G.R. No.
153468 August 17, 2006 When the controversy reached the Securities and Exchange Commission
PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO,
JAMES TAN, JUDITH TAN, ERNESTO TANCHI JR., EDWIN NGO,
VIRGINIA KHOO, SABINO PADILLA JR., EDUARDO P. LIZARES and
GRACE CHRISTIAN HIGH SCHOOL, Petitioners,
vs.
PAUL SYCIP and MERRITTO LIM, Respondents.
DECISION
PANGANIBAN, CJ.:
For stock corporations, the "quorum" referred to in Section 52 of the
Corporation Code is based on the number of outstanding voting stocks. For
nonstock corporations, only those who are actual, living members with voting
rights shall be counted in determining the existence of a quorum during
members’ meetings. Dead members shall not be counted.
The Case
The present Petition for Review on Certiorari [1] under Rule 45 of the Rules of
Court seeks the reversal of the January 23 2 and May 7, 2002, 3 Resolutions
of the Court of Appeals (CA) in CA-GR SP No. 68202. The first assailed
Resolution dismissed the appeal filed by petitioners with the CA. Allegedly,
without the proper authorization of the other petitioners, the Verification and
Certification of Non-Forum Shopping were signed by only one of them -- Atty.
Sabino Padilla Jr. The second Resolution denied reconsideration.
The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit
educational corporation with fifteen (15) regular members, who also
constitute the board of trustees. [4] During the annual members’ meeting held
on April 6, 1998, there were only eleven (11) [5] living member-trustees, as
four (4) had already died. Out of the eleven, seven (7) 6 attended the meeting
through their respective proxies. The meeting was convened and chaired by
Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who
argued that there was no quorum. 7 In the meeting, Petitioners Ernesto
Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the
four deceased member-trustees.
(SEC), petitioners maintained that the deceased member-trustees should not
be counted in the computation of the quorum because, upon their death,
members automatically lost all their rights (including the right to vote) and
interests in the corporation. Page |
1
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null
and void for lack of quorum. She held that the basis for determining the
quorum in a meeting of members should be their number as specified in the
articles of incorporation, not simply the number of living members. 8 She
explained that the qualifying phrase "entitled to vote" in Section 24 9 of the
Corporation Code, which provided the basis for determining a quorum for the
election of directors or trustees, should be read together with Section 89. 10
The hearing officer also opined that Article III (2) 11 of the By-Laws of GCHS,
insofar as it prescribed the mode of filling vacancies in the board of trustees,
must be interpreted in conjunction with Section 29 12 of the Corporation
Code. The SEC en banc denied the appeal of petitioners and affirmed the
Decision of the hearing officer in toto. 13 It found to be untenable their
contention that the word "members," as used in Section 52 14 of the
Corporation Code, referred only to the living members of a nonstock
corporation. 15
As earlier stated, the CA dismissed the appeal of petitioners, because the
Verification and Certification of Non-Forum Shopping had been signed only
by Atty. Sabino Padilla Jr. No Special Power of Attorney had been attached
to show his authority to sign for the rest of the petitioners.
Hence, this Petition. 16
Issues
Petitioners state the issues as follows:
"Petitioners principally pray for the resolution of the legal question of whether
or not in NON-STOCK corporations, dead members should still be counted
in determination of quorum for purposed of conducting the Annual Members’
Meeting.
"Petitioners have maintained before the courts below that the DEAD
members should no longer be counted in computing quorum primarily on the
ground that members’ rights are ‘personal and non-transferable’ as provided
in Sections 90 and 91 of the Corporation Code of the Philippines.
"The SEC ruled against the petitioners solely on the basis of a 1989 SEC
Opinion that did not even involve a non-stock corporation as petitioner
GCHS.
"The Honorable Court of Appeals on the other hand simply refused to resolve
this question and instead dismissed the petition for review on a technicality –
the failure to timely submit an SPA from the petitioners authorizing their co-
petitioner Padilla, their counsel and also a petitioner before the Court of
Appeals, to sign the petition on behalf of the rest of the petitioners.
"Petitioners humbly submit that the action of both the SEC and the Court of
Appeals are not in accord with law particularly the pronouncements of this
Honorable Court in Escorpizo v. University of Baguio (306 SCRA
497), Robern Development Corporation v. Quitain (315 SCRA 150,) and MC
Engineering, Inc. v. NLRC, (360 SCRA 183). Due course should have been
given the petition below and the merits of the case decided in petitioners’
favor." 17
In sum, the issues may be stated simply in this wise: 1) whether the CA erred
in denying the Petition below, on the basis of a defective Verification and
Certification; and 2) whether dead members should still be counted in the
determination of the quorum, for purposes of conducting the annual
members’ meeting.
The Court’s Ruling
The present Petition is partly meritorious.
Procedural Issue:
Verification and Certification of Non-Forum Shopping
The Petition before the CA was initially flawed, because the Verification and
Certification of Non-Forum Shopping were signed by only one, not
by all, of the petitioners; further, it failed to show proof that the signatory was
authorized to sign on behalf of all of them. Subsequently, however,
petitioners submitted a Special Power of Attorney, attesting that Atty. Padilla
was authorized to file the action on their behalf. 18
In the interest of substantial justice, this initial procedural lapse may be
excused. 19 There appears to be no intention to circumvent the need for
proper verification and certification, which are aimed at assuring the
truthfulness and correctness of the allegations in the Petition for Review and
at discouraging forum shopping. 20 More important, the substantial merits of
petitioners’ case and the purely legal question involved in the Petition should
be considered special circumstances 21 or compelling reasons that justify an
exception to the strict requirements of the verification and the certification of
non-forum shopping. 22 Page |
2
Main Issue:
Basis for Quorum
Generally, stockholders’ or members’ meetings are called for the purpose of
electing directors or trustees 23 and transacting some other business calling
for or requiring the action or consent of the shareholders or members, 24 such
as the amendment of the articles of incorporation and bylaws, sale or
disposition of all or substantially all corporate assets, consolidation and
merger and the like, or any other business that may properly come before the
meeting.
Under the Corporation Code, stockholders or members periodically elect the
board of directors or trustees, who are charged with the management of the
corporation. 25 The board, in turn, periodically elects officers to carry out
management functions on a day-to-day basis. As owners, though, the
stockholders or members have residual powers over fundamental and major
corporate changes.
While stockholders and members (in some instances) are entitled to receive
profits, the management and direction of the corporation are lodged with their
representatives and agents -- the board of directors or trustees. 26 In other
words, acts of management pertain to the board; and those of ownership, to
the stockholders or members. In the latter case, the board cannot act alone,
but must seek approval of the stockholders or members. 27
Conformably with the foregoing principles, one of the most important rights of
a qualified shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees who are
to manage the corporate affairs. 28 The right to choose the persons who will
direct, manage and operate the corporation is significant, because it is the
main way in which a stockholder can have a voice in the management of
corporate affairs, or in which a member in a nonstock corporation can have a
say on how the purposes and goals of the corporation may be
achieved. 29 Once the directors or trustees are elected, the stockholders or
members relinquish corporate powers to the board in accordance with law.
In the absence of an express charter or statutory provision to the contrary,
the general rule is that every member of a nonstock corporation, and every
legal owner of shares in a stock corporation, has a right to be present and to
vote in all corporate meetings. Conversely, those who are not stockholders or
members have no right to vote. 30 Voting may be expressed personally, or
through proxies who vote in their representative capacities. 31 Generally, the
right to be present and to vote in a meeting is determined by the time in
which the meeting is held. 32
Section 52 of the Corporation Code states:
"Section 52. Quorum in Meetings. – Unless otherwise provided for in this
Code or in the by-laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or a majority of the
members in the case of non-stock corporations."
In stock corporations, the presence of a quorum is ascertained and counted
on the basis of the outstanding capital stock, as defined by the Code thus:
"SECTION 137. Outstanding capital stock defined. – The term ‘outstanding
capital stock’ as used in this Code, means the total shares of
stock issued under binding subscription agreements to subscribers or
stockholders, whether or not fully or partially paid, except treasury shares."
(Underscoring supplied)
The Right to Vote in
Stock Corporations
The right to vote is inherent in and incidental to the ownership of corporate
stocks. 33 It is settled that unissued stocks may not be voted or considered in
determining whether a quorum is present in a stockholders’ meeting, or
whether a requisite proportion of the stock of the corporation is voted to
adopt a certain measure or act. Only stock actually issued and outstanding
may be voted. 34 Under Section 6 of the Corporation Code, each share of
stock is entitled to vote, unless otherwise provided in the articles of
incorporation or declared delinquent 35 under Section 67 of the Code.
Neither the stockholders nor the corporation can vote or represent shares
that have never passed to the ownership of stockholders; or, having so
passed, have again been purchased by the corporation. 36 These shares are
not to be taken into consideration in determining majorities. When the law
speaks of a
given proportion of the stock, it must be construed to mean the shares that
have passed from the corporation, and that may be voted. 37
Section 6 of the Corporation Code, in part, provides:
Page |
3
"Section 6. Classification of shares. – The shares of stock of stock
corporations may be divided into classes or series of shares, or both, any of
which classes or series of shares may have such rights, privileges or
restrictions as may be stated in the articles of incorporation: Provided, That
no share may be deprived of voting rights except those classified and issued
as "preferred" or "redeemable" shares, unless otherwise provided in this
Code: Provided, further, that there shall always be a class or series of shares
which have complete voting rights.
xxxxxxxxx
"Where the articles of incorporation provide for non-voting shares in the
cases allowed by this Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or
other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
"Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this Code
shall be deemed to refer only to stocks with voting rights."
Taken in conjunction with Section 137, the last paragraph of Section 6 shows
that the intention of the lawmakers was to base the quorum mentioned in
Section 52 on the number of outstanding voting stocks. 38
The Right to Vote in
Nonstock Corporations
In nonstock corporations, the voting rights attach to membership. 39 Members
vote as persons, in accordance with the law and the bylaws of the
corporation. Each member shall be entitled to one vote unless so limited,
broadened, or denied in the articles of incorporation or bylaws. 40 We hold
that when the principle for determining the quorum for stock corporations is
applied by analogy to nonstock corporations, only those who are actual
members with voting rights should be counted.
Under Section 52 of the Corporation Code, the majority of the members
representing the actual number of voting rights, not
the number or numerical constant that may originally be specified in the
articles of incorporation, constitutes the quorum. 41
The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses the
phrase "majority vote of the members"; likewise Section 48 of the
Corporation Code refers to 50 percent of 94 (the number of registered
members of the association mentioned therein) plus one. The best evidence
of who are the present members of the corporation is the "membership
book"; in the case of stock corporations, it is the stock and transfer book. 43
Section 25 of the Code specifically provides that a majority of the directors or
trustees, as fixed in the articles of incorporation, shall constitute a quorum for
the transaction of corporate business (unless the articles of incorporation or
the bylaws provide for a greater majority). If the intention of the lawmakers
was to base the quorum in the meetings of stockholders or members on their
absolute number as fixed in the articles of incorporation, it would have
expressly specified so. Otherwise, the only logical conclusion is that the
legislature did not have that intention.
Effect of the Death
of a Member or Shareholder
Having thus determined that the quorum in a members’ meeting is to be
reckoned as the actual number of members of the corporation, the next
question to resolve is what happens in the event of the death of one of them.
In stock corporations, shareholders may generally transfer their shares. Page |
Thus, on the death of a shareholder, the executor or administrator duly 4
appointed by the Court is vested with the legal title to the stock and entitled
to vote it. Until a settlement and division of the estate is effected, the stocks
of the decedent are held by the administrator or executor. 44
On the other hand, membership in and all rights arising from a nonstock
corporation are personal and non-transferable, unless the articles of
incorporation or the bylaws of the corporation provide otherwise. 45 In other
words, the determination of whether or not "dead members" are entitled to
exercise their voting rights (through their executor or administrator), depends
on those articles of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall, among
others, be terminated by the death of the member. 46 Section 91 of the
Corporation Code further provides that termination extinguishes all the rights
of a member of the corporation, unless otherwise provided in the articles of
incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members who
are dropped from the membership roster in the manner and for the cause
provided for in the By-Laws of GCHS are not to be counted in determining
the requisite vote in corporate matters or the requisite quorum for the annual
members’ meeting. With 11 remaining members, the quorum in the present
case should be 6. Therefore, there being a quorum, the annual members’
meeting, conducted with six 47 members present, was valid.
Vacancy in the
Board of Trustees
As regards the filling of vacancies in the board of trustees, Section 29 of the
Corporation Code provides:
"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy
occurring in the board of directors or trustees other than by removal by the
stockholders or members or by expiration of term, may be filled by the vote of
at least a majority of the remaining directors or trustees, if still constituting
a quorum; otherwise, said vacancies must be filled by the stockholders in a
regular or special meeting called for that purpose. A director or trustee so
elected to fill a vacancy shall be elected only for the unexpired term of his
predecessor in office."

Undoubtedly, trustees may fill vacancies in the board, provided that those
remaining still constitute a quorum. The phrase "may be filled" in Section 29 Page |
shows that the filling of vacancies in the board by the remaining directors or 5
trustees constituting a quorum is merely permissive, not
mandatory. 48 Corporations, therefore, may choose how vacancies in their
respective boards may be filled up -- either by the remaining directors
constituting a quorum, or by the stockholders or members in a regular or
special meeting called for the purpose. 49

The By-Laws of GCHS prescribed the specific mode of filling up existing

vacancies in its board of directors; that is, by a majority vote of the remaining
members of the board. 50

While a majority of the remaining corporate members were present, however,

the "election" of the four trustees cannot be legally upheld for the obvious
reason that it was held in an annual meeting of the members, not of the
board of trustees. We are not unmindful of the fact that the members of
GCHS themselves also constitute the trustees, but we cannot ignore the
GCHS bylaw provision, which specifically prescribes that vacancies in the
board must be filled up by the remaining trustees. In other words, these
remaining member-trustees must sit as a board in order to validly elect the
new ones.

Indeed, there is a well-defined distinction between a corporate act to be done

by the board and that by the constituent members of the corporation. The
board of trustees must act, not individually or separately, but as a body in a
lawful meeting. On the other hand, in their annual meeting, the members
may be represented by their respective proxies, as in the contested annual
members’ meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED.The assailed Resolutions of

the Court of Appeals are hereby REVERSED AND SET ASIDE. The
remaining members of the board of trustees of Grace Christian High School
(GCHS) may convene and fill up the vacancies in the board, in accordance
with this Decision. No pronouncement as to costs in this instance.

