manufacturer, producer, or processor of any
merchandise or object of commerce or an importer of any merchandise or
object of commerce from any foreign country, either as principal or agent,
wholesale or retailer, shall combine, conspire or agree in any manner with
any person likewise engaged in the manufacture, production, processing,
assembling or importation of such merchandise or object of commerce or
with any other persons not so similarly engaged for the purpose of making
transactions prejudicial to lawful commerce, or of increasing the market
price in any part of the Philippines, or any such merchandise or object of
commerce manufactured, produced, processed, assembled in or imported
into the Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or object of
commerce is used.

There are other legislation in this jurisdiction, which prohibit monopolies and
combinations in restraint of trade. 33

Basically, these anti-trust laws or laws against monopolies or combinations in restraint

of trade are aimed at raising levels of competition by improving the consumers'
effectiveness as the final arbiter in free markets. These laws are designed to preserve
free and unfettered competition as the rule of trade. "It rests on the premise that the
unrestrained interaction of competitive forces will yield the best allocation of our
economic resources, the lowest prices and the highest quality ... ." 34 they operate to
forestall concentration of economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by
reason of the inherent nature of the contemplated acts, prejudice the public interest by
unduly restraining competition or unduly obstructing the course of trade. 36

The terms "monopoly", "combination in restraint of trade" and "unfair competition"

appear to have a well defined meaning in other jurisdictions. A "monopoly" embraces
any combination the tendency of which is to prevent competition in the broad and
general sense, or to control prices to the detriment of the public. 37 In short, it is the
concentration of business in the hands of a few. The material consideration in
determining its existence is not that prices are raised and competition actually
excluded, but that power exists to raise prices or exclude competition when
desired. 38 Further, it must be considered that the Idea of monopoly is now understood
to include a condition produced by the mere act of individuals. Its dominant thought is
the notion of exclusiveness or unity, or the suppression of competition by the
qualification of interest or management, or it may be thru agreement and concert of
action. It is, in brief, unified tactics with regard to prices. 39

From the foregoing definitions, it is apparent that the contentions of petitioner are not in
accord with reality. The election of petitioner to the Board of respondent Corporation
can bring about an illegal situation. This is because an express agreement is not
necessary for the existence of a combination or conspiracy in restraint of trade. 40 It is
enough that a concert of action is contemplated and that the defendants conformed to
the arrangements, 41 and what is to be considered is what the parties actually did and
not the words they used. For instance, the Clayton Act prohibits a person from serving
at the same time as a director in any two or more corporations, if such corporations
are, by virtue of their business and location of operation, competitors so that the
elimination of competition between them would constitute violation of any provision of
the anti-trust laws. 42 There is here a statutory recognition of the anti-competitive
dangers which may arise when an individual simultaneously acts as a director of two or

70
more competing corporations. A common director of two or more competing
corporations would have access to confidential sales, pricing and marketing
information and would be in a position to coordinate policies or to aid one corporation
at the expense of another, thereby stifling competition. This situation has been aptly
explained by Travers, thus:

The argument for prohibiting competing corporations from sharing even

one director is that the interlock permits the coordination of policies
between nominally independent firms to an extent that competition between
them may be completely eliminated. Indeed, if a director, for example, is to
be faithful to both corporations, some accommodation must result.
Suppose X is a director of both Corporation A and Corporation B. X could
hardly vote for a policy by A that would injure B without violating his duty of
loyalty to B at the same time he could hardly abstain from voting without
depriving A of his best judgment. If the firms really do compete — in the
sense of vying for economic advantage at the expense of the other — there
can hardly be any reason for an interlock between competitors other than
the suppression of competition. 43 (Emphasis supplied.)

According to the Report of the House Judiciary Committee of the U. S. Congress on

section 9 of the Clayton Act, it was established that: "By means of the interlocking
directorates one man or group of men have been able to dominate and control a great
number of corporations ... to the detriment of the small ones dependent upon them and
to the injury of the public. 44

Shared information on cost accounting may lead to price fixing. Certainly, shared
information on production, orders, shipments, capacity and inventories may lead to
control of production for the purpose of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the
products of San Miguel Corporation, the essence of competition in a free market for the
purpose of serving the lowest priced goods to the consuming public would be
frustrated, The competitor could so manipulate the prices of his products or vary its
marketing strategies by region or by brand in order to get the most out of the
consumers. Where the two competing firms control a substantial segment of the
market this could lead to collusion and combination in restraint of trade. Reason and
experience point to the inevitable conclusion that the inherent tendency of interlocking
directorates between companies that are related to each other as competitors is to
blunt the edge of rivalry between the corporations, to seek out ways of compromising
opposing interests, and thus eliminate competition. As respondent SMC aptly
observes, knowledge by CFC-Robina of SMC's costs in various industries and regions
in the country win enable the former to practice price discrimination. CFC-Robina can
segment the entire consuming population by geographical areas or income groups and
change varying prices in order to maximize profits from every market segment. CFC-
Robina could determine the most profitable volume at which it could produce for every
product line in which it competes with SMC. Access to SMC pricing policy by CFC-
Robina would in effect destroy free competition and deprive the consuming public of
opportunity to buy goods of the highest possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in
agriculture, then the election of petitioner to the Board of SMC may constitute a
violation of the prohibition contained in section 13(5) of the Corporation Law. Said
section provides in part that "any stockholder of more than one corporation organized

71
for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or
attempting to bring about a combination to exercise control of incorporations ... ."

Neither are We persuaded by the claim that the by-law was Intended to prevent the
candidacy of petitioner for election to the Board. If the by-law were to be applied in the
case of one stockholder but waived in the case of another, then it could be reasonably
claimed that the by-law was being applied in a discriminatory manner. However, the by
law, by its terms, applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally upon all persons of a class.
Besides, before petitioner can be declared ineligible to run for director, there must be
hearing and evidence must be submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and management, therefore, support
the view that a by-law which disqualifies a competition from election to the Board of
Directors of another corporation is valid and reasonable.