SO ORDERED.
G.R. No. L-33320 May 30, 1983
RAMON A. GONZALES, petitioner,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.
Ramon A. Gonzales in his own behalf.
Juan Diaz for respondent.
VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First
Instance of Manila a special civil action for mandamus against the herein
respondent praying that the latter be ordered to allow him to look into the
books and records of the respondent bank in order to satisfy himself as to the
truth of the published reports that the respondent has guaranteed the
obligation of Southern Negros Development Corporation in the purchase of a
US$ 23 million sugar-mill to be financed by Japanese suppliers and
financiers; that the respondent is financing the construction of the P 21
million Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and the
construction of Passi Sugar Mill at Iloilo by the Honiron Philippines, Inc., as
well as to inquire into the validity of Id transactions. The petitioner has
alleged hat his written request for such examination was denied by the
respondent. The trial court having dismissed the petition for mandamus, the
instant appeal to review the said dismissal was filed.
The facts that gave rise to the subject controversy have been set forth by the
trial court in the decision herein sought to be reviewed, as follows:
Briefly stated, the following facts gathered from the
stipulation of the parties served as the backdrop of this
proceeding.
Previous to the present action, the petitioner instituted
several cases in this Court questioning different transactions
entered into by the Bark with other parties. First among them
is Civil Case No. 69345 filed on April 27, 1967, by petitioner
as a taxpayer versus Sec. Antonio Raquiza of Public Works
and Communications, the Commissioner of Public
Highways, the Bank, Continental Ore Phil., Inc., Continental
Ore, Huber Corporation, Allis Chalmers and General Motors
Corporation In the course of the hearing of said case on
August 3, 1967, the personality of herein petitioner to sue
the bank and question the letters of credit it has extended for
the importation by the Republic of the Philippines of public Page |
works equipment intended for the massive development 6
program of the President was raised. In view thereof, he
expressed and made known his intention to acquire one
share of stock from Congressman Justiniano Montano
which, on the following day, August 30, 1967, was
transferred in his name in the books of the Bank.
Subsequent to his aforementioned acquisition of one share
of stock of the Bank, petitioner, in his dual capacity as a
taxpayer and stockholder, filed the following cases involving
the bank or the members of its Board of Directors to wit:
l. On October l8,1967, Civil Case No. 71044 versus the
Board of Directors of the Bank; the National Investment and
Development Corp., Marubeni Iida Co., Ltd., and Agro-Inc.
Dev. Co. or Saravia;
2. On May 11, 1968, Civil Case No. 72936 versus Roberto
Benedicto and other Directors of the Bank, Passi (Iloilo)
Sugar Central, Inc., Calinog-Lambunao Sugar Mill Integrated
Farming, Inc., Talog sugar Milling Co., Inc., Safary Central,
Inc., and Batangas Sugar Central Inc.;
3. On May 8, 1969, Civil Case No. 76427 versus Alfredo
Montelibano and the Directors of both the PNB and DBP;
On January 11, 1969, however, petitioner addressed a letter
to the President of the Bank (Annex A, Pet.), requesting
submission to look into the records of its transactions
covering the purchase of a sugar central by the Southern
Negros Development Corp. to be financed by Japanese
suppliers and financiers; its financing of the Cebu-Mactan
Bridge to be constructed by V.C. Ponce, Inc. and the
construction of the Passi Sugar Mills in Iloilo. On January 23,
1969, the Asst. Vice-President and Legal Counsel of the
Bank answered petitioner's letter denying his request for
being not germane to his interest as a one-share stockholder
and for the cloud of doubt as to his real intention and
purpose in acquiring said share. (Annex B, Pet.) In view of
 the Bank's refusal the petitioner instituted this action.' (Rollo,
pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court
in its brief which he characterized as having been "correctly stated."
(Petitioner-Appellant"s Brief, pp. 57.)
The court a quo denied the prayer of the petitioner that he be allowed to
examine and inspect the books and records of the respondent bank
regarding the transactions mentioned on the grounds that the right of a
stockholder to inspect the record of the business transactions of a
corporation granted under Section 51 of the former Corporation Law (Act No.
1459, as amended) is not absolute, but is limited to purposes reasonably
related to the interest of the stockholder, must be asked for in good faith for a
specific and honest purpose and not gratify curiosity or for speculative or
vicious purposes; that such examination would violate the confidentiality of
the records of the respondent bank as provided in Section 16 of its charter,
Republic Act No. 1300, as amended; and that the petitioner has not
exhausted his administrative remedies.
Assailing the conclusions of the lower court, the petitioner has assigned the
single error to the lower court of having ruled that his alleged improper
motive in asking for an examination of the books and records of the
respondent bank disqualifies him to exercise the right of a stockholder to
such inspection under Section 51 of Act No. 1459, as amended. Said
provision reads in part as follows:
Sec. 51. ... The record of all business transactions of the
corporation and the minutes of any meeting shall be open to
the inspection of any director, member or stockholder of the
corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify the
qualification made by the lower court that the inspection of corporate records
may be denied on the ground that it is intended for an improper motive or
purpose, the law having granted such right to a stockholder in clear and
unconditional terms. He further argues that, assuming that a proper motive or
purpose for the desired examination is necessary for its exercise, there is
nothing improper in his purpose for asking for the examination and inspection
herein involved.
Petitioner may no longer insist on his interpretation of Section 51 of Act No.
1459, as amended, regarding the right of a stockholder to inspect and
examine the books and records of a corporation. The former Corporation
Law (Act No. 1459, as amended) has been replaced by Batas Pambansa
Blg. 68, otherwise known as the "Corporation Code of the Philippines."
The right of inspection granted to a stockholder under Section 51 of Act No.
1459 has been retained, but with some modifications. The second and third Page |
paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following: 7
The records of all business transactions of the corporation
and the minutes of any meeting shag be open to inspection
by any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he
may demand, in writing, for a copy of excerpts from said
records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to
allow any director, trustee, stockholder or member of the
corporation to examine and copy excerpts from its records or
minutes, in accordance with the provisions of this Code,
shall be liable to such director, trustee, stockholder or
member for damages, and in addition, shall be guilty of an
offense which shall be punishable under Section 144 of this
Code: Provided, That if such refusal is made pursuant to a
resolution or order of the board of directors or trustees, the
liability under this section for such action shall be imposed
upon the directors or trustees who voted for such refusal;
and Provided, further, That it shall be a defense to any
action under this section that the person demanding to
examine and copy excerpts from the corporation's records
and minutes has improperly used any information secured
through any prior examination of the records or minutes of
such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making his
demand.
As may be noted from the above-quoted provisions, among the changes
introduced in the new Code with respect to the right of inspection granted to
a stockholder are the following the records must be kept at the principal
office of the corporation; the inspection must be made on business days; the
stockholder may demand a copy of the excerpts of the records or minutes;
and the refusal to allow such inspection shall subject the erring officer or
agent of the corporation to civil and criminal liabilities. However, while
seemingly enlarging the right of inspection, the new Code has prescribed
limitations to the same. It is now expressly required as a condition for such
examination that the one requesting it must not have been guilty of using
improperly any information through a prior examination, and that the person
asking for such examination must be "acting in good faith and for a legitimate
purpose in making his demand."
The unqualified provision on the right of inspection previously contained in
Section 51, Act No. 1459, as amended, no longer holds true under the
provisions of the present law. The argument of the petitioner that the right
granted to him under Section 51 of the former Corporation Law should not be
dependent on the propriety of his motive or purpose in asking for the
inspection of the books of the respondent bank loses whatever validity it
might have had before the amendment of the law. If there is any doubt in the
correctness of the ruling of the trial court that the right of inspection granted
under Section 51 of the old Corporation Law must be dependent on a
showing of proper motive on the part of the stockholder demanding the
same, it is now dissipated by the clear language of the pertinent provision
contained in Section 74 of Batas Pambansa Blg. 68.
Although the petitioner has claimed that he has justifiable motives in seeking
the inspection of the books of the respondent bank, he has not set forth the
reasons and the purposes for which he desires such inspection, except to
satisfy himself as to the truth of published reports regarding certain
transactions entered into by the respondent bank and to inquire into their
validity. The circumstances under which he acquired one share of stock in
the respondent bank purposely to exercise the right of inspection do not
argue in favor of his good faith and proper motivation. Admittedly he sought
to be a stockholder in order to pry into transactions entered into by the
respondent bank even before he became a stockholder. His obvious purpose
was to arm himself with materials which he can use against the respondent
bank for acts done by the latter when the petitioner was a total stranger to
the same. He could have been impelled by a laudable sense of civic
consciousness, but it could not be said that his purpose is germane to his
interest as a stockholder.
We also find merit in the contention of the respondent bank that the
inspection sought to be exercised by the petitioner would be violative of the
provisions of its charter. (Republic Act No. 1300, as amended.) Sections 15,
16 and 30 of the said charter provide respectively as follows:
Sec. 15. Inspection by Department of Supervision and
Examination of the Central Bank. — The National Bank shall
be subject to inspection by the Department of Supervision
and Examination of the Central Bank'
Sec. 16. Confidential information. —The Superintendent of
Banks and the Auditor General, or other officers designated
by law to inspect or investigate the condition of the National
Bank, shall not reveal to any person other than the President
of the Philippines, the Secretary of Finance, and the Board Page |
of Directors the details of the inspection or investigation, nor 8
shall they give any information relative to the funds in its
custody, its current accounts or deposits belonging to private
individuals, corporations, or any other entity, except by order
of a Court of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act.—
Any director, officer, employee, or agent of the Bank, who
violates or permits the violation of any of the provisions of
this Act, or any person aiding or abetting the violations of
any of the provisions of this Act, shall be punished by a fine
not to exceed ten thousand pesos or by imprisonment of not
more than five years, or both such fine and imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a charter
of its own, it is not governed, as a rule, by the Corporation Code of the
Philippines. Section 4 of the said Code provides:
SEC. 4. Corporations created by special laws or charters. —
Corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or
charter creating them or applicable to them. supplemented
by the provisions of this Code, insofar as they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new
Corporation Code with respect to the right of a stockholder to demand an
inspection or examination of the books of the corporation may not be
reconciled with the abovequoted provisions of the charter of the respondent
bank. It is not correct to claim, therefore, that the right of inspection under
Section 74 of the new Corporation Code may apply in a supplementary
capacity to the charter of the respondent bank.
WHEREFORE, the petition is hereby DISMISSED, without costs.
G.R. Nos. 107789 & 147214 April 30, 2003
REPUBLIC OF THE PHILIPPINES (PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT), petitioner,
vs.
THE HONORABLE SANDIGANBAYAN (THIRD DIVISION) and VICTOR
AFRICA, respondents.
AEROCOM INVESTORS AND MANAGERS, INC., BENITO NIETO,
CARLOS NIETO, MANUEL NIETO III, RAMON NIETO, ROSARIO
ARELLANO, VICTORIA LEGARDA, ANGELA LOBREGAT, MA. RITA DE
LOS REYES, CARMEN TUAZON and RAFAEL VALDEZ, intervenors.
x-----------------------------x
G.R. No. 147214 April 30, 2003
VICTOR AFRICA, petitioner,
vs.
THE HONORABLE SANDIGANBAYAN and THE PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT, respondents.
RESOLUTION
CARPIO MORALES, J.:
These consolidated cases, the first for Certiorari, Mandamus and Prohibition,
and the second "for Review on Certiorari" although it is actually one for
Certiorari, stem from a Resolution of November 13, 1992 issued by the
Sandiganbayan in Civil Case No. 0130,1 on motion of Victor Africa (Africa)
who prayed that said court order the "calling and holding of the Eastern
Telecommunications, Philippines, Inc. (ETPI) annual stockholders meeting
for 1992 under the [c]ourt's control and supervision and prescribed
guidelines."
It is gathered that on August 7, 1991, the Presidential Commission on Good
Government (PCGG) conducted an ETPI stockholders meeting during which
a PCGG controlled board of directors was elected. A special stockholders
meeting was later convened by the registered ETPI stockholders wherein
another set of board of directors was elected, as a result of which two sets of
such board and officers were elected.
Africa, a stockholder of ETPI, alleging that the PCGG had since January 29,
1988 been "illegally 'exercising' the rights of stockholders of
ETPI,"2 especially in the election of the members of the board of directors,
filed the above-said motion before the Sandiganbayan.
The PCGG did not object to Africa's motion provided that:
Page |
1. An Order be issued upholding the right of PCGG to vote all the 9
Class "A" shares of ETPI.
2. In the alternative, in the remote event that PCGG's right to vote
the sequestered shares be not upheld, an Order be issued:
a. Disregarding the Stock and Transfer Book and Booklet of
Stock Certificates of ETPI in determining who can vote the
shares in an Annual Stockholders Meeting of ETPI,
b. Allowing PCGG to vote twenty-three and 90/100 percent
(23.9%) of the total subscription in ETPI, and
c. Directing the amendment of the Articles of Incorporation
and By-laws of ETPI providing for the minimum safeguards
for the conservation of assets . . . prior to the calling of a
stockholders meeting.3
By the assailed Resolution of November 13, 1992,4 the Sandiganbayan
resolved Africa's motion, the dispositive portion of which reads:
WHEREFORE, it is ordered that an annual stockholders meeting of the
Eastern Telecommunications, Philippines, Inc. (ETPI), for 1992 be held on
Friday, November 27, 1992, at 2:00 o'clock in the afternoon, at the ETPI
Board Room, Telecoms Plaza, 7th Floor, 316 Gil J. Puyat Avenue, Makati,
Metro Manila. The Executive Clerk of Court of this Division shall issue the
call and notice of annual stockholders meeting of ETPI addressed to all the
duly registered/recorded stockholders of ETPI. The stockholders meeting
shall be conducted under the supervision and control of this Court, through
Mr. Justice Sabino R. de Leon, Jr. In accordance with the Supreme Court
ruling in Cojuangco et al vs. Azcuna, et al., supra, only the registered
owners, their duly authorized representatives or their proxies may vote their
corresponding shares.
The following minimum safeguards must be set in place and carefully
maintained until final judicial resolution of the question of whether or not the
sequestered shares of stock (or in a proper case the underlying assets of the
corporation concerned) constitute ill-gotten wealth:
"a. An independent comptroller must be appointed by the Board of
Directors upon nomination of the PCGG as conservator. The
comptroller shall not be removable (nor shall his position be
abolished or his compensation changed) without the consent of the
conservator. The comptroller shall, in addition to his other functions
as such, have charge of internal audit.
b. The corporate secretary must be acceptable to the conservator. If
the corporate secretary ceases to be acceptable to the conservator,
a new one must be appointed by the Board of Directors upon
nomination of the conservator.
c. The external auditors of the corporation must be independent and
must be acceptable to the conservator. The independent external
auditors shall not be changed without the consent of the conservator.
d. The conservator must be represented in the Board of Directors
and in the Executive (or equivalent) and Audit Committees of the
corporation involved and of its majority-owned subsidiaries or
affiliates. The representative of the conservator must be a full
director (not merely an honorary or ex-officio director) with the right
to vote and all other rights and duties of a member of the Board of
Directors under the Corporation Code. The conservator's
representative shall not be removed from the Board of Directors (or
the mentioned Committees) without the consent of the conservator.
The conservator shall, however, have the right to remove and
change its representative at any time, and the new representative
shall be promptly elected to the Board and its mentioned
Committees.
e. All transactions involving the disbursement of corporate funds in
excess of P5 million must have the prior approval of the director
representing the conservator, in order to be valid and effective.
f. The incurring of debt by the corporation, whether in the form of
bonds, debentures, commercial paper or any other form, in excess of
P5 million, must have the prior approval of the director representing
the conservator, in order to be valid and effective.
g. The disposition of a substantial part of assets of the corporation
(substantial meaning in excess of P5 million) shall require the prior
approval of the director representing the conservator, in order to be
valid and effective.
h. The above safeguards must be written into the articles of
incorporation and by-laws of the company involved. In other words,
the articles of incorporation and by-laws of the company must be
amended so as to incorporate the above safeguards.
Page |
i. Any amendment of the articles of incorporation or by-laws of the 10
company that will modify in any way any of the above safeguards,
shall need the prior approval of the director representing the
conservator."
SO ORDERED.5 (Emphasis supplied)
Assailing the foregoing resolution, the PCGG filed before this Court the
herein first petition, docketed as G.R. No. 107789, anchored upon the
following grounds:
I
RESPONDENT SANDIGANBAYAN ACTED WITH GRAVE ABUSE OF
DISCRETION IN RULING THAT THE REGISTERED STOCKHOLDERS OF
ETPI HAD THE RIGHT TO VOTE IN SPITE OF (A) THE RULING OF THIS
HONORABLE COURT IN PCGG V. SEC AND AFRICA (G.R. NO. 82188)
AND (B) A CLEAR SHOWING THAT ETPI'S STOCK AND TRANSFER
BOOK WAS ALTERED AND CANNOT BE USED AS THE BASIS TO
DETERMINE WHO CAN VOTE IN A STOCKHOLDERS' MEETING.
II
RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION
AND EXCEEDED ITS JURISDICTION WHEN IT HELD THAT PCGG
CANNOT VOTE AT LEAST 23.9% OF THE OUTSTANDING CAPITAL
STOCK OF ETPI.
III
WITHOUT DUE CARE AND IN RECKLESS DISREGARD OF THE
INTERESTS OF THE REPUBLIC, RESPONDENT
SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION IN ORDERING
THE HOLDING OF A STOCKHOLDERS' MEETING IN ETPI WITHOUT
FIRST SETTING IN PLACE — BY AMENDING THE ARTICLES AND BY-
LAWS OF ETPI TO INCORPORATE — THE SAFEGUARDS PRESCRIBED
BY THIS HONORABLE COURT IN COJUANGCO V. ROXAS.
 IV
THE SANDIGANBAYAN ACTED IN EXCESS OF ITS AUTHORITY AND/OR
WITH GRAVE ABUSE OF DISCRETION IN APPOINTING (A) ITS OWN
DIVISION CLERK OF COURT TO PERFORM THE DUTIES OF A
CORPORATE SECRETARY, AND (B) ITS OWN JUSTICE SABINO DE
LEON, JR. TO CONTROL AND SUPERVISE THE STOCKHOLDERS'
MEETING.6 (Emphasis in the original)
By Resolution of November 26, 1992, this Court enjoined the Sandiganbayan
from (a) implementing its Resolution of November 13, 1992, and (b) holding
the stockholders' meeting of ETPI scheduled on November 27, 1992, at 2:00
p.m.
On December 7, 1992, Aerocom Investors and Managers, Inc. (AEROCOM),
Benito Nieto, Carlos Nieto, Manuel Nieto III, Ramon Nieto, Rosario Arellano,
Victoria Legarda, Angela Lobregat, Ma. Rita de los Reyes, Carmen Tuazon
and Rafael Valdez, all stockholders of record of ETPI, filed a motion to
intervene in G.R. No. 107789. Their motion was granted by this Court by
Resolution of January 14, 1993.
After the parties submitted their respective memoranda, the PCGG, in early
1995, filed a "VERY URGENT PETITION FOR AUTHORITY TO HOLD
SPECIAL STOCKHOLDERS' MEETING FOR [THE] SOLE PURPOSE OF
INCREASING [ETPI's] AUTHORIZED CAPITAL STOCK," it claiming that the
increase in authorized capital stock was necessary in light of the
requirements laid down by Executive Order No. 1097 and Republic Act No.
7975.8
By Resolution of May 7, 1996,9 this Court resolved to refer the PCGG's very
urgent petition to hold the special stockholders' meeting to the
Sandiganbayan for reception of evidence and resolution.
In compliance therewith, the Sandiganbayan issued a Resolution of
December 13, 1996,10 which is being assailed in the herein second petition,
granting the PCGG "authority to cause the holding of a special stockholders'
meeting of ETPI for the sole purpose of increasing ETPI's authorized capital
stock and to vote therein the sequestered Class 'A' shares of stock. . . ." In
said Resolution, the Sandiganbayan held that there was an urgent necessity
to increase ETPI's authorized capital stock; there existed a prima
facie factual foundation for the issuance of the writ of sequestration covering
the Class "A" shares of stock; and the PCGG was entitled to vote the
sequestered shares of stock.
The PCGG-controlled ETPI board of directors thus authorized the ETPI Chair
and Corporate Secretary to call the special stockholders meeting. Notices
were sent to those entitled to vote for a meeting on March 17, 1997. The
meeting was held as scheduled and the increase in ETPI's authorized capital
stock from P250 Million to P2.6 Billion was "unanimously approved."11 Page |
11
On April 1, 1997, Africa filed before this Court a motion to cite the PCGG
"and its accomplices" in contempt and "to nullify the 'stockholders meeting'
called/conducted by PCGG and its accomplices," he contending that only this
Court, and not the Sandiganbayan, has the power to authorize the PCGG to
call a stockholders meeting and vote the sequestered shares. Africa went on
to contend that, assuming that the Sandiganbayan had such power, its
Resolution of December 13, 1996 authorizing the PCGG to hold the
stockholders meeting had not yet become final because the motions for
reconsideration of said resolution were still pending. Further, Africa alleged
that he was not given notice of the meeting, and the PCGG had no right to
vote the sequestered Class "A" shares.
A motion for leave to intervene relative to Africa's "Motion to Cite the PCGG
and its Accomplices in Contempt" was filed by ETPI. This Court granted the
motion for leave but ETPI never filed any pleading relative to Africa's motion
to cite the PCGG in contempt.
By Resolution of February 16, 2001, the Sandiganbayan finally resolved to
deny the motions for reconsideration of its Resolution of December 13, 1996,
prompting Africa to file on April 6, 2001 before this Court the herein second
petition,12 docketed as G.R. No. 147214, challenging the Sandiganbayan
Resolutions of December 13, 1996 (authorizing the holding of a stockholders
meeting to increase ETPI's authorized capital stock and to vote therein the
sequestered Class "A" shares of stock) and February 16, 2001 (denying
reconsideration of the December 13, 1996 Resolution).
In his petition in G.R. No. 147214, Africa alleged that the Sandiganbayan
committed "grave abuse of discretion" when, by the assailed Resolutions,
a. IT DID NOT ACKNOWLEDGE THE NON-SEQUESTERED
STATUS OF THE SHARES [OF "SMALL STOCKHOLDERS" OF
WHICH HE IS ONE AND AEROCOM AND POLYGON] AND/OR
OWNERS THEREOF[;] [AND]
b. IT DID NOT ACCORD TO THE NON-SEQUESTERED
SHARES/OWNERS THE RIGHTS APPURTENANT TO A
STOCKHOLDER[.]
He thus prayed that this Court set aside the questioned Resolutions
permitting the PCGG to vote the non-sequestered ETPI Class "A" shares and
nullify the votes the PCGG had cast in the stockholders meeting held on
March 17, 1997.
By Resolution of February 24, 2003,13 this Court ordered the consolidation of
G.R. No. 147214 with G.R. No. 107789, now the subject of the present
Resolution.
I
The first issue to be resolved is whether the PCGG can vote the sequestered
ETPI Class "A" shares in the stockholders meeting for the election of the
board of directors. The leading case on the matter is Bataan Shipyard &
Engineering Co., Inc. v. Presidential Commission on Good
Government14 where this Court defined the powers of the PCGG as follows:
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG
cannot exercise acts of dominion over property sequestered, frozen
or provisionally taken over. As already earlier stressed with no little
insistence, the act of sequestration[,] freezing or provisional takeover
of property does not import or bring about a divestment of title over
said property; [it] does not make the PCGG the owner thereof. In
relation to the property sequestered, frozen or provisionally taken
over, the PCGG is a conservator, not an owner. Therefore, it can not
perform acts of strict ownership; and this is specially true in the
situations contemplated by the sequestration rules where, unlike
cases of receivership, for example, no court exercises effective
supervision or can upon due application and hearing, grant authority
for the performance of acts of dominion.
Equally evident is that resort to the provisional remedies in question
should entail the least possible interference with business operations
or activities so that, in the event that the accusation of the business
enterprise being "ill-gotten" be not proven, it may be returned to its
rightful owner as far as possible in the same condition as it was at
the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the
property or business sequestered or provisionally taken over, much
like a court-appointed receiver, such as to bring and defend actions
in its own name; receive rents; collect debts due; pay outstanding
debts due; and generally do such other acts and things as may be
necessary to fulfill its mission as conservator and administrator. In
this context, it may in addition enjoin or restrain any actual or Page |
threatened commission of acts by any person or entity that may 12
render moot and academic, or frustrate or otherwise make ineffectual
its efforts to carry out its task; punish for direct or indirect contempt in
accordance with the Rules of Court; and seek and secure the
assistance of any office, agency or instrumentality of the
government. In the case of sequestered businesses generally (i.e.,
going concerns, businesses in current operation), as in the case of
sequestered objects, its essential role, as already discussed, is that
of conservator, caretaker, "watchdog" or overseer. It is not that of
manager, or innovator, much less an owner.
c. Powers over Business Enterprises Taken Over by Marcos or
Entities or Persons Close to him; Limitations Thereon
Now, in the special instance of a business enterprise shown by
evidence to have been "taken over by the government of the Marcos
Administration or by entities or persons close to former President
Marcos," the PCGG is given power and authority, as already
adverted to, to "provisionally take (it) over in the public interest or to
prevent . . . (its) disposal or dissipation;" and since the term is
obviously employed in reference to going concerns, or business
enterprises in operation, something more than mere physical custody
is connoted; the PCGG may in this case exercise some measure of
control in the operation, running, or management of the business
itself. But even in this special situation, the intrusion into
management should be restricted to the minimum degree necessary
to accomplish the legislative will, which is "to prevent the disposal or
dissipation" of the business enterprise. There should be no hasty,
indiscriminate, unreasoned replacement or substitution of
management officials or change of policies, particularly in respect of
viable establishments. In fact, such a replacement or substitution
should be avoided if at all possible, and undertaken only when
justified by demonstrably tenable grounds and in line with the stated
objectives of the PCGG. And it goes without saying that where
replacement of management officers may be called for, the greatest
prudence, circumspection, care and attention should accompany that
undertaking to the end that truly competent, experienced and honest
managers may be recruited. There should be no role to be played in
this area by rank amateurs, no matter how well meaning. The road to
hell, it has been said, is paved with good intentions. The business is
not to be experimented or played around with, not run into the
ground, not driven to bankruptcy, not fleeced, not ruined. Sight
should never be lost x x x of the ultimate objective of the whole
exercise, which is to turn over the business to the Republic, once
judicially established to be "ill-gotten." Reason dictates that it is only
under these conditions and circumstances that the supervision,
administration and control of business enterprises provisionally taken
over may legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and
circumstances that the PCGG may properly exercise the prerogative
to vote sequestered stock of corporations, granted to it by the
President of the Philippines through a Memorandum dated June 26,
1986. That Memorandum authorizes the PCGG, "pending the
outcome of proceedings to determine the ownership of **
(sequestered) shares of stock," "to vote such shares of stock as it
may have sequestered in corporations at all stockholders' meetings
called for the election of directors, declaration of dividends,
amendment of the Articles of Incorporation, etc." The Memorandum
should be construed in such a manner as to be consistent with, and
not contradictory to the Executive Orders earlier promulgated on the
same matter. There should be no exercise of the right to vote simply
because the right exists, or because the stocks sequestered
constitute the controlling or a substantial part of the corporate voting
power. The stock is not to be voted to replace directors, or revise the
articles or by-laws, or otherwise bring about substantial changes in
policy, program or practice of the corporation except for
demonstrably weighty and defensible grounds, and always in the
context of the stated purposes of sequestration or provisional
takeover, i.e., to prevent the dispersion or undue disposal of the
corporate assets. Directors are not to be voted out simply because
the power to do so exists. Substitution of directors is not to be done
without reason or rhyme, should indeed be shunned if at all possible,
and undertaken only when essential to prevent disappearance or
wastage of corporate property, and always under such
circumstances as to assure that replacements are truly possessed of
competence, experience and probity.
In the case at bar, there was adequate justification to vote the
incumbent directors out of office and elect others in their stead
because the evidence showed prima facie that the former were just
tools of President Marcos and were no longer owners of any stock in
the firm, if they ever were at all. This is why, in its Resolution of
October 28, 1986[,] this Court declared that —
"Petitioner has failed to make out a case of grave abuse or
excess of jurisdiction in respondents' calling and holding of a Page |
stockholders' meeting for the election of directors as 13
authorized by the Memorandum of the President ** (to the
PCGG) dated June 26, 1986, particularly, where as in this
case, the government can, through its designated directors,
properly exercise control and management over what appear
to be properties and assets owned and belonging to the
government itself and over which the persons who appear in
this case on behalf of BASECO have failed to show any right
or even any shareholding in said corporation."
It must however be emphasized that the conduct of the PCGG
nominees in the BASECO Board in the management of the
company's affairs should henceforth be guided and governed by the
norms herein laid down. They should never for a moment allow
themselves to forget they are conservators, not owners of the
business; they are fiduciaries, trustees, of whom the highest degree
of diligence and rectitude is, in the premises, required. (Italics in the
original)
The PCGG cannot thus vote sequestered shares, except when there are
"demonstrably weighty and defensible grounds" or "when essential to prevent
disappearance or wastage of corporate property."15
The principle laid down in Baseco was further enhanced in the subsequent
cases of Cojuangco v. Calpo16 and Presidential Commission on Good
Government v. Cojuangco, Jr.,17 where this Court developed a "two-tiered"
test in determining whether the PCGG may vote sequestered shares:
The issue of whether PCGG may vote the sequestered shares in
SMC necessitates a determination of at least two factual matters:
1. whether there is prima facie evidence showing that the
said shares are ill-gotten and thus belong to the state; and
2. whether there is an immediate danger of dissipation thus
necessitating their continued sequestration and voting by the
PCGG while the main issue pends with the
Sandiganbayan.18
The two-tiered test, however, does not apply in cases involving funds of
"public character." In such cases, the government is granted the authority to
vote said shares, namely:
(1) Where government shares are taken over by private persons or
entities who/which registered them in their own names, and
(2) Where the capitalization or shares that were acquired with public
funds somehow landed in private hands.19
This Court, in Republic v. Cocofed,20 explained:
The [public character] exceptions are based on the common-sense
principle that legal fiction must yield to truth; that public property
registered in the names of non-owners is affected with trust relations;
and that the prima facie beneficial owner should be given the
privilege of enjoying the rights flowing from the prima facie fact of
ownership.
In Baseco, a private corporation known as the Bataan Shipyard and
Engineering Co. was placed under sequestration by the PCGG.
Explained the Court:
"The facts show that the corporation known as BASECO was
owned and controlled by President Marcos 'during his
administration, through nominees, by taking undue
advantage of his public office and/or using his powers,
authority, or influence,' and that it was by and through the
same means, that BASECO had taken over the business
and/or assets of the National Shipyard and Engineering Co.,
Inc., and other government-owned or controlled entities."
Given this factual background, the Court discussed PCGG's right
over BASECO in the following manner:
"Now, in the special instance of a business enterprise shown
by evidence to have been 'taken over by the government of
the Marcos Administration or by entities or persons close to
former President Marcos,' the PCGG is given power and
authority, as already adverted to, to provisionally take (it)
over in the public interest or to prevent ** (its) disposal or
dissipation;' and since the term is obviously employed in
reference to going concerns, or business enterprises in
operation, something more than mere physical custody is
connoted; the PCGG may in this case exercise some
measure of control in the operation, running, or management
of the business itself."
Citing an earlier Resolution, it ruled further: Page |
14
"Petitioner has failed to make out a case of grave abuse of
excess of jurisdiction in respondent's calling and holding of a
stockholder's meeting for the election of directors as
authorized by the Memorandum of the President ** (to the
PCGG) dated June 26, 1986, particularly, where as in this
case, the government can, through its designated directors,
properly exercise control and management over what
appear to be properties and assets owned and belonging to
the government itself and over which the persons who
appear in this case on behalf of BASECO have failed to
show any right or even any shareholding in said
corporation." (Emphasis supplied)
The Court granted PCGG the right to vote the sequestered shares
because they appeared to be "assets belonging to the government
itself." The Concurring Opinion of Justice Ameurfina A. Melencio-
Herrera, in which she was joined by Justice Florentino P. Feliciano,
explained this principle as follows:
"I have no objection to according the right to vote
sequestered stock in case of a take-over of business actually
belonging to the government or whose capitalization comes
from public funds but which, somehow, landed in the hands
of private persons, as in the case of BASECO. To my mind,
however, caution and prudence should be exercised in the
case of sequestered shares of an on-going private business
enterprise, specially the sensitive ones, since the true and
real ownership of said shares is yet to be determined and
proven more conclusively by the Courts." (Italics supplied)
The exception was cited again by the Court in Cojuangco-Roxas in
this wise:
"The rule in this jurisdiction is, therefore, clear. The PCGG
cannot perform acts of strict ownership of sequestered
property. It is a mere conservator. It may not vote the shares
in a corporation and elect the members of the board of
directors. The only conceivable exception is in a case of a
 takeover of a business belonging to the government or
whose capitalization comes from public funds, but which
landed in private hands as in BASECO." (italics supplied)
The "public character" test was reiterated in many subsequent
cases; most recently, in Antiporda v. Sandiganbayan. Expressly
citing Cojuangco-Roxas, this Court said that in determining the issue
of whether the PCGG should be allowed to vote sequestered shares,
it was crucial to find out first whether this were purchased with public
funds, as follows:
"It is thus important to determine first if the sequestered
corporate shares came from public funds that landed in
private hands."
This Court summed up the rule in the determination of whether the PCGG
has the right to vote sequestered shares as follows:
In short, when sequestered shares registered in the names of private
individuals or entities are alleged to have been acquired with ill-
gotten wealth, then the two-tiered test is applied. However, when the
sequestered shares in the name of private individuals or entities are
shown, prima facie, to have been (1) originally government shares,
or (2) purchased with public funds or those affected with public
interest, then the two-tiered test does not apply. Rather, the public
character exception in Baseco v. PCGG and Cojuangco Jr. v.
Roxas prevail; that is, the government shall vote the shares.
The PCGG contends, however, that it is entitled to vote the sequestered
shares in the election of the board of directors, it invoking this Court's alleged
finding in PCGG et al. v. Securities and Exchange Commission, et al.21 that
Africa had dissipated ETPI's assets, thus:
Under a consultancy contract, Polygon Investors and Managers, Inc.
with Jose L. Africa as Chairman and Victor Africa as President,
earned from ETPI as of 1987, more than P57 million. Likewise in
1987, ETPI paid to Jose L. Africa P1,200,000.00 as "professional
fees" and Manuel Nieto, Jr. another P1,200,000.00 as
"allowances".22
The PCGG's contention is misleading, This Court made no finding in PCGG
v. SEC et al. that Africa dissipated ETPI's assets. Precisely this Court issued
a Resolution of July 28, 1988 in the same case to clarify, upon motion of
Africa, that the narration of facts found in the decision therein did not
constitute a finding of facts:
The categorical statement in the decision of June 30, 1988 that the
"relevant background facts of the case culled from Petitioners' Page |
Urgent Consolidated Petition" was not without a reason or purpose. 15
Precisely this statement was made to impress upon the parties
that the narration of facts is just that — a narration, without
necessarily judging its truth or veracity. Being based on mere
allegations, properly controverted, it is not a finding of facts,
but more of a presentation of the complete picture of events
which led to the sequestration of Eastern Telecommunications,
Philippines, Inc. as well as to the instant petition. This Court, it
must be remembered, is not a trier of facts, and particularly so in this
case where the facts narrated are precisely the facts in litigation
before the Sandiganbayan. (Emphasis supplied.)
Unfortunately, the Sandiganbayan, in its impugned Resolution of November
13, 1992, skirted the question of whether there is evidence of dissipation of
ETPI assets, holding instead that:
The issue as to whether the B[enedicto]A[frica]N[ieto] group had
dissipated funds of ETPI during its administration of ETPI is a matter
which is not in issue herein. Dissipation by the PCGG Board of
Directors is also charged by the BAN group. An investigation of the
anomalies charged by one against the other may be taken up in
another case.23
And it further held that the PCGG could not vote the sequestered shares as
"only the owners of the shares of stock of subject corporation, their duly
authorized representatives or their proxies, may vote the said
shares,"24 relying on this Court's ruling in Cojuangco, Jr. v. Roxas25 that:
The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform
acts of strict ownership of sequestered property. It is a mere conservator. It
may not vote the shares in a corporation and elect members of the board of
directors. The only conceivable exception is in a case of a takeover of a
business belonging to the government or whose capitalization comes from
public funds, but which landed in private hands as in BASECO.
In short, the Sandiganbayan held that the public character exception does
not apply, in which case it should have proceeded to apply the two-tiered
test. This it failed to do.
The questions thus remain if there is prima facie evidence showing that the
subject shares are ill-gotten and if there is imminent danger of dissipation.
This Court is not, however, a trier of facts, hence, it is not in a position to rule
on the correctness of the PCGG's contention. Consequently, this issue must
be remanded to the Sandiganbayan for resolution.
II
On the PCGG's submission that the Stock and Transfer Book should not be
used as the basis for determining the voting rights of the shareholders
because some entries therein were altered "by substitution": This Court sees
no grave abuse of discretion on the part of the Sandiganbayan in ruling that:
The charge that there were "alterations by substitution" in the Stock
and Transfer Book is not a matter which should preclude the Stock
and Transfer Book from being the basis or guide to determine who
the true owners of the shares of stock in ETPI are. If there be any
substitution or alterations, the anomaly, if at all, may be explained by
the corporate secretary who made the entries therein. At any rate,
the accuracy of the Stock and Transfer Book may be checked by
comparing the entries therein with the issued stock certificates. The
fact is that any transfer of stock or issuance thereof would
necessitate an alteration of the record by substitution. Any anomaly
in any entry which may deprive a person or entity of its right to vote
may generate a controversy personal to the corporation and the
stockholder and should not affect the issue as to whether it is the
PCGG or the shareholder who has the right to vote. In other words,
should there be a stockholder who feels aggrieved by any alteration
by substitution in the Stock and Transfer Book, said stockholder may
object thereto at the proper time and before the stockholders
meeting.26
Whether the ETPI Stock and Transfer Book was falsified and whether such
falsification deprives the true owners of the shares of their right to vote are
thus issues best settled in a different proceeding instituted by the real
parties-in-interest.
III
On the PCGG's submission that the Sandiganbayan gravely abused its
discretion when it held that it cannot vote at least 23.9% of the outstanding
capital stock of ETPI, which percentage is broken down as follows:
Shares ceded to the government by virtue of - 12.8%
the Benedicto compromise
Shares represented by some stock certificates - 3.1%
found in Malacañang (at least)
Page |
Shares held and admitted by Manuel Nieto to 8.0% 16
belong to then President Marcos -
The PCGG alleges that the 12.8% indicated above represents 51% of the
combined shareholdings of Roberto S. Benedicto and his controlled
corporations amounting to 12.8% of the total equity of ETPI which was ceded
to the Republic; the 3.1% represents the shares covered by the ETPI stock
certificates endorsed in blank found in Malacañang, now in its (PCGG's)
possession, which it submits it may, under Section 34 of the Negotiable
Instruments Law,27 take title thereto and vote the same in the stockholders
meeting; and the 8% represents the shares of Manuel H. Nieto, Jr. which, so
it avers, he, in an Affidavit of May 28, 1986, admitted actually belong to
former President Marcos:
5. That in relation to and simultaneously with the board meeting of
PHILCOMSAT, on March 21, 1986, I declared my concurrence in the
disclosures made on the participation of Mr. Ferdinand E. Marcos
and associates in the companies covered by the sequestration order
dated March 14, 1986 i.e., 39,926.2% (sic) of the total subscribed
capital stock of Philippine Overseas Telecommunications
Corporation and 40% of the individual shareholdings of Jose L.
Africa, Manuel H. Nieto, Jr., & Roberto S. Benedicto in Eastern
Telecommunications Philippines, Inc.28
On the question of whether the PCGG can vote all the above shares, the
Sandiganbayan, finding in the affirmative, held in its Resolution of November
13, 1992:
Considering the Compromise Agreement entered into by the PCGG
and Roberto S. Benedicto in Civil Case No. 009 wherein Roberto S.
Benedicto assigned and transferred to the Government 12.8% of the
shares of stock of ETPI, which Compromise Agreement was made
the basis of a judgment of this Court, it is only proper that the PCGG
may vote these shares in the stockholders meeting after said
judgment shall have become final and executory. Besides, before the
PCGG can vote these shares, the transfer to the State of the shares
of stock must be entered in the Stock and Transfer Book, the entries
therein being the only basis for which the stockholder may vote the
said shares.
 The same ruling is made in respect to the shares of stock
represented by stock certificates found in Malacañang (3.1%) and
the shares of stock allegedly admitted by Manuel H. Nieto to belong
to former President Ferdinand E. Marcos (8.0%).29 (Emphasis
supplied)
The Sandiganbayan clearly made no ruling proscribing the PCGG from
voting the shares representing 12.8% of ETPI's outstanding capital stock, the
only requirement it imposed being that the transfer of the shares be
registered in the Stock and Transfer Book and that, in the case of the
Benedicto shares, the Compromise Agreement be final and executory.
In requiring that the transfer of the Benedicto shares be first recorded in
ETPI's Stock and Transfer Book before the PCGG may vote them, the
Sandiganbayan committed no grave abuse of discretion. For Section 63 of
the Corporation Code provides:
Sec. 63. Certificate of stock and transfer of shares. — The capital
stock of stock corporations shall be divided into shares for which the
certificates signed by the president or vice president, countersigned
by the secretary or assistant secretary, and sealed with the seal of
the corporation shall be issued in accordance with the by-laws.
Shares of stock so issued are personal property and may be
transferred by the delivery of the certificate or certificates endorsed
by the owner or his attorney-in-fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid, except as
between the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares
transferred.
xxx xxx xxx.
Explaining why registration is a prerequisite for the voting of shares, this
Court, in Batangas Laguna Tayabas Bus Company, Inc., v.
Bitanga,30 discoursed:
Indeed, until registration is accomplished, the transfer, though valid
between the parties, cannot be effective as against the corporation.
Thus, the unrecorded transferee x x x cannot vote nor be voted for.
The purpose of registration, therefore, is two-fold: to enable the
transferee to exercise all the rights of a stockholder, including the
right to vote and to be voted for, and to inform the corporation of any
change in share ownership so that it can ascertain the persons
entitled to the rights and subject to the liabilities of a stockholder.
Until challenged in a proper proceeding, a stockholder of record has
a right to participate in any meeting; his vote can be properly counted
to determine whether a stockholders' resolution was approved,
despite the claim of the alleged transferee. On the other hand, a
person who has purchased stock, and who desires to be recognized Page |
as a stockholder for the purpose of voting, must secure such a 17
standing by having the transfer recorded on the corporate books.
Until the transfer is registered, the transferee is not a stockholder but
an outsider.
Whether the PCGG needs to await the finality of the judgment31 based on the
Republic-Benedicto compromise agreement is now moot since it is not
disputed that it had long become final and executory. Accordingly, the PCGG
may vote in its name the shares ceded to the Republic by Benedicto
pursuant to the said agreement once they are registered in its name.
With respect to the PCGG's submission that under Section 34 of the
Negotiable Instruments Law, it may take title to the shares represented by
the blank stock certificates found in Malacañang and vote the same, the
same is untenable. The PCGG assumes that stock certificates are
negotiable. They are not.
x x x [A]lthough a stock certificate is sometimes regarded as quasi-
negotiable, in the sense that it may be transferred by delivery, it is
well settled that the instrument is non-negotiable, because the holder
thereof takes it without prejudice to such rights or defenses as the
registered owner or creditor may have under the law, except insofar
as such rights or defenses are subject to the limitations imposed by
the principles governing estoppel.32
That the PCGG found the stock certificates endorsed in blank does not
necessarily make it the owner of the shares represented therein. Their true
ownership has to be ascertained in a proper proceeding. Similarly, the
ownership of the Nieto shares has yet to be adjudicated. That they allegedly
belong to former President Marcos does not make the PCGG, its owner. The
PCGG must, in an appropriate proceeding, first establish that they truly
belong to the former President and that they were ill-gotten. Pending final
judgment over the ownership of these shares, the PCGG may not register
and vote the Nieto and the Malacañang shares in its name. If the
Sandiganbayan finds, however, that there is evidence of dissipation of these
shares, the PCGG may vote the same as conservator thereof.
IV
On the PCGG's imputation of grave abuse of discretion upon the
Sandiganbayan for ordering the holding of a stockholders meeting to elect
the ETPI board of directors without first setting in place, through the
amendment of the articles of incorporation and the by-laws of ETPI, the
safeguards prescribed in Cojuangco, Jr. v. Roxas.33 This Court laid down
those safeguards because of the obvious need to reconcile the rights of the
stockholder whose shares have been sequestered and the duty of the
conservator to preserve what could be ill-gotten wealth.
It is through the right to vote that the stockholder participates in the
management of the corporation. The right to vote, unlike the rights to
receive dividends and liquidating distributions, is not a passive thing
because management or administration is, under the Corporation
Code, vested in the board of directors, with certain reserved powers
residing in the stockholders directly. The board of directors and
executive committee (or management committee) and the corporate
officers selected by the board may make it very difficult if not
impossible for the PCGG to carry out its duties as conservator if the
Board or officers do not cooperate, are hostile or antagonistic to the
conservator's objectives.
Thus, it is necessary to achieve a balancing of or a reconciliation
between the stockholders' right to vote and the conservator's
statutory duty to recover and in the process thereof, to conserve
assets, thought to be ill-gotten wealth, until final judicial
determination of the character of such assets or until a final
compromise agreement between the parties is reached.
There are, in the main, two (2) types of situations that need to be
addressed. The first situation arises where the sequestered shares
of stock constitute a distinct minority of the voting shares of the
corporation involved, such that the registered owners of such
sequestered shares would in any case be able to vote in only
a minority of the Board of Directors of the corporation. The second
situation arises where the sequestered shares of stock constitute a
majority of the voting shares of the corporation concerned, such that
the registered owners of such shares of stock would in any case be
entitled to elect a majority of the Board of Directors of the corporation
involved.
Turning to the first situation, the Court considers and so holds that in
order to enable the PCGG to perform its functions as conservator of
the sequestered shares of stock pending final determination by the
courts as to whether or not the same constitute ill-gotten wealth or a
final compromise agreement between the parties, the PCGG must
be represented in the Board of Directors of the corporation and to its
majority-owned subsidiaries or affiliates and in the Executive
Committee (or its equivalent) and the Audit Committee thereof, in at
least an ex officio (i.e., non-voting) capacity. The PCGG Page |
representative must have a right of full access to and inspection of 18
(including the right to obtain copies of) the books, records and all
other papers of the corporation relating to its business, as well as a
right to receive copies of reports to the Board of Directors, its
Executive (or equivalent) and Audit Committees. By such
representation and rights of full access, the PCGG must be able so
to observe and monitor the carrying out of the business of the
corporation as to discover in a timely manner any move or effort on
the part of the registered owners of the sequestered stock alone or in
concert with other shareholders, to conceal, waste and dissipate the
assets of the corporation, or the sequestered shares themselves,
and seasonably to bring such move or effort to the attention of the
Sandiganbayan for appropriate action.
In the second situation above referred to, the Court considers and so
holds that the following minimum safeguards must be set in place
and carefully maintained until final judicial resolution of the question
of whether or not the sequestered shares of stock (or, in a proper
case, the underlying assets of the corporation concerned) constitute
ill-gotten wealth or until a final compromise agreement between the
parties is reached:
a. An independent comptroller must be appointed by the
Board of Directors upon nomination of the PCGG as
conservator. The comptroller shall not be removable (nor