In the absence of any legal prohibition or overriding public policy, wide latitude may be
accorded to the corporation in adopting measures to protect legitimate corporation
interests. Thus, "where the reasonableness of a by-law is a mere matter of judgment,
and upon which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have expressed their authority. 45

Although it is asserted that the amended by-laws confer on the present Board powers
to perpetua themselves in power such fears appear to be misplaced. This power, but is
very nature, is subject to certain well established limitations. One of these is inherent in
the very convert and definition of the terms "competition" and "competitor".
"Competition" implies a struggle for advantage between two or more forces, each
possessing, in substantially similar if not Identical degree, certain characteristics
essential to the business sought. It means an independent endeavor of two or more
persons to obtain the business patronage of a third by offering more advantageous
terms as an inducement to secure trade. 46 The test must be whether the business
does in fact compete, not whether it is capable of an indirect and highly unsubstantial
duplication of an isolated or non-characteristics activity. 47 It is, therefore, obvious that
not every person or entity engaged in business of the same kind is a competitor. Such
factors as quantum and place of business, Identity of products and area of competition
should be taken into consideration. It is, therefore, necessary to show that petitioner's
business covers a substantial portion of the same markets for similar products to the
extent of not less than 10% of respondent corporation's market for competing products.
While We here sustain the validity of the amended by-laws, it does not follow as a
necessary consequence that petitioner is ipso facto disqualified. Consonant with the
requirement of due process, there must be due hearing at which the petitioner must be
given the fullest opportunity to show that he is not covered by the disqualification. As
trustees of the corporation and of the stockholders, it is the responsibility of directors to
act with fairness to the stockholders.48 Pursuant to this obligation and to remove any
suspicion that this power may be utilized by the incumbent members of the Board to
perpetuate themselves in power, any decision of the Board to disqualify a candidate for
the Board of Directors should be reviewed by the Securities behind Exchange
Commission en banc and its decision shall be final unless reversed by this Court on
certiorari. 49 Indeed, it is a settled principle that where the action of a Board of Directors
is an abuse of discretion, or forbidden by statute, or is against public policy, or is ultra
vires, or is a fraud upon minority stockholders or creditors, or will result in waste,

72
dissipation or misapplication of the corporation assets, a court of equity has the power
to grant appropriate relief. 50

III

Whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International Inc., a fully
owned subsidiary of San Miguel Corporation —

Respondent San Miguel Corporation stated in its memorandum that petitioner's claim
that he was denied inspection rights as stockholder of SMC "was made in the teeth of
undisputed facts that, over a specific period, petitioner had been furnished numerous
documents and information," to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders for use at the
annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the
stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million
investment in associated companies and other companies as of December 31, 1975;
(5) a listing of the salaries, allowances, bonuses and other compensation or
remunerations received by the directors and corporate officers of SMC; (6) a copy of
the US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the
minutes of all meetings of the Board of Directors from January 1975 to May 1976, with
deletions of sensitive data, which deletions were not objected to by petitioner.

Further, it was averred that upon request, petitioner was informed in writing on
September 18, 1976; (1) that SMC's foreign investments are handled by San Miguel
International, Inc., incorporated in Bermuda and wholly owned by SMC; this was
SMC's first venture abroad, having started in 1948 with an initial outlay of ?500,000.00,
augmented by a loan of Hongkong $6 million from a foreign bank under the personal
guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of
December 31, 1975, the estimated value of SMI would amount to almost P400 million
(3) that the total cash dividends received by SMC from SMI since 1953 has amount to
US $ 9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock
dividends, all earnings having been used in line with a program for the setting up of
breweries by SMI

These averments are supported by the affidavit of the Corporate Secretary, enclosing
photocopies of the afore-mentioned documents. 51

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record
of all business transactions of the corporation and minutes of any meeting shall be
open to the inspection of any director, member or stockholder of the corporation at
reasonable hours."

The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership, or a ownership. 52 This right is
predicated upon the necessity of self-protection. It is generally held by majority of the
courts that where the right is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the corporation. 53 In other words,
the inspection has to be germane to the petitioner's interest as a stockholder, and has
to be proper and lawful in character and not inimical to the interest of the
corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to examine

73
the books of the corporation must be exercised in good faith, for specific and honest
purpose, and not to gratify curiosity, or for specific and honest purpose, and not to
gratify curiosity, or for speculative or vexatious purposes. The weight of judicial opinion
appears to be, that on application for mandamus to enforce the right, it is proper for the
court to inquire into and consider the stockholder's good faith and his purpose and
motives in seeking inspection. 56 Thus, it was held that "the right given by statute is not
absolute and may be refused when the information is not sought in good faith or is
used to the detriment of the corporation." 57 But the "impropriety of purpose such as will
defeat enforcement must be set up the corporation defensively if the Court is to take
cognizance of it as a qualification. In other words, the specific provisions take from the
stockholder the burden of showing propriety of purpose and place upon the corporation
the burden of showing impropriety of purpose or motive. 58 It appears to be the general
rule that stockholders are entitled to full information as to the management of the
corporation and the manner of expenditure of its funds, and to inspection to obtain
such information, especially where it appears that the company is being mismanaged
or that it is being managed for the personal benefit of officers or directors or certain of
the stockholders to the exclusion of others." 59

While the right of a stockholder to examine the books and records of a corporation for
a lawful purpose is a matter of law, the right of such stockholder to examine the books
and records of a wholly-owned subsidiary of the corporation in which he is a
stockholder is a different thing.

Some state courts recognize the right under certain conditions, while others do not.
Thus, it has been held that where a corporation owns approximately no property
except the shares of stock of subsidiary corporations which are merely agents or
instrumentalities of the holding company, the legal fiction of distinct corporate entities
may be disregarded and the books, papers and documents of all the corporations may
be required to be produced for examination, 60 and that a writ of mandamus, may be
granted, as the records of the subsidiary were, to all incontents and purposes, the
records of the parent even though subsidiary was not named as a party. 61 mandamus
was likewise held proper to inspect both the subsidiary's and the parent corporation's
books upon proof of sufficient control or dominion by the parent showing the relation of
principal or agent or something similar thereto. 62

On the other hand, mandamus at the suit of a stockholder was refused where the
subsidiary corporation is a separate and distinct corporation domiciled and with its
books and records in another jurisdiction, and is not legally subject to the control of the
parent company, although it owned a vast majority of the stock of the
subsidiary. 63 Likewise, inspection of the books of an allied corporation by stockholder
of the parent company which owns all the stock of the subsidiary has been refused on
the ground that the stockholder was not within the class of "persons having an
interest." 64

In the Nash case, 65 The Supreme Court of New York held that the contractual right of
former stockholders to inspect books and records of the corporation included the right
to inspect corporation's subsidiaries' books and records which were in corporation's
possession and control in its office in New York."

In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the
records of a controlled subsidiary corporation which used the same offices and had
Identical officers and directors.

74
In his "Urgent Motion for Production and Inspection of Documents" before respondent
SEC, petitioner contended that respondent corporation "had been attempting to
suppress information for the stockholders" and that petitioner, "as stockholder of
respondent corporation, is entitled to copies of some documents which for some
reason or another, respondent corporation is very reluctant in revealing to the
petitioner notwithstanding the fact that no harm would be caused thereby to the
corporation." 67 There is no question that stockholders are entitled to inspect the books
and records of a corporation in order to investigate the conduct of the management,
determine the financial condition of the corporation, and generally take an account of
the stewardship of the officers and directors. 68

In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would be more
in accord with equity, good faith and fair dealing to construe the statutory right of
petitioner as stockholder to inspect the books and records of the corporation as
extending to books and records of such wholly subsidiary which are in respondent
corporation's possession and control.

IV

Whether or not respondent SEC gravely abused its discretion in allowing the
stockholders of respondent corporation to ratify the investment of corporate funds in a
foreign corporation

Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation
invested corporate funds in SMI without prior authority of the stockholders, thus
violating section 17-1/2 of the Corporation Law, and alleges that respondent SEC
should have investigated the charge, being a statutory offense, instead of allowing
ratification of the investment by the stockholders.

Respondent SEC's position is that submission of the investment to the stockholders for
ratification is a sound corporate practice and should not be thwarted but encouraged.

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any
other corporation or business or for any purpose other than the main purpose for which
it was organized" provided that its Board of Directors has been so authorized by the
affirmative vote of stockholders holding shares entitling them to exercise at least two-
thirds of the voting power. If the investment is made in pursuance of the corporate
purpose, it does not need the approval of the stockholders. It is only when the
purchase of shares is done solely for investment and not to accomplish the purpose of
its incorporation that the vote of approval of the stockholders holding shares entitling
them to exercise at least two-thirds of the voting power is necessary. 69

As stated by respondent corporation, the purchase of beer manufacturing facilities by

SMC was an investment in the same business stated as its main purpose in its Articles
of Incorporation, which is to manufacture and market beer. It appears that the original
investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc.,
purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the
manufacture and marketing of San Miguel beer thereat. Restructuring of the
investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax
free reorganization.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an

75
investment made by Manao Sugar Central Co., Inc., without prior resolution approved
by the affirmative vote of 2/3 of the stockholders' voting power, in the Philippine Fiber
Processing Co., Inc., a company engaged in the manufacture of sugar bags. The lower
court said that "there is more logic in the stand that if the investment is made in a
corporation whose business is important to the investing corporation and would aid it in
its purpose, to require authority of the stockholders would be to unduly curtail the
power of the Board of Directors." This Court affirmed the ruling of the court a quo on
the matter and, quoting Prof. Sulpicio S. Guevara, said:

"j. Power to acquire or dispose of shares or securities. — A private

corporation, in order to accomplish is purpose as stated in its articles of
incorporation, and subject to the limitations imposed by the Corporation
Law, has the power to acquire, hold, mortgage, pledge or dispose of
shares, bonds, securities, and other evidence of indebtedness of any
domestic or foreign corporation. Such an act, if done in pursuance of the
corporate purpose, does not need the approval of stockholders; but when
the purchase of shares of another corporation is done solely for investment
and not to accomplish the purpose of its incorporation, the vote of approval
of the stockholders is necessary. In any case, the purchase of such shares
or securities must be subject to the limitations established by the
Corporations law; namely, (a) that no agricultural or mining corporation
shall be restricted to own not more than 15% of the voting stock of nay
agricultural or mining corporation; and (c) that such holdings shall be solely
for investment and not for the purpose of bringing about a monopoly in any
line of commerce of combination in restraint of trade." The Philippine
Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis
supplied.)

40. Power to invest corporate funds. — A private corporation has the power
to invest its corporate funds "in any other corporation or business, or for
any purpose other than the main purpose for which it was organized,
provide that 'its board of directors has been so authorized in a resolution by
the affirmative vote of stockholders holding shares in the corporation
entitling them to exercise at least two-thirds of the voting power on such a
propose at a stockholders' meeting called for that purpose,' and provided
further, that no agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining corporation. When the
investment is necessary to accomplish its purpose or purposes as stated in
its articles of incorporation the approval of the stockholders is not
necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).

Assuming arguendo that the Board of Directors of SMC had no authority to make the
assailed investment, there is no question that a corporation, like an individual, may
ratify and thereby render binding upon it the originally unauthorized acts of its officers
or other agents. 70 This is true because the questioned investment is neither contrary to
law, morals, public order or public policy. It is a corporate transaction or contract which
is within the corporate powers, but which is defective from a supported failure to
observe in its execution the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding two-thirds of the voting
power. This requirement is for the benefit of the stockholders. The stockholders for
whose benefit the requirement was enacted may, therefore, ratify the investment and
its ratification by said stockholders obliterates any defect which it may have had at the
outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not

76
illegal and void ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable when
ratified by the stockholders.

Besides, the investment was for the purchase of beer manufacturing and marketing
facilities which is apparently relevant to the corporate purpose. The mere fact that
respondent corporation submitted the assailed investment to the stockholders for
ratification at the annual meeting of May 10, 1977 cannot be construed as an
admission that respondent corporation had committed an ultra vires act, considering
the common practice of corporations of periodically submitting for the gratification of
their stockholders the acts of their directors, officers and managers.

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be
allowed to examine the books and records of San Miguel International, Inc., as
specified by him.