shall his position be abolished or his compensation changed)
without the consent of the conservator. The comptroller
shall, in addition to his other functions as such, have charge
of internal audit.
b. The corporate secretary must be acceptable to the
conservator. If the corporate secretary ceases to be
acceptable to the conservator, a new one must be appointed
by the Board of Directors upon nomination of the
conservator.
c. The external auditors of the corporation must be
independent and must be acceptable to the conservator. The
independent external auditors shall not be changed without
the consent of the conservator.
d. The conservator must be represented in the Board of
Directors and in the Executive (or equivalent) and Audit
Committees of the corporation involved and of its majority-
owned subsidiaries or affiliates. The representative of the
conservator must be a full director (not merely an honorary
or ex officio director) with the right to vote and all other rights
and duties of a member of the Board of Directors under the
Corporation Code. The conservator's representative shall not
be removed from the Board of Directors (or the mentioned
Committees) without the consent of the conservator. The
conservator shall, however, have the right to remove and
change its representative at any time, and the new
representative shall be promptly elected to the Board and its
mentioned Committees.
e. All transactions involving the disbursement of corporate
funds in excess of P5 million must have the prior approval of
the director representing the conservator, in order to be valid
and effective.
f. The incurring of debt by the corporation, whether in the
form of bonds, debentures, commercial paper or any other
form, in excess of P5 million, must have the prior approval of
the director representing the conservator, in order to be valid
and effective.
g. The disposition of a substantial part of assets of the
corporation (substantial meaning in excess of P5 million)
shall require the prior approval of the director representing
the conservator, in order to be valid and effective.
h. The above safeguards must be written into the articles of
incorporation and by-laws of the company involved. In other
words, the articles of incorporation and by-laws of the
company must be amended so as to incorporate the above
safeguards.
i. Any amendment of the articles of incorporation or by-laws
of the company that will modify in any way any of the above
safeguards, shall need the prior approval of the director
representing the conservator.
The amount of P5,000,000.00 referred to in paragraphs (e),
(f) and (g) above is intended merely to be indicative. The
precise amount may differ depending upon the size of the
corporation involved and the reasonable operating
requirements of its business. Page |
19
Whether a particular case falls within the first or the second type of
situation described above, the following safeguards are
indispensably necessary:
1. The sequestered shares and any stock dividends
pertaining to such shares, may not be sold, transferred,
alienated, mortgaged, or otherwise disposed of and no such
sale, transfer or other disposition shall be registered in the
books of the corporation, pending final judicial resolution of
the question of ill-gotten wealth or a final compromise
agreement between the parties; and
2. Dividend and liquidating distributions shall not be
delivered to the registered stockholders of the sequestered
shares, including stock dividends pertaining to such shares,
but shall instead be deposited in an escrow, interest-bearing,
account in a first class bank or banks, acceptable to the
Sandiganbayan, to be held by such banks for the benefit of
whoever is held by final judicial decision or final compromise
agreement, to be entitled to the shares involved. (Emphasis
in the original)
There is nothing in the Cojuangco case that would suggest that the above
measures should be incorporated in the articles and by-laws before a
stockholders meeting for the election of the board of directors is held. The
PCGG nonetheless insists that those measures should be written in the
articles and by-laws before such meeting, "otherwise, the [Marcos] cronies
will elect themselves or their representatives, control the corporation, and for
an appreciable period of time, have every opportunity to disburse funds,
destroy or alter corporate records, and dissipate assets." That could be a
possibility, but the peculiar circumstances of this case require that the
election of the board of directors first be held before the articles of
incorporation are amended. Section 16 of the Corporation Code requires the
majority vote of the board of directors to amend the articles of incorporation:
Sec. 16. Amendment of Articles of Incorporation. — Unless
otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles of
 incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code, or the
vote or written assent of at least two thirds (2/3) of the members if it
be a non-stock corporation.
xxx xxx xxx. (Emphasis supplied)
At the time Africa filed his motion for the holding of the annual stockholders
meeting, there were two sets of ETPI directors, one controlled by the PCGG
and the other by the registered stockholders. Which of them is the legitimate
board of directors? Which of them may rightfully vote to amend the articles of
incorporation and integrate the safeguards laid down in Cojuangco? It is
essential, therefore, to cure this aberration of two boards of directors sitting in
a single corporation before the articles of incorporation are amended to set in
place the Cojuangco safeguards.
The danger of the so-called Marcos cronies taking control of the corporation
and dissipating its assets is, of course, a legitimate concern of the PCGG,
charged as it is with the duties of a conservator. Nevertheless, such danger
may be averted by the "substantially contemporaneous" amendment of the
articles after the election of the board. This Court said as much in Cojuangco:
The Court is aware that the implementation of some of the above
safeguards may require agreement between the registered
stockholders and the PCGG as well as action on the part of the
Securities and Exchange Commission. The Court, therefore, directs
petitioners and the PCGG to effect the implementation of this
decision under the supervision and control of the Sandiganbayan so
that the right to vote the sequestered shares and the installation and
operation of the safeguards above-specified may be exercised and
effected in a substantially contemporaneous manner and with all
deliberate dispatch.
V Class B stockholders for whom notices were sent to him. As a result,
As for the PCGG's contention that the Sandiganbayan gravely abused its
discretion in ordering the Division Clerk of Court to call the stockholders
meeting and in appointing then Sandiganbayan Associate Justice Sabino de
Leon, Jr. to control and supervise the same, it is impressed with merit.
The Clerk of Court, who is already saddled with judicial responsibilities, need
not be burdened with the additional duties of a corporate secretary.
Moreover, the Clerk of Court may not have the requisite knowledge and
expertise to discharge the functions of a corporate secretary. It is not thus
surprising to find the PCGG complaining that: Page |
20
x x x ETPI's By-laws provide:
"Sec. 4. Notice of Meeting. — Except as otherwise provided
by law, written or printed notice of all annual and special
meetings of stockholders, stating the place and time of the
meeting and the general nature of the business to be
considered, shall be transmitted by personal delivery,
registered air-mail, telegraph, or cable to each stockholder of
record entitled to vote thereat at his address last known to
the Secretary of the Company, at least ten (10) days before
the date of the meeting, if an annual meeting, or at least five
(5) days before the date of the meeting, if a special meeting."
Here, respondent Victor Africa filed a Motion dated March 30, 1992
asking the Sandiganbayan to "issue the call and Notice of Annual
Stockholder's Meeting in ETPI" because under ETPI's By-laws such
meeting should be held in the month of May. x x x . In the Resolution
dated November 13, 1992, the Sandiganbayan granted the Motion
and authorized its Division Clerk of Court to issue such "Notice
of Annual Stockholder's Meeting." However, for inexplicable reasons,
the Division Clerk of Court issued a "Notice of Special Stockholder's
Meeting". x x x . which requires only a prior 5-day notice, instead of a
"notice of (Delayed) Annual Stockholder's Meeting" which requires a
prior 10-day notice.
Instead of sending the Notices to each stockholder at his recorded
address, the Division Clerk of Court whimsically sent all the Notices
meant for the Class B stockholders to Atty. Eduardo de los Angeles
(who returned the Notices because he was not authorized to receive
such Notices). According to him . . ., he does not know some of the
at this late stage, no proper notice has been sent to Class B
stockholders. Yet, the Sandiganbayan has scheduled and is dead
set to supervise a stockholder's meeting on November 27, 1992.
This clearly violates the substantial rights of the Class B stockholders
who own 40% of ETPI. Under the Articles of Incorporation . . . and
By-laws . . . of ETPI, Class B stockholders are entitled to vote two
members of the Board of Directors. Unless properly notified, most of
 the Class B stockholders who reside in the United Kingdom (and
whose shares are not sequestered) will not be able to exercise their
right to vote.34 (Emphasis in the original)
The appointment of a sitting member of the Sandiganbayan is particularly
unsound for, as the PCGG points out:
x x x What then is the reason for him to attend and supervise the
meeting? To observe so that he can later testify in the court where
he himself sits — in the court which will eventually decide any
controversy which may arise from the meeting?35
Obviously, under such situation, the justice so appointed would be compelled
to inhibit himself from any judicial controversy arising from the stockholders
meeting.36 Worse, if he were to preside at the meeting and rule upon the
objections that may be raised by some stockholders, the Sandiganbayan
would be faced with the "anomaly"37 of eventually reviewing the decisions
rendered by a member of its court during the stockholders meeting.
This Court appreciates the quandary that the Sandiganbayan faced when it
ordered its Division Clerk of Court to call the meeting: ETPI has two sets of
officers and, presumably, two corporate secretaries. And given the stakes
involved, the stockholders meeting would be contentious, to say the least,
hence, the need for an impartial referee to supervise and control the meeting.
Happily, the case of Board of Directors and Election Committee of SMB
Workers Savings and Loan Asso., Inc. v. Tan, etc., et al.38 provides a solution
to the Sandiganbayan's dilemma. There, this Court upheld the creation of a
committee empowered to call, conduct and supervise the election of the
board of directors:
As regards the creation of a committee of three vested with the
authority to call, conduct and supervise the election, and the
appointment thereto of Candido C. Viernes as chairman and
representative of the court and one representative each from the
parties, the Court in the exercise of its equity jurisdiction may appoint
such committee, it having been shown that the Election Committee
that conducted the election annulled by the respondent court if
allowed to act as such may jeopardize the rights of the respondents.
In a proper proceeding a court of equity may direct the
holding of a stockholders' meeting under the control of a
special master, and the action taken at such a meeting will
not be set aside because of a wrongful use of the court's
interlocutory decree, where not brought to the attention of
the court prior to the meeting. (18 C.J.S. 1270.)
A court of equity may, on showing of good reason, appoint a
master to conduct and supervise an election of directors Page |
when it appears that a fair election cannot otherwise be had. 21
Such a court cannot make directions contrary to statute and
public policy with respect to the conduct of such election. (19
C.J.S. 41)
This Court also approved a similar action by the Securities and Exchange
Commission in Sales v. Securities and Exchange Commission.39
Such a committee composed of impartial persons knowledgeable in
corporate proceedings would provide the needed expertise and objectivity in
the calling and the holding of the meeting without compromising the
Sandiganbayan or its officers. The appointment of the committee members
and the delineation of the scope of the duties of the committee may be made
pursuant to an agreement by the parties or in accordance with the provisions
of Rule 9 (Management Committee) of the Interim Rules of Procedure for
Intra-Corporate Controversies insofar as they are applicable.
VI
And now, Africa's motion to cite the PCGG and its "accomplices" in contempt
for calling and holding a stockholders meeting to increase ETPI's authorized
capital stock without this Court's authority and despite the pendency of
motions for reconsideration of the Sandiganbayan Resolution of December
13, 1996 granting the PCGG authority to cause the holding of such meeting.
In the same motion, Africa asks this Court to nullify the March 17, 1997
stockholders meeting which increased ETPI's authorized capital stock on the
grounds that he, an ETPI stockholder, was not notified of the meeting, and
the PCGG voted the sequestered ETPI shares despite the absence of
evidence of dissipation of assets. Intervenor AEROCOM has shared Africa's
assertions.
As earlier stated, this Court, by Resolution of May 7, 1996, referred the
PCGG's "VERY URGENT MOTION FOR RECONSIDERATION TO HOLD
SPECIAL STOCKHOLDERS MEETING . . ." to the Sandiganbayan for
reception of evidence and resolution. The dispositive portion of said
Resolution reads:
Taking account of all the foregoing, the Court Resolved to REFER
the "VERY URGENT PETITION FOR AUTHORITY TO HOLD
 SPECIAL STOCKHOLDERS' MEETING FOR SOLE PURPOSE OF
INCREASING EASTERN'S AUTHORIZED CAPITAL STOCK" to the
Sandiganbayan for reception of evidence and resolution — WITH
ALL DELIBERATE DISPATCH but no longer than sixty (60) days
from notice hereof — of the factual issues raised by the parties
as herein set out, and such others, factual or otherwise as are
relevant, in order to decide the basic question in this proceeding of
the necessity and propriety of the holding of the special stockholders'
meeting of EASTERN for the "sole purpose of increasing ** (its)
authorized capital stock" and the exercise by the PCGG of the right
to vote at said meeting.40 (Emphasis supplied)
Clearly, when the PCGG's "VERY URGENT PETITION TO HOLD SPECIAL
STOCKHOLDERS MEETING . . . " was referred to the Sandiganbayan, this
Court gave the latter full authority to decide the issue of whether a
stockholders meeting should be held. Implicit in this authority was the power
to grant (or deny) the petition. There is thus no need for the parties to seek
this Court's imprimatur to hold the same.
Africa's motion must thus be denied.
Even assuming arguendo that the holding of the meeting was contemptuous
because the December 13, 1996 Sandiganbayan Resolution had not yet
attained finality, it was the Sandiganbayan, and not this Court, which was
contemned. Consequently, it is the Sandiganbayan, and not this Court, which
has jurisdiction over the motion to declare the PCGG and "its accomplices" in
contempt.
In whatever context it may arise, contempt of court involves the
doing of an act, or the failure to do an act, in such a manner as to
create an affront to the court and the sovereign dignity with which it
is clothed. As a matter of practical judicial administration, jurisdiction
has been felt properly to rest in only one tribunal at a time with
respect to a given controversy. Partly because of administrative
considerations, and partly to visit the full personal effect of the
punishment on a contemnor, the rule has been that no other court
than the one contemned will punish a given contempt.
The rationale that is usually advanced for the general rule that the
power to punish for contempt rests with the court contemned is that
contempt proceedings are sui generic and are triable only by the
court against whose authority the contempts are charged; the power
to punish for contempt exists for the purpose of enabling a court to
compel due decorum and respect in its presence and due obedience
to its judgments, orders and processes; and in order that a court may
compel obedience to its orders, it must have the right to inquire
whether there has been any disobedience thereof, for to submit the
question of disobedience to another tribunal would operate to
deprive the proceeding of half its efficiency. 41 Page |
22
The above rule is not of course absolute as it admits exception "when the
entire case has already been appealed [in which case] jurisdiction to punish
for contempt rests with the appellate court where the appeal completely
transfers to proceedings thereto or where there is a tendency to affect
the status quo or otherwise interfere with the jurisdiction of the appellate
court."42 This exception does not, however, apply to Africa's motion since at
the time he filed it on April 1, 1997 before this Court, his petition in G.R. No.
L-147214 assailing the December 17, 1996 Resolution of the Sandiganbayan
had not yet been filed.
The motion to nullify the March 17, 1997 stockholders meeting must likewise
be denied for lack of jurisdiction. Such motion is but an incident to
Sandiganbayan Civil Case No. 0130.43 As such, jurisdiction over it pertains
exclusively and originally to the Sandiganbayan.
Under Section 2 of the President's Executive Order No. 14 issued on
May 7, 1986, all cases of the Commission regarding "the Funds,
Moneys, Assets, and Properties Illegally Acquired or Misappropriated
by Former President Ferdinand Marcos, Mrs. Imelda Romualdez
Marcos, their Close Relatives, Subordinates, Business Associates,
Dummies, Agents, or Nominees" whether civil or criminal are lodged
within the "exclusive and original jurisdiction of the
Sandiganbayan" and all incidents arising from, incidental to, or
related to, such cases necessarily fall likewise under the
Sandiganbayan's exclusive and original jurisdiction, subject to
review on certiorari exclusively by the Supreme Court.44
This is another reason for the denial of the motion to cite the PCGG and its
"accomplices" in contempt.
VII
FINALLY, the question on the validity of the PCCG's voting the Class "A"
shares to increase the authorized capital stock of ETPI.
In his petition in G.R. No. 147214, Africa faults the Sandiganbayan for failing
to acknowledge, in its Resolution of February 16, 2001, the Decisions of this
Court declaring that his shares in ETPI45 and those of AEROCOM46 and
POLYGON (Polygon Investors & Managers, Inc.)47 were not sequestered.
Hence, so he contends, they, and not the PCGG, should have been allowed
to vote their respective shares during the meeting.
Two matters require clarification at this point. First, that this Court rendered
decisions holding that the shares of Africa, AEROCOM and POLYGON are
not or are no longer sequestered is of little consequence since the decisions
were promulgated after the Sandiganbayan issued its resolution granting the
PCGG authority to call and hold the stockholders meeting to increase the
authorized capital stock. At that time, the shares were presumed to have
been regularly sequestered. The more fundamental question that confronts
this Court is: Was the PCGG entitled to vote the sequestered shares in the
stockholders meeting of March 17, 1997?
Second, the PCGG correctly argues that Africa has no cause of action to
claim on behalf of AEROCOM and POLYGON that these two companies are
entitled to vote their respective shares in the stockholders meeting to
increase ETPI's authorized capital stock. The claim is personal to
AEROCOM and POLYGON. Nevertheless, this does not preclude Africa from
invoking his own right as a "small stockholder" of ETPI to vote in the
stockholders meeting for the purpose of increasing ETPI's authorized capital
stock. The PCGG maintains, however, that it is entitled to vote said shares
because this Court, by its claim, recognized in PCGG v. SEC, supra, that
ETPI's assets were being dissipated by the BAN (Benedicto, Africa, Nieto)
Group, thus:
Under the Management of Cable and Wireless ETPI grew and
prospered. But when its dividends, which were paid in dollars to the
BAN Group, began to run into millions, said group also started to
intervene in the corporation's operations and management. Requests
for employment of family relatives and high salaries for them were
made. The BAN Group likewise placed the majority of their individual
stockholdings in three separate companies, namely: Aerocom
Investors, Universal Molasses, and Polygon, so that in 1986, the
ownership of the Class "A" stocks of the corporation was as follows:
Roberto S. Benedicto - 3.3 percent
Universal Molasses Corp. - 16.6 percent
Manuel Nieto, Jr. - 2.2 percent
Nieto's relatives - 3.3 percent
Aerocom Investors and Managers - 17.5 percent
Inc.
Jose Africa - 2.2 percent
Africa's relatives - .3 percent
Polygon Investors and Managers Inc. - 17.5 percent
Page |
By the end of 1987, the initial capital of P1M of the BAN Group, its 23
corporations and relatives had grown to the astronomical sum of
P784,185,198.00. Cash dividends paid to them as of 1986 had
amounted to P225,845,000.00 even as another P180,000,000.00 is
due them for 1987, for a grand total of P405,845,000.00. In 1984,
cash dividends to the BAN Group, et al. in the amount of $1M were
remitted to the United States.
Under a consultancy contract, Polygon Investors and Managers with
Jose L. Africa as Chairman and his son, Victor Africa as President,
earned from ETPI as of 1987 more than P57M. Likewise in
1987, ETPI paid to Jose L. Africa P1,200,000.00 as "professional
fees" and Manuel H. Nieto, Jr., another P1,200,000.00 as
"allowances".48
As stated early on, however, the foregoing narration does not constitute a
finding of fact.
The PCGG further submits that the Sandiganbayan found prima facie
evidence for the issuance of the writ of sequestration covering the Class "A"
shares of ETPI. Such reliance on the Sandiganbayan's ruling is misplaced
because the issue is not whether there is prima facie evidence to warrant
sequestration of the shares, but whether there is prima facie evidence
showing that the shares are ill-gotten and whether there is evidence of
dissipation of assets to warrant the voting by the PCGG of sequestered
shares. As to the latter issue, the Sandiganbayan held in the affirmative in
this wise:
x x x [T]he propriety and legality of allowing the PCGG to cause the
holding of a stockholders' meeting of the ETPI for the purpose of
electing a new Board of Directors or effecting changes in the policy,
program and practices of said corporation (except for the specified
purpose of amending the right of first refusal clause in ETPI's Articles
of Incorporation and By Laws) and impliedly to vote the sequestered
shares of stocks has been upheld by the Supreme Court in the case
of "PCGG vs. SEC, PCGG vs. Sandiganbayan, et al.", G.R. No.
82188, promulgated June 30, 1988 x x x.49 (Emphasis supplied)
The Sandiganbayan proceeded to quote the following pronouncement of this
Court in PCGG v. SEC:
But while We find the Sandiganbayan to have acted properly in
enjoining the PCGG from holding the stockholders meeting for the
specified purpose of amending the "right of first refusal" clause in
ETPI's Articles of Incorporation and By-Laws, We find the general
injunction imposed by it on the PCGG to desist and refrain from
calling a stockholders meeting for the purpose of electing a new
Board of Directors of effecting substantial changes in the policy,
program or practice of the corporation to be too broad as to taint said
order with grave abuse of discretion. Said order completely ties the
hands of the PCGG, rendering it virtually helpless in the exercise of
its power of conserving and preserving the assets of the corporation.
Indeed, of what use is the PCGG if it cannot even do this? x x
x.50 (italics and underscoring supplied)
The Sandiganbayan, however, misread this Court's ruling in the said SEC
case. One of the issues raised therein was whether the Sandiganbayan
committed grave abuse of discretion in enjoining the PCGG from calling and
holding stockholders meetings and voting the sequestered ETPI shares for
the purpose of deleting the "right of first refusal" clause in ETPI's articles of
incorporation. In its therein assailed Order, the Sandiganbayan temporarily
restrained the PCGG "from calling and/or holding stockholders meetings and
voting the sequestered shares thereat for the purpose of amending the
articles or by-laws of ETPI, or otherwise effecting substantial changes in
policy, programs or practices of said corporation."
Clearly, the temporary restraining order was too broad. The Sandiganbayan
should have limited itself to restraining the calling and holding of the
stockholders meeting and voting the shares for the sole purpose of amending
the "right of first refusal" clause. It was thus necessary for this Court to make
the underscored ruling above. No declaration therein was made that in all
instances the PCGG may vote the sequestered shares to effect substantial
changes in ETPI policy, programs or practices. In lifting the injunction on that
aspect, this Court merely recognized "that situations may arise wherein only
through an act of strict ownership can the PCGG be able to prevent the
dissipation of the assets of the sequestered corporation or business."51
Moreover, if, as the Sandiganbayan assumed, this Court had come to a
conclusion in the SEC case that the BAN Group was guilty of dissipation and
that, consequently, the PCGG was entitled to vote the sequestered shares,
this Court would not have bothered, in its Resolution of May 7, 1996, to direct
said court to decide whether the PCGG has the right to vote in the
stockholders meeting for the purpose of increasing ETPI's authorized capital
stock.52
This Court notes that, like in Africa's motion to hold a stockholders meeting
(to elect a board of directors), the Sandiganbayan, in the PCGG's petition to Page |
hold a stockholders meeting (to amend the articles of incorporation to 24
increase the authorized capital stock), again failed to apply the two-tiered
test. On such determination hinges the validity of the votes cast by the
PCGG in the stockholders meeting of March 17, 1997. This lapse by the
Sandiganbayan leaves this Court with no other choice but to remand these
questions to it for proper determination.
IN SUM, this Court rules that:
(1) The PCGG cannot vote sequestered shares to elect the ETPI Board of
Directors or to amend the Articles of Incorporation for the purpose of
increasing the authorized capital stock unless there is a prima facie evidence
showing that said shares are ill-gotten and there is an imminent danger of
dissipation.
(2) The ETPI Stock and Transfer Book should be the basis for determining
which persons have the right to vote in the stockholders meeting for the
election of the ETPI Board of Directors.
(3) The PCGG is entitled to vote the shares ceded to it by Roberto S.
Benedicto and his controlled corporations under the Compromise
Agreement, provided that the shares are first registered in the name of the
PCGG. The PCGG may not register the transfer of the Malacañang and the
Nieto shares in the ETPI Stock and Transfer Book; however, it may vote the
same as conservator provided that the PCGG satisfies the two-tiered test
devised by the Court in Cojuangco v. Calpo, supra.
(4) The safeguards laid down in the case of Cojuangco v. Roxas shall be
incorporated in the ETPI Articles of Incorporation substantially
contemporaneous to, but not before, the election of the ETPI Board of
Directors.
(5) Members of the Sandiganbayan shall not participate in the stockholders
meeting for the election of the ETPI Board of Directors. Neither shall a Clerk
of Court be appointed to call such meeting and issue notices thereof. The
Sandiganbayan shall appoint, or the parties may agree to constitute, a
committee of competent and impartial persons to call, send notices and
preside at the meeting for the election of the ETPI Board of Directors; and
(6) This Court has no jurisdiction over the motion to cite the PCGG and "its
accomplices" in contempt and to nullify the stockholders meeting of March
17, 1997.