On the matter of the validity of the amended by-laws of respondent San Miguel
Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos,
Abad Santos and De Castro, voted to sustain the validity per se of the amended by-
laws in question and to dismiss the petition without prejudice to the question of the
actual disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as
director of respondent San Miguel Corporation being decided, after a new and proper
hearing by the Board of Directors of said corporation, whose decision shall be
appealable to the respondent Securities and Exchange Commission deliberating and
acting en banc and ultimately to this Court. Unless disqualified in the manner herein
provided, the prohibition in the afore-mentioned amended by-laws shall not apply to
petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare
the issue on the validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-
laws, pending hearing by this Court on the applicability of section 13(5) of the
Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws
but otherwise concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and
Guerrero filed a separate opinion, wherein they voted against the validity of the
questioned amended bylaws and that this question should properly be resolved first by
the SEC as the agency of primary jurisdiction. They concur in the result that petitioner
may be allowed to run for and sit as director of respondent SMC in the scheduled May
6, 1979 election and subsequent elections until disqualified after proper hearing by the
respondent's Board of Directors and petitioner's disqualification shall have been
sustained by respondent SEC en banc and ultimately by final judgment of this Court.

In resume, subject to the qualifications aforestated judgment is hereby rendered

GRANTING the petition by allowing petitioner to examine the books and records of
San Miguel International, Inc. as specified in the petition. The petition, insofar as it
assails the validity of the amended by- laws and the ratification of the foreign

77
investment of respondent corporation, for lack of necessary votes, is hereby
DISMISSED. No costs.

SECOND DIVISION

[G.R. No. 108905. October 23, 1997.]

GRACE CHRISTIAN HIGH SCHOOL, Petitioner, v. THE COURT OF

APPEALS, GRACE VILLAGE ASSOCIATION, INC., ALEJANDRO G.
BELTRAN, and ERNESTO L. GO, Respondents.

DECISION

MENDOZA, J.:

The question for decision in this case is the right of petitioner’s

representative to sit in the board of directors of respondent Grace Village
Association, Inc. as a permanent member thereof. For fifteen years — from
1975 until 1989 — petitioner’s representative had been recognized as a
"permanent director" of the association. But on February 13, 1990,
petitioner received notice from the association’s committee on election that
the latter was "reexamining" (actually, reconsidering) the right of
petitioner’s representative to continue as an unelected member of the
board. As the board denied petitioner’s request to be allowed representation
without election, petitioner brought an action for mandamus in the Home
Insurance and Guaranty Corporation. Its action was dismissed by the
hearing officer whose decision was subsequently affirmed by the appeals
board. Petitioner appealed to the Court of Appeals, which in turn upheld the
decision of the HIGC’s appeals board. Hence this petition for review based
on the following contentions: chanrob1es virtual 1aw library

1. The Petitioner herein has already acquired a vested right to a permanent

seat in the Board of Directors of Grace Village Association;

2. The amended By-laws of the Association drafted and promulgated by a

78
Committee on December 20, 1975 is valid and binding; and

3. The Practice of tolerating the automatic inclusion of petitioner as a

permanent member of the Board of Directors of the Association without the
benefit of election is allowed under the law. 1

Briefly stated, the facts are as follows: chanrob1es virtual 1aw library

Petitioner Grace Christian High School is an educational institution offering

preparatory, kindergarten and secondary courses at the Grace Village in
Quezon City. Private respondent Grace Village Association, Inc., on the
other hand, is an organization of lot and/or building owners, lessees and
residents at Grace Village, while private respondents Alejandro G. Beltran
and Ernesto L. Go were its president and chairman of the committee on
election, respectively, in 1990, when this suit was brought.

As adopted in 1968, the by-laws of the association provided in Article IV, as

follows:chanrob1es virtual 1aw library

The annual meeting of the members of the Association shall be held on the
first Sunday of January in each calendar year at the principal office of the
Association at 2:00 P.M. where they shall elect by plurality vote and by
secret balloting, the Board of Directors, composed of eleven (11) members
to serve for one year until their successors are duly elected and have
qualified. 2

It appears, that on December 20, 1975, a committee of the board of

directors prepared a draft of an amendment to the by-laws, reading as
follows: 3

VI. ANNUAL MEETING

The Annual Meeting of the members of the Association shall be held on the
second Thursday of January of each year. Each Charter or Associate
Member of the Association is entitled to vote. He shall be entitled to as
many votes as he has acquired thru his monthly membership fees only
computed on a ratio of TEN (P10.00) PESOS for one vote.

The Charter and Associate Members shall elect the Directors of the
Association. The candidates receiving the first fourteen (14) highest number
of votes shall be declared and proclaimed elected until their successors are
elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION.

This draft was never presented to the general membership for approval.
Nevertheless, from 1975, after it was presumably submitted to the board,
up to 1990, petitioner was given a permanent seat in the board of directors
of the association. On February 13, 1990, the association’s committee on
election in a letter informed James Tan, principal of the school, that "it was
the sentiment that all directors should be elected by members of the

79
association" because "to make a person or entity a permanent Director
would deprive the right of voters to vote for fifteen (15) members of the
Board," and "it is undemocratic for a person or entity to hold office in
perpetuity." 4 For this reason, Tan was told that "the proposal to make the
Grace Christian High School representative as a permanent director of the
association, although previously tolerated in the past elections should be
reexamined." Following this advice, notices were sent to the members of
the association that the provision on election of directors of the 1968 by-
laws of the association would be observed.

Petitioner requested the chairman of the election committee to change the

notice of election by following the procedure in previous elections, claiming
that the notice issued for the 1990 elections ran "counter to the practice in
previous years" and was "in violation of the by-laws (of 1975)" and
"unlawfully deprive[d] Grace Christian High School of its vested right [to] a
permanent seat in the board." 5

As the association denied its request, the school brought suit for mandamus
in the Home Insurance and Guaranty Corporation to compel the board of
directors of the association to recognize its right to a permanent seat in the
board. Petitioner based its claim on the following portion of the proposed
amendment which, it contended, had become part of the by-laws of the
association as Article VI, paragraph 2, thereof:chanrob1es virtual 1aw library

The Charter and Associate Members shall elect the Directors of the
Association. The candidates receiving the first fourteen (14) highest number
of votes shall be declared and proclaimed elected until their successors are
elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION.

It appears that the opinion of the Securities and Exchange Commission on

the validity of this provision was sought by the association and that in reply
to the query, the SEC rendered an opinion to the effect that the practice of
allowing unelected members in the board was contrary to the existing by-
laws of the association and to �92 of the Corporation Code (B.P. Blg. 68).

Private respondent association cited the SEC opinion in its answer.

Additionally, the association contended that the basis of the petition for
mandamus was merely "a proposed by-laws which has not yet been
approved by competent authority nor registered with the SEC or HIGC." It
argued that "the by-laws which was registered with the SEC on January 16,
1969 should be the prevailing by-laws of the association and not the
proposed amended by-laws." 6

In reply, petitioner maintained that the "amended by-laws is valid and

binding" and that the association was estopped from questioning the by-
laws. 7

A preliminary conference was held on March 29, 1990 but nothing

substantial was agreed upon. The parties merely agreed that the board of

80
directors of the association should meet on April 17, 1990 and April 24,
1990 for the purpose of discussing the amendment of the by-laws and a
possible amicable settlement of the case. A meeting was held on April 17,
1990, but the parties failed to reach an agreement. Instead, the board
adopted a resolution declaring the 1975 provision null and void for lack of
approval by members of the association and the 1968 by-laws to be
effective.
chanroblesvirtuallawlibrary

On June 20, 1990, the hearing officer of the HIGC rendered a decision
dismissing petitioner’s action. The hearing officer held that the amended
by-laws, upon which petitioner based its claim," [was] merely a proposed
by-laws which, although implemented in the past, had not yet been ratified
by the members of the association nor approved by competent authority" ;
that, on the contrary, in the meeting held on April 17, 1990, the directors of
the association declared ‘the proposed by-law dated December 20, 1975
prepared by the committee on by-laws . . . null and void" and the by-laws
of December 17, 1968 as the "prevailing by-laws under which the
association is to operate until such time that the proposed amendments to
the by-laws are approved and ratified by a majority of the members of the
association and duly filed and approved by the pertinent government
agency." The hearing officer rejected petitioner’s contention that it had
acquired a vested right to a permanent seat in the board of directors. He
held that past practice in election of directors could not give rise to a vested
right and that departure from such practice was justified because it
deprived members of association of their right to elect or to be voted in
office, not to say that "allowing the automatic inclusion of a member
representative of petitioner as permanent director [was] contrary to law
and the registered by-laws of respondent association." 8

The appeals board of the HIGC affirmed the decision of the hearing officer
in its resolution dated September 13, 1990. It cited the opinion of the SEC
based on �92 of the Corporation Code which reads: chanrob1es virtual 1aw library

�92. Election and term of trustees. — Unless otherwise provided in the

articles of incorporation or the by-laws, the board of trustees of non-stock
corporations, which may be more than fifteen (15) in number as may be
fixed in their articles of incorporation or by-laws, shall, as soon as
organized, so classify themselves that the term of office of one-third (1/3)
of the number shall expire every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees shall be held annually
and trustees so elected shall have a term of three (3) years. Trustees
thereafter elected to fill vacancies occurring before the expiration of a
particular term shall hold office only for the unexpired period.

The HIGC appeals board denied claims that the school" [was] being
deprived of its right to be a member of the Board of Directors of respondent
association," because the fact was that "it may nominate as many
representatives to the Association’s Board as it may deem appropriate." It
said that "what is merely being upheld is the act of the incumbent directors
of the Board of correcting a long standing practice which is not anchored

81
upon any legal basis." 9

Petitioner appealed to the Court of Appeals but petitioner again lost as the
appellate court on February 9, 1993, affirmed the decision of the HIGC. The
Court of Appeals held that there was no valid amendment of the
association’s by-laws because of failure to comply with the requirement of
its existing by-laws, prescribing the affirmative vote of the majority of the
members of the association at a regular or special meeting called for the
adoption of amendment to the by-laws. Article XIX of the by-laws provides:
10

The members of the Association by an affirmative vote of the majority at

any regular or special meeting called for the purpose, may alter, amend,
change or adopt any new by-laws.

This provision of the by-laws actually implements �22 of the Corporation

Law (Act No. 1459) which provides: chanrob1es virtual 1aw library

�22. The owners of a majority of the subscribed capital stock, or a

majority of the members if there be no capital stock, may, at a regular or
special meeting duly called for the purpose, amend or repeal any by-law or
adopt new by-laws. The owners of two-thirds of the subscribed capital
stock, or two-thirds of the members if there be no capital stock, may
delegate to the board of directors the power to amend or repeal any by-law
or to adopt new by-laws: Provided, however, That any power delegated to
the board of directors to amend or repeal any by-law or adopt new by-laws
shall be considered as revoked whenever a majority of the stockholders or
of the members of the corporation shall so vote at a regular or special
meeting. And provided, further, That the Director of the Bureau of
Commerce and Industry shall not hereafter file an amendment to the by-
laws of any bank, banking institution or building and loan association,
unless accompanied by certificate of the Bank Commissioner to the effect
that such amendments are in accordance with law.

The proposed amendment to the by-laws was never approved by the

majority of the members of the association as required by these provisions
of the law and by-laws. But petitioner contends that the members of the
committee which prepared the proposed amendment were duly authorized
to do so and that because the members of the association thereafter
implemented the provision for fifteen years, the proposed amendment for
all intents and purposes should be considered to have been ratified by
them. Petitioner contends: 11

Considering, therefore, that the "agents" or committee were duly

authorized to draft the amended by-laws and the acts done by the "agents"
were in accordance with such authority, the acts of the "agents" from the
very beginning were lawful and binding on the homeowners (the principals)
per se without need of any ratification or adoption. The more has the
amended by-laws become binding on the homeowners when the
homeowners followed and implemented the provisions of the amended by-

82
laws. This is not merely tantamount to tacit ratification of the acts done by
duly authorized "agents" but express approval and confirmation of what the
"agents" did pursuant to the authority granted to them.

Corollarily, petitioner claims that it has acquired a vested right to a

permanent seat in the board. Says petitioner: chanrob1es virtual 1aw library

The right of the petitioner to an automatic membership in the board of the

Association was granted by the members of the Association themselves and
this grant has been implemented by members of the board themselves all
through the years. Outside the present membership of the board, not a
single member of the Association has registered any desire to remove the
right of herein petitioner to an automatic membership in the board. If there
is anybody who has the right to take away such right of the petitioner, it
would be the individual members of the Association through a referendum
and not the present board some of the members of which are motivated by
personal interest.