WHEREFORE, this Court Resolved to REFER the petitions at bar to the Page |
Sandiganbayan for reception of evidence to determine whether there is 25
a prima facie evidence showing that the sequestered shares in question are
ill-gotten and there is an imminent danger of dissipation to entitle the PCGG
to vote them in a stockholders meeting to elect the ETPI Board of Directors
and to amend the ETPI Articles of Incorporation for the sole purpose of
increasing the authorized capital stock of ETPI.

The Sandiganbayan shall render a decision thereon within sixty (60) days
from receipt of this Resolution and in conformity herewith.

The motion to cite the PCGG and its "accomplices" and to nullify the ETPI
Stockholders Meeting of March 17, 1997 filed by Victor Africa is DENIED for
lack of jurisdiction.

SO ORDERED.

G.R. No. 147062-64 December 14, 2001

REPUBLIC OF THE PHILIPPINES, represented by the PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT (PCGG), petitioner,
vs.
COCOFED, ET AL. and BALLARES, ET AL.,1 EDUARDO M.
COJUANGCO JR. and the SANDIGANBAYAN (First
Division) respondents.
PANGANIBAN, J.:
The right to vote sequestered shares of stock registered in the names of
private individuals or entitles and alleged to have been acquired with ill-
gotten wealth shall, as a rule, be exercised by the registered owner. The
PCGG may, however, be granted such voting right provided in can (1)
show prima facie evidence that the wealth and/or the shares are indeed ill-
gotten; and (2) demonstrate imminent danger of dissipation of the assets,
thus necessitating their continued sequestration and voting by the
government until a decision, ruling with finality on their ownership, is
promulgated by the proper court.1âwphi1.nêt
However, the foregoing "two-tiered" test does not apply when the
sequestered stocks are acquired with funds that are prima facie public in
character or, at least, are affected with public interest. Inasmuch as the
subject UCPB shares in the present case were undisputably acquired with
coco levy funds which are public in character, then the right to vote them
shall be exercised by the PCGG. In sum, the "public character" test, not the
"two-tiered" one, applies in the instant controversy.
The Case
Before us is a Petition for Certiorari with a prayer for the issuance of a
temporary restraining order and/or a writ of preliminary injunction under Rule
65 of the Rules of Court, seeking to set aside the February 28, 2001
Order2 of the First Division of the Sandiganbayan3 in Civil Case Nos. 0033-A,
0033-B and 0033-F. The pertinent portions of the assailed Order read as
follows:
"In view hereof, the movants COCOFED, et al. and Ballares, et al. as
well as Eduardo Cojuangco, et al., who were acknowledged to be
registered stockholders of the UCPB are authorized, as are all other
registered stockholders of the United Coconut Planters Bank, until
further orders from this Court, to exercise their rights to vote their
shares of stock and themselves to be voted upon in the United
Coconut Planters Bank (UCPB) at the scheduled Stockholders'
Meeting on March 6, 2001 or on any subsequent continuation or
resetting thereof, and to perform such acts as will normally follow in
the exercise of these rights as registered stockholders.
"Since by way of form, the pleadings herein had been labeled as
praying for an injunction, the right of the movants to exercise their Page |
right as abovementioned will be subject to the posting of a nominal 26
bond in the amount of FIFTY THOUSAND PESOS (P50,000.00)
jointly for the defendants COCOFED, et al. and Ballares, et al., as
well as all other registered stockholders of sequestered shares in
that bank, and FIFTY THOUSAND PESOS (P50,000.00) for Eduardo
Cojuangco, Jr., et al., to answer for any undue damage or injury to
the United Coconut Planters Bank as may be attributed to their
exercise of their rights as registered stockholders."4
The Antecedents
The very roots of this case are anchored on the historic events that
transpired during the change of government in 1986. Immediately after the
1986 EDSA Revolution, then President Corazon C. Aquino issued Executive
Order (EO) Nos. 1,5 26 and 14.7
"On the explicit premise that 'vast resources of the government have been
amassed by former President Ferdinand E. Marcos, his immediate family,
relatives, and close associates both here and abroad,' the Presidential
Commission on Good Government (PCGG) was created by Executive Order
No. 1 to assist the President in the recovery of the ill-gotten wealth thus
accumulated whether located in the Philippines or abroad."8
Executive Order No. 2 states that the ill-gotten assets and properties are in
the form of bank accounts, deposits, trust accounts, shares of stocks,
buildings, shopping centers, condominiums, mansions, residences, estates,
and other kinds of real and personal properties in the Philippines and in
various countries of the world.9
Executive Order No. 14, on the other hand, empowered the PCGG, with the
assistance of the Office of the Solicitor General and other government
agencies, inter alia, to file and prosecute all cases investigated by it under
EO Nos. 1 and 2.
Pursuant to these laws, the PCGG issued and implemented numerous
sequestrations, freeze orders and provisional takeovers of allegedly ill-gotten
companies, assets and properties, real or personal.10
Among the properties sequestered by the Commission were shares of stock
in the United Coconut Planters Bank (UCPB) registered in the names of the
alleged "one million coconut farmers," the so-called Coconut Industry
Investment Fund companies (CIIF companies) and Private Respondent
Eduardo Cojuangco Jr. (hereinafter "Cojuangco").
In connection with the sequestration of the said UCPB shares, the PCGG, on
July 31, 1987, instituted an action for reconveyance, reversion, accounting,
restitution and damages docketed as Case No. 0033 in the Sandiganbayan.
On November 15, 1990, upon Motion11 of Private Respondent COCOFED,
the Sandiganbayan issued a Resolution12 lifting the sequestration of the
subject UCPB shares on the ground that herein private respondents – in
particular, COCOFED and the so-called CIIF companies – had not been
impleaded by the PCGG as parties-defendants in its July 31, 1987 Complaint
for reconveyance, reversion, accounting, restitution and damages. The
Sandiganbayan ruled that the Writ of Sequestration issued by the
Commission was automatically lifted for PCGG's failure to commence the
corresponding judicial action within the six-month period ending on August 2,
1987 provided under Section 26, Article XVIII of the 1987 Constitution. The
anti-graft court noted that though these entities were listed in an annex
appended to the Complaint, they had not been named as parties-
respondents.
This Sandiganbayan Resolution was challenged by the PCGG in a Petition
for Certiorari docketed as GR No. 96073 in this Court. Meanwhile, upon
motion of Cojuangco, the anti-graft court ordered the holding of elections for
the Board of Directors of UCPB. However, the PCGG applied for and was
granted by this Court a Restraining Order enjoining the holding of the
election. Subsequently, the Court lifted the Restraining Order and ordered
the UCPB to proceed with the election of its board of directors. Furthermore,
it allowed the sequestered shares to be voted by their registered owners.
The victory of the registered shareholders was fleeting because the Court,
acting on the solicitor general's Motion for Clarification/Manifestation, issued
a Resolution on February 16, 1993, declaring that "the right of petitioners
[herein private respondents] to vote stock in their names at the meetings of
the UCPB cannot be conceded at this time. That right still has to be
established by them before the Sandiganbayan. Until that is done, they
cannot be deemed legitimate owners of UCPB stock and cannot be accorded
the right to vote them."13 The dispositive portion of the said Resolution reads
as follows:
"IN VIEW OF THE FOREGOING, the Court recalls and sets aside
the Resolution dated March 3, 1992 and, pending resolution on the
merits of the action at bar, and until further orders, suspends the
effectivity of the lifting of the sequestration decreed by the
Sandiganbayan on November 15, 1990, and directs the restoration Page |
of the status quo ante, so as to allow the PCGG to continue voting 27
the shares of stock under sequestration at the meetings of the United
14
Coconut Planters Bank."
On January 23, 1995, the Court rendered its final Decision in GR No. 96073,
nullifying and setting aside the November 15, 1990 Resolution of the
Sandiganbayan which, as earlier stated, lifted the sequestration of the
subject UCPB shares. The express impleading of herein Respondents
COCOFED et al. was deemed unnecessary because "the judgment may
simply be directed against the shares of stock shown to have been issued in
consideration of ill-gotten wealth."15 Furthermore, the companies "are simply
the res in the actions for the recovery of illegally acquires wealth, and there
is, in principle, no cause of action against them and no ground to implead
them as defendants in said case."16
A month thereafter, the PCGG – pursuant to an Order of the Sandiganbayan
– subdivided Case No. 0033 into eight Complaints and docketed them as
Case Nos. 0033-A to 0033-H.
Six years later, on February 13, 2001, the Board of Directors of UCPB
received from the ACCRA Law Office a letter written on behalf of the
COCOFED and the alleged nameless one million coconut farmers,
demanding the holding of a stockholders' meeting for the purpose of, among
others, electing the board of directors. In response, the board approved a
Resolution calling for a stockholders' meeting on March 6, 2001 at three
o'clock in the afternoon.
On February 23, 2001, "COCOFED, et al. and Ballares, et al." filed the
"Class Action Omnibus Motion"17 referred to earlier in Sandiganbayan Civil
Case Nos. 0033-A, 0033-B and 0033-F, asking the court a quo:
"1. To enjoin the PCGG from voting the UCPB shares of stock
registered in the respective names of the more than one million
coconut farmers; and
"2. To enjoin the PCGG from voting the SMC shares registered in the
names of the 14 CIIF holding companies including those registered
in the name of the PCGG."18
On February 28, 2001, respondent court, after hearing the parties on oral
argument, issued the assailed Order.
Hence, this Petition by the Republic of the Philippines represented by the
PCGG.19
The case had initially been raffled to this Court's Third Division which, by a
vote of 3-2,20 issued a Resolution21 requiring the parties to maintain the status
quo existing before the issuance of the questioned Sandiganbayan Order
dated February 28, 2001. On March 7, 2001, Respondent COCOFED et al.
moved that the instant Petition be heard by the Court en banc.22 The Motion
was unanimously granted by the Third Division.
On March 13, 2001, the Court en banc resolved to accept the Third Division's
referral.23 It heard the case on Oral Argument in Baguio City on April 17,
2001. During the hearing, it admitted the intervention of a group of coconut
farmers and farm worker organizations, the Pambansang Koalisyon ng mga
Samahang Magsasaka at Manggagawa ng Niyugan (PKSMMN). The
coalition claims that its members have been excluded from the benefits of the
coconut levy fund. Inter alia, it joined petitioner in praying for the exclusion of
private respondents in voting the sequestered shares.
Issues
24
Petitioner submits the following issues for our consideration:
"A.
Despite the fact that the subject sequestered shares were purchased
with coconut levy funds (which were declared public in character)
and the continuing effectivity of Resolution dated February 16, 1993
in G.R. No. 96073 which allows the PCGG to vote said sequestered
shares, Respondent Sandiganbayan, with grave abuse of discretion,
issued its Order dated February 20, 2001 enjoining PCGG from
voting the sequestered shares of stock in UCPB.
"B.
The Respondent Sandiganbayan violated petitioner's right to due
process by taking cognizance of the Class Action Omnibus Motion
dated 23 February 2001 despite gross lack of sufficient notice and by
issuing the writ of preliminary injunction despite the obvious fact that
there was no actual pressing necessity or urgency to do so."
In its Resolution dated April 17, 2001, the Court defined the issue to be
resolved in the instant case simply as follows:
This Court's Ruling
Page |
The Petition is impressed with merit. 28
Main Issue:
Who May Vote the Sequestered Shares of Stock?
Simply stated, the gut substantive issue to be resolved in the present Petition
is: "Who may vote the sequestered UCPB shares while the main case for
their reversion to the State is pending in the Sandiganbayan?"
This Court holds that the government should be allowed to continue voting
those shares inasmuch as they were purchased with coconut levy funds –
that are prima facie public in character or, at the very least, are "clearly
affected with public interest."
General Rule: Sequestered Shares
Are Voted by the Registered Holder
At the outset, it is necessary to restate the general rule that the registered
owner of the shares of a corporation exercises the right and the privilege of
voting.25 This principle applies even to shares that are sequestered by the
government, over which the PCGG as a mere conservator cannot, as a
general rule, exercise acts of dominion.26 On the other hand, it is authorized
to vote these sequestered shares registered in the names of private persons
and acquired with allegedly ill-gotten wealth, if it is able to satisfy the two-
tiered test devised by the Court in Cojuangco v. Calpo27 and PCGG v.
Cojuangco Jr.,28 as follows:
(1) Is there prima facie evidence showing that the said shares are ill-
gotten and thus belong to the State?
(2) Is there an imminent danger of dissipation, thus necessitating
their continued sequestration and voting by the PCGG, while the
main issue is pending with the Sandiganbayan?
Sequestered Shares Acquired with Public Funds are an Exception
From the foregoing general principle, the Court in Baseco v.
PCGG29 (hereinafter "Baseco") and Cojuangco Jr. v. Roxas30 ("Cojuangco-
Roxas") has provided two clear "public character" exceptions under which
the government is granted the authority to vote the shares:
(1) Where government shares are taken over by private persons or
entities who/which registered them in their own names, and
(2) Where the capitalization or shares that were acquired with public
funds somehow landed in private hands.
The exceptions are based on the common-sense principle that legal fiction
must yield to truth; that public property registered in the names of non-
owners is affected with trust relations; and that the prima facie beneficial
owner should be given the privilege of enjoying the rights flowing from
the prima facie fact of ownership.
In Baseco, a private corporation known as the Bataan Shipyard and
Engineering Co. was placed under sequestration by the PCGG. Explained
the Court:
"The facts show that the corporation known as BASECO was owned
and controlled by President Marcos 'during his administration,
through nominees, by taking undue advantage of his public office
and/or using his powers, authority, or influence,' and that it was by
and through the same means, that BASECO had taken over the
business and/or assets of the National Shipyard and Engineering
Co., Inc., and other government-owned or controlled entities."31
Given this factual background, the Court discussed PCGG's right over
BASECO in the following manner:
"Now, in the special instance of a business enterprise shown by
evidence to have been 'taken over by the government of the Marcos
Administration or by entities or persons close to former President
Marcos,' the PCGG is given power and authority, as already
adverted to, to 'provisionally take (it) over in the public interest or to
prevent * * (its) disposal or dissipation;' and since the term is
obviously employed in reference to going concerns, or business
enterprises in operation, something more than mere physical custody
is connoted; the PCGG may in this case exercise some measure of
control in the operation, running, or management of the business
itself."32
Citing an earlier Resolution, it ruled further:
"Petitioner has failed to make out a case of grave abuse or excess of
jurisdiction in respondents' calling and holding of a stockholders'
meeting for the election of directors as authorized by the Page |
Memorandum of the President * * (to the PCGG) dated June 26, 29
1986, particularly, where as in this case, the government can,
through its designated directors, properly exercise control and
management over what appear to be properties and assets owned
and belonging to the government itself and over which the persons
who appear in this case on behalf of BASECO have failed to show
any right or even any shareholding in said corporation."33 (Italics
supplied)
The Court granted PCGG the right to vote the sequestered shares because
they appeared to be "assets belonging to the government itself." The
Concurring Opinion of Justice Ameurfina A. Melencio-Herrera, in which she
was joined by Justice Florentino P. Feliciano, explained this principle as
follows:
"I have no objection to according the right to vote sequestered stock
in case of a take-over of business actually belonging to the
government or whose capitalization comes from public funds but
which, somehow, landed in the hands of private persons, as in the
case of BASECO. To my mind, however, caution and prudence
should be exercised in the case of sequestered shares of an on-
going private business enterprise, specially the sensitive ones, since
the true and real ownership of said shares is yet to be determined
and proven more conclusively by the Courts."34 (Italics supplied)
The exception was cited again by the Court in Cojuangco-Roxas35 in this
wise:
"The rule in this jurisdiction is, therefore, clear. The PCGG cannot
perform acts of strict ownership of sequestered property. It is a mere
conservator. It may not vote the shares in a corporation and elect the
members of the board of directors. The only conceivable exception
is in a case of a takeover of a business belonging to the government
or whose capitalization comes from public funds, but which landed in
private hands as in BASECO."36 (Italics supplied)
The "public character" test was reiterated in many subsequent cases; most
recently, in Antiporda v. Sandiganbayan.37 Expressly citing Conjuangco-
Roxas,38 this Court said that in determining the issue of whether the PCGG
should be allowed to vote sequestered shares, it was crucial to find out first
whether these were purchased with public funds, as follows:
"It is thus important to determine first if the sequestered corporate
shares came from public funds that landed in private hands."39
In short, when sequestered shares registered in the names of private
individuals or entities are alleged to have been acquired with ill-gotten
wealth, then the two-tiered test is applied. However, when the sequestered
shares in the name of private individuals or entities are shown, prima facie, to
have been (1) originally government shares, or (2) purchased with public
funds or those affected with public interest, then the two-tiered test does not
apply. Rather, the public character exceptions in Baseco v.
PCGG and Cojuangco Jr. v. Roxas prevail; that is, the government shall vote
the shares.
UCPB Shares Were Acquired With Coconut Levy Funds
In the present case before the Court, it is not disputed that the money used
to purchase the sequestered UCPB shares came from the Coconut
Consumer Stabilization Fund (CCSF), otherwise known as the coconut levy
funds.
This fact was plainly admitted by private respondent's counsel, Atty.
Teresita J. Herbosa, during the Oral Arguments held on April 17, 2001 in
Baguio City, as follows:
"Justice Panganiban:
"In regard to the theory of the Solicitor General that the funds used to
purchase [both] the original 28 million and the subsequent 80 million
came from the CCSF, Coconut Consumers Stabilization Fund, do
you agree with that?
"Atty. Herbosa:
"Yes, Your Honor.
xxx xxx xxx
"Justice Panganiban:
"So it seems that the parties [have] agreed up to that point that the
funds used to purchase 72% of the former First United Bank came
from the Coconut Consumer Stabilization Fund?
"Atty. Herbosa: Page |
30
"Yes, Your Honor."40
Indeed in Cocofed v. PCGG,41 this Court categorically declared that
the UCPB was acquired "with the use of the Coconut Consumers
Stabilization Fund in virtue of Presidential Decree No. 755,
promulgated on July 29, 1975."
Coconut Levy Funds Are Affected With Public Interest
Having conclusively shown that the sequestered UCPB shares were
purchased with coconut levies, we hold that these funds and shares are, at
the very least, "affected with public interest."
The Resolution issued by the Court on February 16, 1993 in Republic v.
Sandiganbayan42 stated that coconut levy funds were "clearly affected with
public interest"; thus, herein private respondents – even if they are the
registered shareholders – cannot be accorded the right to vote them. We
quote the said Resolution in part, as follows:
"The coconut levy funds being 'clearly affected with public interest, it
follows that the corporations formed and organized from those funds,
and all assets acquired therefrom should also be regarded as 'clearly
affected with public interest.'"43
xxx xxx xxx
"Assuming, however, for purposes of argument merely, the lifting of
sequestration to be correct, may it also be assumed that the lifting of
sequestration removed the character of the coconut levy companies
of being affected with public interest, so that they and their stock and
assets may now be considered to be of private ownership? May it be
assumed that the lifting of sequestration operated to relieve the
holders of stock in the coconut levy companies – affected with public
interest – of the obligation of proving how that stock had been
legitimately transferred to private ownership, or that those
stockholders who had had some part in the collection, administration,
or disposition of the coconut levy funds are now deemed qualified to
 acquire said stock, and freed from any doubt or suspicion that they
had taken advantage of their special or fiduciary relation with the
agencies in charge of the coconut levies and the funds thereby
accumulated? The obvious answer to each of the questions is a
negative one. It seems plain that the lifting of sequestration has no
relevance to the nature of the coconut levy companies or their stock
or property, or to the legality of the acquisition by private persons of
their interest therein, or to the latter's capacity or disqualification to
acquire stock in the companies or any property acquired from
coconut levy funds.
"This being so, the right of the [petitioners] to vote stock in their
names at the meetings of the UCPB cannot be conceded at this
time. That right still has to be established by them before the
Sandiganbayan. Until that is done, they cannot be deemed
legitimate owners of UCPB stock and cannot be accorded the right
to vote them."44 (Italics supplied)
It is however contended by respondents that this Resolution was in the
nature of a temporary restraining order. As such, it was supposedly
interlocutory in character and became functus oficio when this Court decided
GR No. 96073 on January 23, 1995.
This argument is aptly answered by petitioner in its Memorandum, which we
quote:
"The ruling made in the Resolution dated 16 February 1993
confirming the public nature of the coconut levy funds and denying
claimants their purported right to vote is an affirmation of doctrines
laid down in the cases of COCOFED v. PCGG supra, Baseco v.
PCGG, supra, and Cojuangco v. Roxas, supra. Therefore it is of no
moment that the Resolution dated 16 February 1993 has not been
ratified. Its jurisprudential based remain."45 (Italics supplied)
To repeat, the foregoing juridical situation has not changed. It is still the truth
today: "the coconut levy funds are clearly affected with public interest."
Private respondents have not "demonstrated satisfactorily that they have
legitimately become private funds."
If private respondents really and sincerely believed that the final Decision of
the Court in Republic v. Sandiganbayan (GR No. 96073, promulgated on
January 23, 1995) granted them the right to vote, why did they wait for the
lapse of six long years before definitively asserting it (1) through their letter
dated February 13, 2001, addressed to the UCPB Board of Directors,
demanding the holding of a shareholders' meeting on March 6, 2001; and (2)
through their Omnibus Motion dated February 23, 2001 filed in the court a
quo, seeking to enjoin PCGG from voting the subject sequestered shares
during the said stockholders' meeting? Certainly, if they even half believed
their submission now – that they already had such right in 1995 – why are Page |
they suddenly and imperiously claiming it only now? 31
It should be stressed at this point that the assailed Sandiganbayan Order
dated February 28, 2001 – allowing private respondents to vote the
sequestered shares – is not based on any finding that the coconut levies and
the shares have "legitimately become private funds." Neither is it based on
the alleged lifting of the TRO issued by this Court on February 16, 1993.
Rather, it is anchored on the grossly mistaken application of the two-tiered
test mentioned earlier in this Decision.
To stress, the two-tiered test is applied only when the sequestered asset in
the hands of a private person is alleged to have been acquired with ill-gotten
wealth. Hence, in PCGG v. Cojuangco,47 we allowed Eduardo Cojuangco Jr.
to vote the sequestered shares of the San Miguel Corporation (SMC)