Petitioner disputes the ruling that the provision in question, giving

petitioner’s representative a permanent seat in the board of the association,
is contrary to law. Petitioner claims that that is not so because there is
really no provision of law prohibiting unelected members of boards of
directors of corporations. Referring to �92 of the present Corporation
Code, petitioner says: chanrob1es virtual 1aw library

It is clear that the above provision of the Corporation Code only provides
for the manner of election of the members of the board of trustees of non-
stock corporations which may be more than fifteen in number and which
manner of election is even subject to what is provided in the articles of
incorporation or by-laws of the association thus showing that the above
provisions [are] not even mandatory.

Even a careful perusal of the above provision of the Corporation Code would
not show that it prohibits a non-stock corporation or association from
granting one of its members a permanent seat in its board of directors or
trustees. If there is no such legal prohibition then it is allowable provided it
is so provided in the Articles of Incorporation or in the by-laws as in the
instant case.

x x x

If fact, the truth is that this is allowed and is being practiced by some
corporations duly organized and existing under the laws of the Philippines.

One example is the Pius XII Catholic Center, Inc. Under the by-laws of this
corporation, that whoever is the Archbishop of Manila is considered a
member of the board of trustees without benefit of election. And not only
that. He also automatically sits as the Chairman of the Board of Trustees,
again without need of any election.

83
Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It
is also provided in the by-laws of this corporation that whoever is the
Archbishop of Manila is considered a member of the board of trustees year
after year without benefit of any election and he also sits automatically as
the Chairman of the Board of Trustees.

It is actually ��28 and 29 of the Corporation Law — not �92 of the

present law or �29 of the former one — which require members of the
boards of directors of corporations to be elected. These provisions read:chanrob1es
virtual 1aw library

�28. Unless otherwise provided in this Act, the corporate powers of all
corporations formed under this Act shall be exercised, all business
conducted and all property of such corporations controlled and held by a
board of not less than five nor more than eleven directors to be elected
from among the holders of stock or, where there is no stock, from the
members of the corporation: Provided, however, That in corporations, other
than banks, in which the United States has or may have a vested interest,
pursuant to the powers granted or delegated by the Trading with the Enemy
Act, as amended, and similar Acts of Congress of the United States relating
to the same subject, or by Executive Order No. 9095 of the President of the
United States, as heretofore or hereafter amended, or both, the directors
need not be elected from among the holders of the stock, or, where there is
no stock from the members of the corporation. (emphasis added)

�29. At the meeting for the adoption of the original by-laws, or at such
subsequent meeting as may be then determined, directors shall be elected
to hold their offices for one year and until their successors are elected and
qualified. Thereafter the directors of the corporation shall be elected
annually by the stockholders if it be a stock corporation or by the members
if it be a nonstock corporation, and if no provision is made in the by-laws
for the time of election the same shall be held on the first Tuesday after the
first Monday in January. Unless otherwise provided in the by-laws, two
weeks’ notice of the election of directors must be given by publication in
some newspaper of general circulation devoted to the publication of general
news at the place where the principal office of the corporation is established
or located, and by written notice deposited in the post-office, postage pre-
paid, addressed to each stockholder, or, if there be no stockholders, then to
each member, at his last known place of residence. If there be no
newspaper published at the place where the principal office of the
corporation is established or located, a notice of the election of directors
shall be posted for a period of three weeks immediately preceding the
election in at least three public places, in the place where the principal
office of the corporation is established or located. (Emphasis added)

The present Corporation Code (B.P. Blg. 68), which took effect on May 1,
1980, 12 similarly provides:chanrob1es virtual 1aw library

�23. The Board of Directors or Trustees. — Unless otherwise provided in

this Code, the corporate powers of all corporations formed under this Code

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shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1)
year and until their successors are elected and qualified. (Emphasis added)

These provisions of the former and present corporation law leave no room
for doubt as to their meaning: the board of directors of corporations must
be elected from among the stockholders or members. There may be
corporations in which there are unelected members in the board but it is
clear that in the examples cited by petitioner the unelected members sit as
ex officio members, i.e., by virtue of and for as long as they hold a
particular office. But in the case of petitioner, there is no reason at all for its
representative to be given a seat in the board. Nor does petitioner claim a
right to such seat by virtue of an office held. In fact it was not given such
seat in the beginning. It was only in 1975 that a proposed amendment to
the by-laws sought to give it one.

Since the provision in question is contrary to law, the fact that for fifteen
years it has not been questioned or challenged but, on the contrary,
appears to have been implemented by the members of the association
cannot forestall a later challenge to its validity. Neither can it attain validity
through acquiescence because, if it is contrary to law, it is beyond the
power of the members of the association to waive its invalidity. For that
matter the members of the association may have formally adopted the
provision in question, but their action would be of no avail because no
provision of the by-laws can be adopted if it is contrary to law. 13

It is probable that, in allowing petitioner’s representative to sit on the

board, the members of the association were not aware that this was
contrary to law. It should be noted that they did not actually implement the
provision in question except perhaps insofar as it increased the number of
directors from 11 to 15, but certainly not the allowance of petitioner’s
representative as an unelected member of the board of directors. It is more
accurate to say that the members merely tolerated petitioner’s
representative and tolerance cannot be considered ratification. chanroblesvirtual|awlibrary

Nor can petitioner claim a vested right to sit in the board on the basis of
"practice." Practice, no matter how long continued, cannot give rise to any
vested right if it is contrary to law. Even less tenable is petitioner’s claim
that its right is "coterminus with the existence of the association." 14

Finally, petitioner questions the authority of the SEC to render an opinion

on the validity of the provision in question. It contends that jurisdiction over
this case is exclusively vested in the HIGC.

But this case was not decided by the SEC but by the HIGC. The HIGC
merely cited as authority for its ruling the opinion of the SEC chairman. The
HIGC could have cited any other authority for the view that under the law
members of the board of directors of a corporation must be elected and it

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would be none the worse for doing so.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

FIRST DIVISION

G.R. No. 160273 January 18, 2008

CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D. ALMENDRAS,

JULIUS Z. NERI, DOUGLAS L. LUYM, CESAR T. LIBI, RAMONTITO* E. GARCIA
and JOSE B. SALA, petitioners,
vs.
RICARDO F. ELIZAGAQUE, respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the
1997 Rules of Civil Procedure, as amended, assailing the Decision1 dated January 31,
2003 and Resolution dated October 2, 2003 of the Court of Appeals in CA-G.R. CV No.
71506.

The facts are:

Cebu Country Club, Inc. (CCCI), petitioner, is a domestic corporation operating as a

non-profit and non-stock private membership club, having its principal place of
business in Banilad, Cebu City. Petitioners herein are members of its Board of
Directors.

Sometime in 1987, San Miguel Corporation, a special company proprietary member of

CCCI, designated respondent Ricardo F. Elizagaque, its Senior Vice President and
Operations Manager for the Visayas and Mindanao, as a special non-proprietary
member. The designation was thereafter approved by the CCCI’s Board of Directors.

In 1996, respondent filed with CCCI an application for proprietary membership. The
application was indorsed by CCCI’s two (2) proprietary members, namely: Edmundo T.
Misa and Silvano Ludo.

As the price of a proprietary share was around the P5 million range, Benito Unchuan,
then president of CCCI, offered to sell respondent a share for only P3.5 million.

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Respondent, however, purchased the share of a certain Dr. Butalid for only P3 million.
Consequently, on September 6, 1996, CCCI issued Proprietary Ownership Certificate
No. 1446 to respondent.

During the meetings dated April 4, 1997 and May 30, 1997 of the CCCI Board of
Directors, action on respondent’s application for proprietary membership was deferred.
In another Board meeting held on July 30, 1997, respondent’s application was voted
upon. Subsequently, or on August 1, 1997, respondent received a letter from Julius Z.
Neri, CCCI’s corporate secretary, informing him that the Board disapproved his
application for proprietary membership.

On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote CCCI a letter of

reconsideration. As CCCI did not answer, respondent, on October 7, 1997, wrote
another letter of reconsideration. Still, CCCI kept silent. On November 5, 1997,
respondent again sent CCCI a letter inquiring whether any member of the Board
objected to his application. Again, CCCI did not reply.

Consequently, on December 23, 1998, respondent filed with the Regional Trial Court
(RTC), Branch 71, Pasig City a complaint for damages against petitioners, docketed as
Civil Case No. 67190.

After trial, the RTC rendered its Decision dated February 14, 2001 in favor of
respondent, thus:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. Ordering defendants to pay, jointly and severally, plaintiff the amount

of P2,340,000.00 as actual or compensatory damages.

2. Ordering defendants to pay, jointly and severally, plaintiff the amount

of P5,000,000.00 as moral damages.

3. Ordering defendants to pay, jointly and severally, plaintiff the amount

of P1,000,000.00 as exemplary damages.

4. Ordering defendants to pay, jointly and severally, plaintiff the amount

of P1,000,000.00 as and by way of attorney’s fees and P80,000.00 as litigation
expenses.

5. Costs of suit.

Counterclaims are hereby DISMISSED for lack of merit.

SO ORDERED.2

On appeal by petitioners, the Court of Appeals, in its Decision dated January 31, 2003,
affirmed the trial court’s Decision with modification, thus:

WHEREFORE, premises considered, the assailed Decision dated February 14,

2001 of the Regional Trial Court, Branch 71, Pasig City in Civil Case No. 67190
is hereby AFFIRMED with MODIFICATION as follows:

1. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee

the amount of P2,000,000.00 as moral damages;

87
 2. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee
the amount of P1,000,000.00 as exemplary damages;

3. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee

the mount of P500,000.00 as attorney’s fees and P50,000.00 as litigation
expenses; and

4. Costs of the suit.

The counterclaims are DISMISSED for lack of merit.

SO ORDERED.3

On March 3, 2003, petitioners filed a motion for reconsideration and motion for leave to
set the motion for oral arguments. In its Resolution4 dated October 2, 2003, the
appellate court denied the motions for lack of merit.

Hence, the present petition.

The issue for our resolution is whether in disapproving respondent’s application for
proprietary membership with CCCI, petitioners are liable to respondent for damages,
and if so, whether their liability is joint and several.

Petitioners contend, inter alia, that the Court of Appeals erred in awarding exorbitant
damages to respondent despite the lack of evidence that they acted in bad faith in
disapproving the latter’s application; and in disregarding their defense of damnum
absque injuria.

For his part, respondent maintains that the petition lacks merit, hence, should be
denied.

CCCI’s Articles of Incorporation provide in part:

SEVENTH: That this is a non-stock corporation and membership therein as well

as the right of participation in its assets shall be limited to qualified persons who
are duly accredited owners of Proprietary Ownership Certificates issued by the
corporation in accordance with its By-Laws.

Corollary, Section 3, Article 1 of CCCI’s Amended By-Laws provides:

SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for the

admission of new members of the Club shall be as follows:

(a) Any proprietary member, seconded by another voting proprietary member,

shall submit to the Secretary a written proposal for the admission of a candidate
to the "Eligible-for-Membership List";

(b) Such proposal shall be posted by the Secretary for a period of thirty (30) days
on the Club bulletin board during which time any member may interpose
objections to the admission of the applicant by communicating the same to the
Board of Directors;

(c) After the expiration of the aforesaid thirty (30) days, if no objections have
been filed or if there are, the Board considers the objections unmeritorious, the
candidate shall be qualified for inclusion in the "Eligible-for-Membership List";

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 (d) Once included in the "Eligible-for-Membership List" and after the candidate
shall have acquired in his name a valid POC duly recorded in the books of the
corporation as his own, he shall become a Proprietary Member, upon a non-
refundable admission fee of P1,000.00, provided that admission fees will only be
collected once from any person.

On March 1, 1978, Section 3(c) was amended to read as follows:

(c) After the expiration of the aforesaid thirty (30) days, the Board may,
by unanimous vote of all directors present at a regular or special meeting,
approve the inclusion of the candidate in the "Eligible-for-Membership List".

As shown by the records, the Board adopted a secret balloting known as the "black ball
system" of voting wherein each member will drop a ball in the ballot box. A white ball
represents conformity to the admission of an applicant, while a black ball means
disapproval. Pursuant to Section 3(c), as amended, cited above, a unanimous vote of
the directors is required. When respondent’s application for proprietary membership
was voted upon during the Board meeting on July 30, 1997, the ballot box contained
one (1) black ball. Thus, for lack of unanimity, his application was disapproved.