registered in his name but alleged to have been acquired with ill-gotten
wealth. We did so on his representation that he had acquired them with
borrowed funds and upon failure of the PCGG to satisfy the "two-tiered" test.
This test was, however, not applied to sequestered SMC shares that were
purchased with coco levy funds.
In the present case, the sequestered UCPB shares are confirmed to have
been acquired with coco levies, not with alleged ill-gotten wealth. Hence, by
parity of reasoning, the right to vote them is not subject to the "two-tiered
test" but to the public character of their acquisition, which per Antiporda v.
Sandiganbayan cited earlier, must first be determined.
Coconut Levy Funds Are Prima Facie Public Funds
To avoid misunderstanding and confusion, this Court will even be more
categorical and positive than its earlier pronouncements: the coconut levy
funds are not only affected with public interest; they are, in fact, prima
facie public funds.
Public funds are those moneys belonging to the State or to any political
subdivision of the State; more specifically, taxes, customs duties and moneys
raised by operation of law for the support of the government or for the
discharge of its obligations.48 Undeniably, coconut levy funds satisfy this
general definition of public funds, because of the following reasons:
 1. Coconut levy funds are raised with the use of the police and taxing
powers of the State.
2. They are levies imposed by the State for the benefit of the coconut
industry and its farmers.
3. Respondents have judicially admitted that the sequestered shares
were purchased with public funds.
4. The Commission on Audit (COA) reviews the use of coconut levy
funds.
5. The Bureau of Internal Revenue (BIR), with the acquiescence of
private respondents, has treated them as public funds.
6. The very laws governing coconut levies recognize their public
character.
We shall now discuss each of the foregoing reasons, any one of which is
enough to show their public character.
1. Coconut Levy Funds Are Raised Through the State's Police and
Taxing Powers.
Indeed, coconut levy funds partake of the nature of taxes which, in general,
are enforced proportional contributions from persons and properties, exacted
by the State by virtue of its sovereignty for the support of government and for
all public needs.49
Based on this definition, a tax has three elements, namely: a) it is an
enforced proportional contribution from persons and properties; b) it is
imposed by the State by virtue of its sovereignty; and c) it is levied for the
support of the government. The coconut levy funds fall squarely into these
elements for the following reasons:
(a) They were generated by virtue of statutory enactments imposed
on the coconut farmers requiring the payment of prescribed
amounts. Thus, PD No. 276, which created the Coconut Consumer
Stabilization Fund (CCSF), mandated the following:
"a. A levy, initially, of P15.00 per 100 kilograms of copra resecada or
its equivalent in other coconut products, shall be imposed on every
first sale, in accordance with the mechanics established under RA
6260, effective at the start of business hours on August 10, 1973.
"The proceeds from the levy shall be deposited with the Philippine
National Bank or any other government bank to the account of the Page |
Coconut Consumers Stabilization Fund, as a separate trust fund 32
which shall not form part of the general fund of the government."50
The coco levies were further clarified in amendatory laws, specifically
PD No. 96151 and PD No. 146852 – in this wise:
"The Authority (Philippine Coconut Authority) is hereby empowered
to impose and collect a levy, to be known as the Coconut
Consumers Stabilization Fund Levy, on every one hundred kilos of
copra resecada, or its equivalent in other coconut products delivered
to, and/or purchased by, copra exporters, oil millers, desiccators and
other end-users of copra or its equivalent in other coconut products.
The levy shall be paid by such copra exporters, oil millers,
desiccators and other end-users of copra or its equivalent in other
coconut products under such rules and regulations as the Authority
may prescribe. Until otherwise prescribed by the Authority, the
current levy being collected shall be continued."53
Like other tax measures, they were not voluntary payments or
donations by the people. They were enforced contributions exacted
on pain of penal sanctions, as provided under PD No. 276:
"3. Any person or firm who violates any provision of this Decree or
the rules and regulations promulgated thereunder, shall, in addition
to penalties already prescribed under existing administrative and
special law, pay a fine of not less than P2,500 or more than P10,000,
or suffer cancellation of licenses to operate, or both, at the discretion
of the Court."54
Such penalties were later amended thus:
"Whenever any person or entity willfully and deliberately violates any
of the provisions of this Act, or any rule or regulation legally
promulgated hereunder by the Authority, the person or persons
responsible for such violation shall be punished by a fine of not more
than P20,000.00 and by imprisonment of not more than five years. If
the offender be a corporation, partnership or a juridical person, the
penalty shall be imposed on the officer or officers authorizing,
permitting or tolerating the violation. Aliens found guilty of any
 offenses shall, after having served his sentence, be immediately
deported and, in the case of a naturalized citizen, his certificate of
naturalization shall be cancelled."55
(b) The coconut levies were imposed pursuant to the laws enacted
by the proper legislative authorities of the State. Indeed, the CCSF
was collected under PD No. 276, issued by former President
Ferdinand E. Marcos who was then exercising legislative powers.56
(c) They were clearly imposed for a public purpose. There is
absolutely no question that they were collected to advance the
government's avowed policy of protecting the coconut industry. This
Court takes judicial notice of the fact that the coconut industry is one
of the great economic pillars of our nation, and coconuts and their
byproducts occupy a leading position among the country's export
products; that it gives employment to thousands of Filipinos; that it is
a great source of the state's wealth; and that it is one of the important
sources of foreign exchange needed by our country and, thus,
pivotal in the plans of a government committed to a policy of
currency stability.
Taxation is done not merely to raise revenues to support the government, but
also to provide means for the rehabilitation and the stabilization of a
threatened industry, which is so affected with public interest as to be within
the police power of the State, as held in Caltex Philippines v.
COA57 and Osmeña v. Orbos.58
Even if the money is allocated for a special purpose and raised by special
means, it is still public in character. In the case before us, the funds were
even used to organize and finance State offices. In Cocofed v. PCGG,59 the
Court observed that certain agencies or enterprises "were organized and
financed with revenues derived from coconut levies imposed under a
succession of laws of the late dictatorship x x x with deposed Ferdinand
Marcos and his cronies as the suspected authors and chief beneficiaries of
the resulting coconut industry monopoly."60 The Court continued: "x x x. It
cannot be denied that the coconut industry is one of the major industries
supporting the national economy. It is, therefore, the State's concern to make
it a strong and secure source not only of the livelihood of a significant
segment of the population, but also of export earnings the sustained growth
of which is one of the imperatives of economic stability. x x x."61
2. Coconut Funds Are Levied for the Benefit of the Coconut Industry
and Its Farmers.
Just like the sugar levy funds, the coconut levy funds constitute state funds
even though they may be held for a special public purpose.
In fact, Executive Order No. 481 dated May 1, 1998 specifically likens the
coconut levy funds to the sugar levy funds, both being special public funds Page |
acquired through the taxing and police powers of the State. The sugar 33
levy funds, which are strikingly similar to the coconut levies in their imposition
and purpose, were declared public funds by this Court in Gaston v. Republic
Planters Bank,62 from which we quote:
"The stabilization fees collected are in the nature of a tax which is
within the power of the state to impose for the promotion of the sugar
industry (Lutz vs. Araneta, 98 Phil. 148). They constitute sugar liens
(Sec. 7[b], P.D. No. 388). The collections made accrue to a 'Special
Fund,' a 'Development and Stabilization Fund,' almost identical to the
'Sugar Adjustment and Stabilization Fund' created under Section 6 of
Commonwealth Act 567. The tax collected is not in a pure exercise
of the taxing power. It is levied with a regulatory purpose, to provide
means for the stabilization of the sugar industry. The levy is primarily
in the exercise of the police power of the State. (Lutz vs.
Araneta, supra.)."63
The Court further explained:64
"The stabilization fees in question are levied by the State upon sugar
millers, planters and producers for a special purpose – that of
'financing the growth and development of the sugar industry and all
its components, stabilization of the domestic market including the
foreign market.' The fact that the State has taken possession of
moneys pursuant to law is sufficient to constitute them as state
funds, even though they are held for a special purpose (Lawrence v.
American Surety Co., 263 Mich 586. 294 ALR 535, cited in 42 Am.
Jur., Sec. 2., p. 718). Having been levied for a special purpose, the
revenues collected are to be treated as a special fund, to be, in the
language of the statute, 'administered in trust' for the purpose
intended. Once the purpose has been fulfilled or abandoned, the
balance, if any, is to be transferred to the general funds of the
Government. That is the essence of the trust intended (see 1987
Constitution, Art. VI, Sec. 29[3], lifted from the 1935 Constitution,
Article VI, Sec. 23[1]. (Italics supplied)
"The character of the Stabilization Fund as a special fund is
emphasized by the fact that the funds are deposited in the Philippine
National Bank and not in the Philippine Treasury, moneys from which
 may be paid out only in pursuance of an appropriation made by law
(1987 Constitution, Article VI, Sec. 29[1], 1973 Constitution, Article
VIII, Sec. 18[1]).
"That the fees were collected from sugar producers, planters and
millers, and that the funds were channeled to the purchase of shares
of stock in respondent Bank do not convert the funds into a trust fund
for their benefit nor make them the beneficial owners of the shares
so purchased. It is but rational that the fees be collected from them
since it is also they who are to be benefited from the expenditure of
the funds derived from it. The investment in shares of respondent
Bank is not alien to the purpose intended because of the Bank's
character as a commodity bank for sugar conceived for the industry's
growth and development. Furthermore, of note is the fact that one-
half (1/2) or P0.50 per picul, of the amount levied under P.D. No. 388
is to be utilized for the 'payment of salaries and wages of personnel,
fringe benefits and allowances of officers and employees of
PHILSUCOM' thereby immediately negating the claim that the entire
amount levied is in trust for sugar, producers, planters and millers.
"To rule in petitioners' favor would contravene the general principle
that revenues derived from taxes cannot be used for purely private
purposes or for the exclusive benefit of private persons. The
Stabilization Fund is to be utilized for the benefit of the entire sugar
industry, 'and all its components, stabilization of the domestic market
including the foreign market,' the industry being of vital importance to
the country's economy and to national interest."
In the same manner, this Court has also ruled that the oil stabilization funds
were public in character and subject to audit by COA. It ruled in this wise:
"Hence, it seems clear that while the funds collected may be referred
to as taxes, they are exacted in the exercise of the police power of
the State. Moreover, that the OPSF is a special fund is plain from the
special treatment given it by E.O. 137. It is segregated from the
general fund; and while it is placed in what the law refers to as a
'trust liability account,' the fund nonetheless remains subject to the
scrutiny and review of the COA. The Court is satisfied that these
measures comply with the constitutional description of a 'special
fund.' Indeed, the practice is not without precedent."65
In his Concurring Opinion in Kilosbayan v. Guingona,66 Justice Florentino P.
Feliciano explained that the funds raised by the On-line Lottery System were
also public in nature. In his words:
"x x x. In the case presently before the Court, the funds involved are
clearly public in nature. The funds to be generated by the proposed
lottery are to be raised from the population at large. Should the
proposed operation be as successful as its proponents project, those
funds will come from well-nigh every town and barrio of Luzon. The Page |
funds here involved are public in another very real sense: they will 34
belong to the PCSO, a government owned or controlled corporation
and an instrumentality of the government and are destined for
utilization in social development projects which, at least in principle,
are designed to benefit the general public. x x x. The interest of a
private citizen in seeing to it that public funds, from whatever source
they may have been derived, go only to the uses directed and
permitted by law is as real and personal and substantial as the
interest of a private taxpayer in seeing to it that tax monies are not
intercepted on their way to the public treasury or otherwise diverted
from uses prescribed or allowed by law. It is also pertinent to note
that the more successful the government is in raising revenues by
non-traditional methods such as PAGCOR operations and
privatization measures, the lesser will be the pressure upon the
traditional sources of public revenues, i.e., the pocket books of
individual taxpayers and importers."67
Thus, the coconut levy funds – like the sugar levy and the oil stabilization
funds, as well as the monies generated by the On-line Lottery System – are
funds exacted by the State. Being enforced contributions, the are prima
facie public funds.
3. Respondents Judicially Admit That the Levies Are Government
Funds.
Equally important as the fact that the coconut levy funds were raised through
the taxing and police powers of the State is respondents' effective judicial
admission that these levies are government funds. As shown by the
attachments to their pleadings,68 respondents concede that the Coconut
Consumers Stabilization Fund (CCSF) and the Coconut Investment
Development Fund "constitute government funds x x x for the benefit of
coconut farmers."
"Collections on both levies constitute government funds. However,
unlike other taxes that the Government levies and collects such as
income tax, tariff and customs duties, etc., the collections on the
CCSF and CIDF are, by express provision of the laws imposing
them, for a definite purpose, not just for any governmental purpose.
As stated above part of the collections on the CCSF levy should be
 spent for the benefit of the coconut farmers. And in respect of the
collections on the CIDF levy, P.D. 582 mandatorily requires that the
same should be spent exclusively for the establishment, operation
and maintenance of a hybrid coconut seed garden and the
distribution, for free, to the coconut farmers of the hybrid coconut
seednuts produced from that seed garden.
"On the other hand, the laws which impose special levies on specific
industries, for example on the mining industry, sugar industry, timber
industry, etc., do not, by their terms, expressly require that the
collections on those levies be spent exclusively for the benefit of the
industry concerned. And if the enabling law thus so provide, the fact
remains that the governmental agency entrusted with the duty of
implementing the purpose for which the levy is imposed is vested
with the discretionary power to determine when and how the
collections should be appropriated."69
4. The COA Audit Shows the Public Nature of the Funds.
Under COA Office Order No. 86-9470 dated April 15, 1986,70 the COA
reviewed the expenditure and use of the coconut levies allocated for the
acquisition of the UCPB. The audit was aimed at ascertaining whether these
were utilized for the purpose for which they had been intended.71 Under the
1987 Constitution, the powers of the COA are as follows:
"The Commission on Audit shall have the power, authority, and duty
to examine, audit, and settle all accounts pertaining to the revenue
and receipts of, and expenditures or uses of funds and property,
owned or held in trust by, or pertaining to, the Government, or any of
its subdivisions, agencies, or instrumentalities x x x."72
Because these funds have been subjected to COA audit, there can be no
other conclusion than that are prima facie public in character.
5. The BIR Has Pronounced That the Coconut Levy Funds Are Taxes.
In response to a query posed by the administrator of the Philippine Coconut
Authority regarding the character of the coconut levy funds, the Bureau of
Internal Revenue has affirmed that these funds are public in character. It held
as follows: "[T]he coconut levy is not a public trust fund for the benefit of the
coconut farmers, but is in the nature of a tax and, therefore, x x x public
funds that are subject to government administration and disposition."73
Furthermore, the executive branch treats the coconut levies as public funds.
Thus, Executive Order No. 277, issued on September 24, 1995, directed the
mode of treatment, utilization, administration and management of the
coconut levy funds. It provided as follows:
Page |
'(a) The coconut levy funds, which include all income, interests, 35
proceeds or profits derived therefrom, as well as all assets,
properties and shares of stocks procured or obtained with the use of
such funds, shall be treated, utilized, administered and managed as
public funds consistent with the uses and purposes under the laws
which constituted them and the development priorities of the
government, including the government's coconut productivity,
rehabilitation, research extension, farmers organizations, and market
promotions programs, which are designed to advance the
development of the coconut industry and the welfare of the coconut
farmers."74 (Italics supplied)
Doctrinally, acts of the executive branch are prima facie valid and binding,
unless declared unconstitutional or contrary to law.
6. Laws Governing Coconut Levies Recognize Their Public Nature.
Finally and tellingly, the very laws governing the coconut levies recognize
their public character. Thus, the third Whereas clause of PD No. 276 treats
them as special funds for a specific public purpose. Furthermore, PD No. 711
transferred to the general funds of the State all existing special and fiduciary
funds including the CCSF. On the other hand, PD No. 1234 specifically
declared the CCSF as a special fund for a special purpose, which should be
treated as a special account in the National Treasury.
Moreover, even President Marcos himself, as the sole legislative/executive
authority during the martial law years, struck off the phrase which is a private
fund of the coconut farmers from the original copy of Executive Order No.
504 dated May 31, 1978, and we quote:
"WHEREAS, by means of the Coconut Consumers Stabilization
Fund ('CCSF'), which is the private fund of the coconut
farmers (deleted), essential coconut-based products are made
available to household consumers at socialized prices." (Emphasis
supplied)
The phrase in bold face -- which is the private fund of the coconut
farmers – was crossed out and duly initialed by its author, former, President
Marcos. This deletion, clearly visible in "Attachment C" of petitioner's
Memorandum,75 was a categorical legislative intent to regard the CCSF as
public, not private, funds.
Having Been Acquired With Public Funds, UCPB Shares Belong, Prima
Facie, to the Government
Having shown that the coconut levy funds are not only affected with public
interest, but are in fact prima facie public funds, this Court believes that the
government should be allowed to vote the questioned shares, because they
belong to it as the prima facie beneficial and true owner.
As stated at the beginning, voting is an act of dominion that should be
exercised by the share owner. One of the recognized rights of an owner is
the right to vote at meetings of the corporation. The right to vote is classified
as the right to control.76 Voting rights may be for the purpose of, among
others, electing or removing directors, amending a charter, or making or
amending by laws.77 Because the subject UCPB shares were acquired with
government funds, the government becomes their prima facie beneficial and
true owner.
Ownership includes the right to enjoy, dispose of, exclude and recover a
thing without limitations other than those established by law or by the
owner.78 Ownership has been aptly described as the most comprehensive of
all real rights.79 And the right to vote shares is a mere incident of ownership.
In the present case, the government has been shown to be the prima
facie owner of the funds used to purchase the shares. Hence, it should be
allowed the rights and privileges flowing from such fact.
And paraphrasing Cocofed v. PCGG, already cited earlier, the Republic
should continue to vote those shares until and unless private respondents
are able to demonstrate, in the main cases pending before the
Sandiganbayan, that "they [the sequestered UCPB shares] have legitimately
become private."
Procedural and Incidental Issues:
Grave Abuse of Discretion, Improper Arguments and Intervenors' Relief
Procedurally, respondents argue that petitioner has failed to demonstrate
that the Sandiganbayan committed grave abuse of discretion, a
demonstration required in every petition under Rule 65.80
We disagree. We hold that the Sandiganbayan gravely abused its discretion
when it contravened the rulings of this Court in Baseco and Cojuangco-
Roxas – thereby unlawfully, capriciously and arbitrarily depriving the
government of its right to vote sequestered shares purchased with coconut
levy funds which are prima facie public funds. Page |
36
Indeed, grave abuse of discretion may arise when a lower court or tribunal
violates or contravenes the Constitution, the law or existing jurisprudence. In
one case,81 this Court ruled that the lower court's resolution was "tantamount
to overruling a judicial pronouncement of the highest Court x x x and
unmistakably a very grave abuse of discretion."82
The Public Character of Shares Is a Valid Issue
Private respondents also contend that the public nature of the coconut levy
funds was not raised as an issue before the Sandiganbayan. Hence, it could
not be taken up before this Court.
Again we disagree. By ruling that the two-tiered test should be applied in
evaluating private respondents' claim of exercising voting rights over the
sequestered shares, the Sandiganbayan effectively held that the subject
assets were private in character. Thus, to meet this issue, the Office of the
Solicitor General countered that the shares were not private in character, and
that quite the contrary, they were and are public in nature because they were
acquired with coco levy funds which are public in character. In short, the
main issue of who may vote the shares cannot be determined without
passing upon the question of the public/private character of the shares and
the funds used to acquire them. The latter issue, although not specifically
raised in the Court a quo, should still be resolved in order to fully adjudicate
the main issue.
Indeed, this Court has "the authority to waive the lack of proper assignment
of errors if the unassigned errors closely relate to errors properly pinpointed
out or if the unassigned errors refer to matters upon which the determination
of the questions raised by the errors properly assigned depend."83
Therefore, "where the issues already raised also rest on other issues not
specifically presented as long as the latter issues bear relevance and close
relation to the former and as long as they arise from matters on record, the
Court has the authority to include them in its discussion of the controversy as
well as to pass upon them."84
No Positive Relief For Intervenors
Intervenors anchor their interest in this case on an alleged right that they are
trying to enforce in another Sandiganbayan case docketed as SB Case No.
0187.85 In that case, they seek the recovery of the subject UCPB shares from
herein private respondents and the corporations controlled by them.
Therefore, the rights sought to be protected and the reliefs prayed for by
intervenors are still being litigated in the said case. The purported rights they
are invoking are mere expectancies wholly dependent on the outcome of that
case in the Sandiganbayan.
the only issue settled here is the right of PCGG to vote the sequestered
shares, pending the final outcome of said cases.
This matter involving the coconut levy funds and the sequestered UCPB
shares has been straddling the courts for about 15 years. What we are Page |
discussing in the present Petition, we stress, is just an incident of the main 37
cases which are pending in the anti-graft court – the cases for the
reconveyance, reversion and restitution to the State of these UCPB shares.

Clearly, we cannot rule on intervenors' alleged right to vote at this time and in
this case. That right is dependent upon the Sandiganbayan's resolution of
their action for the recovery of said sequestered shares. Given the patent fact
that intervenors are not registered stockholders of UCPB as of the moment,
their asserted rights cannot be ruled upon in the present proceedings.
Hence, no positive relief can be given them now, except insofar as they join
petitioner in barring private respondents from voting the subject shares.
Epilogue
In sum, we hold that the Sandiganbayan committed grave abuse of discretion
in grossly contradicting and effectively reversing existing jurisprudence, and
in depriving the government of its right to vote the sequestered UCPB shares
which are prima facie public in character.
In making this ruling, we are in no way preempting the proceedings the
Sandiganbayan may conduct or the final judgment it may promulgate in Civil
Case Nos. 0033-A, 0033-B and 0033-F. Our determination here is
merely prima facie, and should not bar the anti-graft court from making a final
ruling, after proper trial and hearing, on the issues and prayers in the said
civil cases, particularly in reference to the ownership of the subject shares.
The resolution of the main cases has indeed been long overdue. Every effort,
both by the parties and the Sandiganbayan, should be exerted to finally settle
this controversy.
WHEREFORE, the Petition is hereby GRANTED and the assailed
Order SET ASIDE. The PCGG shall continue voting the sequestered shares
until Sandiganbayan Civil Case Nos. 0033-A, 0033-B and 0033-F are finally
and completely resolved. Furthermore, the Sandiganbayan is ORDERED to
decide with finality the aforesaid civil cases within a period of six (6) months
from notice. It shall report to this Court on the progress of the said cases
every three (3) months, on pain of contempt. The Petition in Intervention
is DISMISSED inasmuch as the reliefs prayed for are not covered by the
main issues in this case. No costs.
SO ORDERED.

We also lay down the caveat that, in declaring the coco levy funds to
be prima facie public in character, we are not ruling in any final manner on
their classification – whether they are general or trust or special funds – since
such classification is not at issue here. Suffice it to say that the public nature
of the coco levy funds is decreed by the Court only for the purpose of
determining the right to vote the shares, pending the final outcome of the
said civil cases.