Obviously, the CCCI Board of Directors, under its Articles of Incorporation, has the
right to approve or disapprove an application for proprietary membership. But such
right should not be exercised arbitrarily. Articles 19 and 21 of the Civil Code on the
Chapter on Human Relations provide restrictions, thus:

Article 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith.

Article 21. Any person who willfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall compensate the
latter for the damage.

In GF Equity, Inc. v. Valenzona,5 we expounded Article 19 and correlated it with Article

21, thus:

This article, known to contain what is commonly referred to as the principle of

abuse of rights, sets certain standards which must be observed not only in the
exercise of one's rights but also in the performance of one's duties. These
standards are the following: to act with justice; to give everyone his due; and to
observe honesty and good faith. The law, therefore, recognizes a primordial
limitation on all rights; that in their exercise, the norms of human conduct set forth
in Article 19 must be observed. A right, though by itself legal because
recognized or granted by law as such, may nevertheless become the
source of some illegality. When a right is exercised in a manner which does
not conform with the norms enshrined in Article 19 and results in damage
to another, a legal wrong is thereby committed for which the wrongdoer
must be held responsible. But while Article 19 lays down a rule of conduct for
the government of human relations and for the maintenance of social order, it
does not provide a remedy for its violation. Generally, an action for damages
under either Article 20 or Article 21 would be proper. (Emphasis in the original)

In rejecting respondent’s application for proprietary membership, we find that

petitioners violated the rules governing human relations, the basic principles to be

89
observed for the rightful relationship between human beings and for the stability of
social order. The trial court and the Court of Appeals aptly held that petitioners
committed fraud and evident bad faith in disapproving respondent’s applications. This
is contrary to morals, good custom or public policy. Hence, petitioners are liable for
damages pursuant to Article 19 in relation to Article 21 of the same Code.

It bears stressing that the amendment to Section 3(c) of CCCI’s Amended By-Laws
requiring the unanimous vote of the directors present at a special or regular meeting
was not printed on the application form respondent filled and submitted to CCCI. What
was printed thereon was the original provision of Section 3(c) which was silent on the
required number of votes needed for admission of an applicant as a proprietary
member.

Petitioners explained that the amendment was not printed on the application form due
to economic reasons. We find this excuse flimsy and unconvincing. Such amendment,
aside from being extremely significant, was introduced way back in 1978 or almost
twenty (20) years before respondent filed his application. We cannot fathom why such
a prestigious and exclusive golf country club, like the CCCI, whose members are all
affluent, did not have enough money to cause the printing of an updated application
form.

It is thus clear that respondent was left groping in the dark wondering why his
application was disapproved. He was not even informed that a unanimous vote of the
Board members was required. When he sent a letter for reconsideration and an inquiry
whether there was an objection to his application, petitioners apparently ignored him.
Certainly, respondent did not deserve this kind of treatment. Having been designated
by San Miguel Corporation as a special non-proprietary member of CCCI, he should
have been treated by petitioners with courtesy and civility. At the very least, they
should have informed him why his application was disapproved.

The exercise of a right, though legal by itself, must nonetheless be in accordance with
the proper norm. When the right is exercised arbitrarily, unjustly or excessively and
results in damage to another, a legal wrong is committed for which the wrongdoer must
be held responsible.6 It bears reiterating that the trial court and the Court of Appeals
held that petitioners’ disapproval of respondent’s application is characterized by bad
faith.

As to petitioners’ reliance on the principle of damnum absque injuria or damage without

injury, suffice it to state that the same is misplaced. In Amonoy v. Gutierrez,7 we held
that this principle does not apply when there is an abuse of a person’s right, as in
this case.

As to the appellate court’s award to respondent of moral damages, we find the same in
order. Under Article 2219 of the New Civil Code, moral damages may be recovered,
among others, in acts and actions referred to in Article 21. We believe respondent’s
testimony that he suffered mental anguish, social humiliation and wounded feelings as
a result of the arbitrary denial of his application. However, the amount
of P2,000,000.00 is excessive. While there is no hard-and-fast rule in determining what
would be a fair and reasonable amount of moral damages, the same should not be
palpably and scandalously excessive. Moral damages are not intended to impose a
penalty to the wrongdoer, neither to enrich the claimant at the expense of the
defendant.8 Taking into consideration the attending circumstances here, we hold that
an award to respondent of P50,000.00, instead of P2,000,000.00, as moral damages is
reasonable.

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Anent the award of exemplary damages, Article 2229 allows it by way of example or
correction for the public good. Nonetheless, since exemplary damages are imposed
not to enrich one party or impoverish another but to serve as a deterrent against or as
a negative incentive to curb socially deleterious actions,9 we reduce the amount
from P1,000,000.00 to P25,000.00 only.

On the matter of attorney’s fees and litigation expenses, Article 2208 of the same Code
provides, among others, that attorney’s fees and expenses of litigation may be
recovered in cases when exemplary damages are awarded and where the court
deems it just and equitable that attorney’s fees and expenses of litigation should be
recovered, as in this case. In any event, however, such award must be reasonable, just
and equitable. Thus, we reduce the amount of attorney’s fees (P500,000.00) and
litigation expenses (P50,000.00) to P50,000.00 and P25,000.00, respectively.

Lastly, petitioners’ argument that they could not be held jointly and severally liable for
damages because only one (1) voted for the disapproval of respondent’s application
lacks merit.

Section 31 of the Corporation Code provides:

SEC. 31. Liability of directors, trustees or officers. — Directors or trustees who

willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in conflict
with their duty as such directors, or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons. (Emphasis ours)

WHEREFORE, we DENY the petition. The challenged Decision and Resolution of the
Court of Appeals in CA-G.R. CV No. 71506 are AFFIRMED with modification in the
sense that (a) the award of moral damages is reduced from P2,000,000.00
to P50,000.00; (b) the award of exemplary damages is reduced from P1,000,000.00
to P25,000.00; and (c) the award of attorney’s fees and litigation expenses is reduced
from P500,000.00 and P50,000.00 to P50,000.00 and P25,000.00, respectively.

Costs against petitioners.

SO ORDERED.

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