Neither are we resolving in the present case the question of whether the
shares held by Respondent Cojuangco are, as he claims, the result of private
enterprise. This factual matter should also be taken up in the final decision in
the cited cases that are pending in the court a quo. Again suffice it to say that
G.R. No. 170783 June 18, 2012
LEGASPI TOWERS 300, INC., LILIA MARQUINEZ PALANCA, ROSANNA
D. IMAI, GLORIA DOMINGO and RAY VINCENT, Petitioners,
vs.
AMELIA P. MUER, SAMUEL M. TANCHOCO, ROMEO TANKIANG,
RUDEL PANGANIBAN, DOLORES AGBAYANI, ARLENEDAL A.
YASUMA, GODOFREDO M. CAGUIOA and EDGARDO M.
SALANDANAN, Respondents.
DECISION
PERALTA, J.:
This is a petition for review on certiorari of the Court of Appeals’
Decision1 dated July 22, 2005 in CA-G.R. CV No. 87684, and its
Resolution2 dated November 24, 2005, denying petitioners’ motion for
reconsideration.
The Court of Appeals held that Judge Antonio I. De Castro of the Regional
Trial Court (RTC) of Manila, Branch 3, did not commit grave abuse of
discretion in issuing the Orders dated July 21, 2004 and September 24, 2004
in Civil Case No. 04-109655, denying petitioners’ Motion to Admit Second
Amended Complaint.
The facts, as stated by the Court of Appeals, are as follows:
Pursuant to the by-laws of Legaspi Towers 300, Inc., petitioners Lilia
Marquinez Palanca, Rosanna D. Imai, Gloria Domingo and Ray Vincent, the
incumbent Board of Directors, set the annual meeting of the members of the
condominium corporation and the election of the new Board of Directors for
the years 2004-2005 on April 2, 2004 at 5:00 p.m. at the lobby of Legaspi
Towers 300, Inc.
Out of a total number of 5,723 members who were entitled to vote, 1,358
were supposed to vote through their respective proxies and their votes were
critical in determining the existence of a quorum, which was at least 2,863
(50% plus 1). The Committee on Elections of Legaspi Towers 300, Inc.,
however, found most of the proxy votes, at its face value, irregular, thus,
questionable; and for lack of time to authenticate the same, petitioners
adjourned the meeting for lack of quorum.
However, the group of respondents challenged the adjournment of the
meeting. Despite petitioners' insistence that no quorum was obtained during
the annual meeting held on April 2, 2004, respondents pushed through with
the scheduled election and were elected as the new Board of Directors and
officers of Legaspi Towers 300, Inc. Subsequently, they submitted a General Page |
Information Sheet to the Securities and Exchange Commission (SEC) with 38
the following new set of officers: Amelia P. Muer, President; Samuel M.
Tanchoco, Internal Vice President; Romeo V. Tankiang, External Vice-
President; Rudel H. Panganiban, Secretary; Dolores B. Agbayani, Assistant
Secretary; Arlenedal A. Yasuma, Treasurer; Godofredo M. Caguioa,
Assistant Treasurer; and Edgardo M. Salandanan, Internal Auditor.
On April 13, 2004, petitioners filed a Complaint for the Declaration of Nullity
of Elections with Prayers for the lssuance of Temporary Restraining Orders
and Writ of Preliminary Injunction and Damages against respondents with
the RTC of Manila. Before respondents could file an Answer to the original
Complaint, petitioners filed an Amended Complaint, which was admitted by
the RTC in an Order dated April 14, 2004.
On April 20, 2004, before respondents could submit an Answer to the
Amended Complaint, petitioners again filed an Urgent Ex-Parte Motion to
Admit Second Amended Complaint and for the lssuance of Ex-Parte
Temporary Restraining Order Effective only for Seventy-Two (72) Hours. It
was stated in the said pleading that the case was raffled to Branch 24, but
Presiding Judge Antonio Eugenio, Jr. inhibited himself from handling the
case; and when the case was assigned to Branch 46, Presiding Judge
Artemio S. Tipon also inhibited himself from the case.
On April 21, 2004, Executive Judge Enrico A. Lanzanas of the RTC of Manila
acted on the Motion for the Issuance of an Ex Parte Temporary Restraining
Order, and issued an Order disposing, thus:
WHEREFORE, pursuant to administrative Circular No. 20-95 of the Supreme
Court, a seventy-two (72) hour Temporary Restraining Order is hereby
issued, enjoining defendants from taking over management, or to maintain a
status quo, in order to prevent further irreparable damages and prejudice to
the corporation, as day-to-day activities will be disrupted and will be
paralyzed due to the legal controversy.3
On the same date, April 21, 2004, respondents filed their Answer4 to the
Amended Complaint, alleging that the election on April 2, 2004 was lawfully
conducted. Respondents cited the Report5 of SEC Counsel Nicanor P.
Patricio, who was ordered by the SEC to attend the annual meeting of
Legaspi Towers 300, Inc. on April 2, 2004. Atty. Patricio stated in his Report
that at 5:40 p.m. of April 2, 2004, a representative of the Board of the
condominium corporation stated that the scheduled elections could not
proceed because the Election Committee was not able to validate the
authenticity of the proxies prior to the election due to limited time available as
the submission was made only the day before. Atty. Patricio noted that the
Board itself fixed the deadline for submission of proxies at 5:00 p.m. of April
1, 2004. One holder of proxy stood up and questioned the motives of the
Board in postponing the elections. The Board objected to this and moved for
a declaration of adjournment. There was an objection to the adjournment,
which was ignored by the Board. When the Board adjourned the meeting
despite the objections of the unit owners, the unit owners who objected to the
adjournment gathered themselves at the same place of the meeting and
proceeded with the meeting. The attendance was checked from among the
members who stayed at the meeting. Proxies were counted and recorded,
and there was a declaration of a quorum – out of a total of 5,721 votes, 2,938
were present either in person or proxy. Thereafter, ballots were prepared,
proxies were counterchecked with the number of votes entitled to each unit
owner, and then votes were cast. At about 9:30 p.m., canvassing started,
and by 11:30 p.m., the newly-elected members of the Board of Directors for
the years 2004-2005 were named.
Respondents contended that from the proceedings of the election reported
by SEC representative, Atty. Patricio, it was clear that the election held on
April 2, 2004 was legitimate and lawful; thus, they prayed for the dismissal of
the complaint for lack cause of action against them.
This case was scheduled to be re-raffled to regular courts on April 22, 2004,
and was assigned to Judge Antonio I. De Castro of the RTC of Manila,
Branch 3 (trial court).
On April 26, 2004, the trial court conducted a hearing on the injunction
sought by petitioners, and issued an Order clarifying that the TRO issued by
Executive Judge Enrico A. Lanzanas, enjoining respondents from taking over
management, was not applicable as the current Board of Directors
(respondents) had actually assumed management of the corporation. The
trial court stated that the status quo mentioned in the said TRO shall mean
that the current board of directors shall continue to manage the affairs of the
condominium corporation, but the court shall monitor all income earned and
expenses incurred by the corporation. The trial court stated:
Precisely this complaint seeks to annul the election of the Board due to
alleged questionable proxy votes which could not have produced a quorum.
As such, there is nothing to enjoin and so injunction shall fail. As an answer
has been filed, the case is ripe for pre-trial and the parties are directed to file
their pre-trial briefs by May 3, 2004.
As plaintiffs’ second amended complaint is admitted by the Court, defendants
are given up to May 3, 2004 to file a comment thereto. In the meantime, the Page |
banks and other persons & entities are advised to recognize the Board 39
headed by its president, Amelia Muer. All transactions made by the Board
and its officers for the corporation are considered legal for all intents and
purposes.6
On May 3, 2004, respondents filed a Comment on the Motion to Amend
Complaint, praying that the name of Legaspi Towers 300, Inc., as party-
plaintiff in the Second Amended Complaint, be deleted as the said inclusion
by petitioners was made without the authority of the current Board
of Directors, which had been recognized by the trial court in its Order dated
April 26, 2004.
During the pre-trial conference held on July 21, 2004, the trial court resolved
various incidents in the case and other issues raised by the contending
parties. One of the incidents acted upon by the trial court was petitioners'
motion to amend complaint to implead Legaspi Towers 300, Inc. as plaintiff,
which motion was denied with the issuance of two Orders both dated July 21,
2004. The first Order7 held that the said motion could not be admitted for
being improper, thus:
xxxx
On plaintiffs’ motion to admit amended complaint (to include Legaspi Towers
300, Inc. as plaintiff), the Court rules to deny the motion for being improper.
(A separate Order of even date is issued.) As prayed for, movants are given
10 days from today to file a motion for reconsideration thereof, while
defendants are given 10 days from receipt thereof to reply.8
The second separate Order,9 also dated July 21, 2004, reads:
This resolves plaintiffs’ motion to amend complaint to include Legaspi
Towers 300, Inc. as party-plaintiff and defendants’ comment thereto. Finding
no merit therein and for the reasons stated in the comment, the motion is
hereby DENIED.
Petitioners filed a Motion for Reconsideration of the Orders dated July 21,
2004. In the Order10 dated September 24, 2004, the trial court denied the
motion for reconsideration for lack of merit.
Petitioners filed a petition for certiorari with the Court of Appeals alleging that
the trial court gravely abused its discretion amounting to lack or excess of
jurisdiction in issuing the Orders dated July 21, 2004 and September 24,
2004, and praying that judgment be rendered annulling the said Orders and
directing RTC Judge De Castro to admit their Second Amended Complaint.
In a Decision dated July 22, 2005, the Court of Appeals dismissed the
petition for lack of merit. It held that RTC Judge De Castro did not commit
grave abuse of discretion in denying petitioners' Motion To Admit Second
Amended Complaint.
The Court of Appeals stated that petitioners’ complaint sought to nullify the
election of the Board of Directors held on April 2, 2004, and to protect and
enforce their individual right to vote. The appellate court held that as the right
to vote is a personal right of a stockholder of a corporation, such right can
only be enforced through a direct action; hence, Legaspi Towers 300, Inc.
cannot be impleaded as plaintiff in this case.
Petitioners’ motion for reconsideration was denied by the Court of Appeals in
a Resolution dated November 24, 2005.
Petitioners filed this petition raising the following issues:
I
THE HONORABLE COURT OF APPEALS ERRED IN RESOLVING
THAT PUBLIC RESPONDENT-APPELLEE DID NOT COMMIT ANY
WHIMSICAL, ARBITRARY AND OPPRESSIVE EXERCISE OF
JUDICIAL AUTHORITY WHEN THE LATTER REVERSED HIS
EARLIER RULING ALREADY ADMITTING THE SECOND
AMENDED COMPLAINT OF PETITIONERS-APPELLANTS.
II
THERE IS NO LEGAL BASIS FOR THE HONORABLE COURT OF
APPEALS TO RESOLVE THAT PETITIONERS-APPELLANTS
HAVE NO RIGHT AS BOARD OF DIRECTORS TO BRING AN
ACTION IN BEHALF OF LEGASPI TOWERS 300, INC.
III
THERE IS NO LEGAL BASIS FOR THE HONORABLE COURT OF
APPEALS TO RESOLVE THAT THE ELECTIONS CONDUCTED IN
LEGASPI TOWERS 300, INC. FOR THE PERIOD OF 2005 TO 2006 Page |
HAVE RENDERED THE ISSUE IN CIVIL CASE NO. 04-10655 40
MOOT AND ACADEMIC.11
Petitioners contend that the Court of Appeals erred in not finding that RTC
Judge Antonio I. De Castro committed grave abuse of discretion amounting
to lack or excess of jurisdiction in denying the admission of the Second
Amended Complaint in the Orders dated July 21, 2004 and September 24,
2004, despite the fact that he had already ordered its admission in a previous
Order dated April 26, 2004.
Petitioners’ contention is unmeritorious.
It is clear that in the Orders dated July 21, 2004, the trial court did not admit
the Second Amended Complaint wherein petitioners made the condominium
corporation, Legaspi Towers 300, Inc., the party-plaintiff. In the Order dated
September 24, 2004, denying petitioners’ motion for reconsideration of the
Orders dated July 21, 2004, the RTC explained its action, thus:
x x x The word "admitted" in the 3rd paragraph of the Order dated April 26,
2004 should read "received" for which defendants were told to comment
thereon as an answer has been filed. It was an oversight of the clerical error
in said Order.
The Order of July 21, 2004 states "amended complaint" in the 3rd paragraph
thereof and so it does not refer to the second amended complaint. The
amended complaint was admitted by the court of origin – Br. 24 in its Order
of April 14, 2004 as there was no responsive pleading yet.
Nonetheless, admission of the second amended complaint is improper. Why
should Legaspi Towers 300, Inc. x x x be included as party-plaintiff when
defendants are members thereof too like plaintiffs. Both parties are deemed
to be acting in their personal capacities as they both claim to be the lawful
board of directors. The motion for reconsideration for the admission of the
second amended complaint is hereby DENIED.12
The courts have the inherent power to amend and control their processes
and orders so as to make them conformable to law and justice.13 A judge has
an inherent right, while his judgment is still under his control, to correct
errors, mistakes, or injustices.14
Next, petitioners state that the Court of Appeals seems to be under the
impression that the action instituted by them is one brought forth solely by
way of a derivative suit. They clarified that the inclusion of Legaspi Towers
300, Inc. as a party-plaintiff in the Second Amended Complaint was, first and
foremost, intended as a direct action by the corporation acting through them
(petitioners) as the reconstituted Board of Directors of Legaspi Towers 300,
Inc. Petitioners allege that their act of including the corporation as party-
plaintiff is consistent with their position that the election conducted by
respondents was invalid; hence, petitioners, under their by-laws, could
reconstitute themselves as the Board of Directors of Legaspi Towers 300,
Inc. in a hold-over capacity for the succeeding term. By so doing, petitioners
had the right as the rightful Board of Directors to bring the action in
representation of Legaspi Towers 300, Inc. Thus, the Second Amended
Complaint was intended by the petitioners as a direct suit by the corporation
joined in by the petitioners to protect and enforce their common rights.
Petitioners contend that Legaspi Towers 300, Inc. is a real party-in- interest
as it stands to be affected the most by the controversy, because it involves
the determination of whether or not the corporation’s by-laws was properly
carried out in the meeting held on April 2, 2004, when despite the
adjournment of the meeting for lack of quorum, the elections were still
conducted. Although petitioners admit that the action involves their right to
vote, they argue that it also involves the right of the condominium corporation
to be managed and run by the duly-elected Board of Directors, and to seek
redress against those who wrongfully occupy positions of the corporation and
who may mismanage the corporation.
Petitioners’ argument is unmeritorious.
The Court notes that in the Amended Complaint, petitioners as plaintiffs
stated that they are the incumbent reconstituted Board of Directors of
Legaspi Towers 300, Inc., and that defendants, herein respondents, are the
newly-elected members of the Board of Directors; while in the Second
Amended Complaint, the plaintiff is Legaspi Towers 300, Inc., represented by
petitioners as the allegedly incumbent reconstituted Board of Directors of
Legaspi Towers 300, Inc.
The Second Amended Complaint states who the plaintiffs are, thus:
1. That the plaintiffs are: LEGASPI TOWERS 300, INC., non-stock
corporation xxx duly represented by the incumbent reconstituted Board of
Directors of Legaspi Towers 300, Inc., namely: ELIADORA FE BOTE VERA
xxx, as President; BRUNO C. HAMAN xxx, as Director; LILY MARQUINEZ
PALANCA xxx, as Secretary; ROSANNA DAVID IMAI xxx, as Treasurer; and
members of the Board of Directors, namely: ELIZABETH GUERRERO xxx,
GLORIA DOMINGO xxx, and RAY VINCENT.15
The Court agrees with the Court of Appeals that the Second Amended
Complaint is meant to be a derivative suit filed by petitioners in behalf of the Page |
corporation. The Court of Appeals stated in its Decision that petitioners 41
justified the inclusion of Legaspi Towers 300, Inc. as plaintiff in Civil Case
No. 0410655 by invoking the doctrine of derivative suit, as petitioners
specifically argued, thus:
xxxx
x x x [T]he sudden takeover by private respondents of the management of
Legaspi Towers 300, Inc. has only proven the rightfulness of petitioners’
move to include Legaspi Towers 300, Inc. as party-plaintiff. This is because
every resolution passed by private respondents sitting as a board result[s] in
violation of Legaspi Towers 300, Inc.’s right to be managed and represented
by herein petitioners.
In short, the amendment of the complaint [to include] Legaspi Towers 300,
Inc. was done in order to protect the interest and enforce the right of the
Legaspi [Towers 300,] Inc. to be administered and managed [by petitioners]
as the duly constituted Board of Directors. This is no different from and may
in fact be considered as a DERIVATIVE SUIT instituted by an individual
stockholder against those controlling the corporation but is being instituted in
the name of and for the benefit of the corporation whose right/s are being
violated.16
Is a derivative suit proper in this case?
Cua, Jr. v. Tan17 differentiates a derivative suit and an individual/class suit as
follows:
A derivative suit must be differentiated from individual and representative or
class suits, thus:
Suits by stockholders or members of a corporation based on wrongful or
fraudulent acts of directors or other persons may be classified into individual
suits, class suits, and derivative suits. Where a stockholder or member is
denied the right of inspection, his suit would be individual because the
wrong is done to him personally and not to the other stockholders or the
corporation. Where the wrong is done to a group of stockholders, as where
preferred stockholders' rights are violated, a class or representative
suit will be proper for the protection of all stockholders belonging to the same
group. But where the acts complained of constitute a wrong to the
corporation itself, the cause of action belongs to the corporation and not to
the individual stockholder or member. Although in most every case of wrong
to the corporation, each stockholder is necessarily affected because the
value of his interest therein would be impaired, this fact of itself is not
sufficient to give him an individual cause of action since the corporation is a
person distinct and separate from him, and can and should itself sue the
wrongdoer. Otherwise, not only would the theory of separate entity be
violated, but there would be multiplicity of suits as well as a violation of the
priority rights of creditors. Furthermore, there is the difficulty of determining
the amount of damages that should be paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are
committed by the directors or trustees themselves, a stockholder or member
may find that he has no redress because the former are vested by law with
the right to decide whether or not the corporation should sue, and they will
never be willing to sue themselves. The corporation would thus be helpless
to seek remedy. Because of the frequent occurrence of such a situation, the
common law gradually recognized the right of a stockholder to sue on behalf
of a corporation in what eventually became known as a "derivative suit." It
has been proven to be an effective remedy of the minority against the abuses
of management. Thus, an individual stockholder is permitted to institute a
derivative suit on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever officials of the corporation
refuse to sue or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party-in- interest.18
Since it is the corporation that is the real party-in-interest in a derivative suit,
then the reliefs prayed for must be for the benefit or interest of the
corporation.19 When the reliefs prayed for do not pertain to the corporation,
then it is an improper derivative suit.20
The requisites for a derivative suit are as follows:
a) the party bringing suit should be a shareholder as of the time of
the act or transaction complained of, the number of his shares not
being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a
demand on the board of directors for the appropriate relief but the
latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the
wrongdoing or harm having been, or being caused to the corporation
and not to the particular stockholder bringing the suit.21
In this case, petitioners, as members of the Board of Directors of the Page |
condominium corporation before the election in question, filed a complaint 42
against the newly-elected members of the Board of Directors for the years
2004-2005, questioning the validity of the election held on April 2, 2004, as it
was allegedly marred by lack of quorum, and praying for the nullification of
the said election.
As stated by the Court of Appeals, petitioners’ complaint seek to nullify the
said election, and to protect and enforce their individual right to vote.
Petitioners seek the nullification of the election of the Board of Directors for
the years 2004-2005, composed of herein respondents, who pushed through
with the election even if petitioners had adjourned the meeting allegedly due
to lack of quorum. Petitioners are the injured party, whose rights to vote and
to be voted upon were directly affected by the election of the new set of
board of directors. The party-in-interest are the petitioners as stockholders,
who wield such right to vote. The cause of action devolves on petitioners, not
the condominium corporation, which did not have the right to vote. Hence,
the complaint for nullification of the election is a direct action by petitioners,
who were the members of the Board of Directors of the corporation before
the election, against respondents, who are the newly-elected Board of
Directors. Under the circumstances, the derivative suit filed by petitioners in
behalf of the condominium corporation in the Second Amended Complaint is
improper.
The stockholder’s right to file a derivative suit is not based on any express
provision of The Corporation Code, but is impliedly recognized when the law
makes corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties,22 which
is not the issue in this case.
Further, petitioners’ change of argument before this Court, asserting that the
Second Amended Complaint is a direct action filed by the corporation,
represented by the petitioners as the incumbent Board of Directors, is an
afterthought, and lacks merit, considering that the newly-elected Board of
Directors had assumed their function to manage corporate affairs.23
In fine, the Court of Appeals correctly upheld the Orders of the trial court
dated July 21, 2004 and September 24, 2004 denying petitioners’ Motion to
Admit Second Amended Complaint.
Lastly, petitioners contend that the Court of Appeals erred in resolving that
the recent elections conducted by Legaspi Towers, 300, Inc. have rendered
the issue raised via the special civil action for certiorari before the appellate
court moot and academic.
Page |
The Court of Appeals, in its Resolution dated November 24, 2005, stated: 43

x x x [T]he election of the corporation’s new set of directors for the years
2005-2006 has, finally, rendered the petition at bench moot and academic.
As correctly argued by private respondents, the nullification of the orders
assailed by petitioners would, therefore, be of little or no practical and legal
purpose.24

The statement of the Court of Appeals is correct.

Petitioners question the validity of the election of the Board of Directors for
the years 2004-2005, which election they seek to nullify in Civil Case No. 04-
109655. However, the valid election of a new set of Board of Directors for the
years 2005-2006 would, indeed, render this petition moot and academic.

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

in CA-G.R. CV No. 87684, dated July 22, 2005, and its Resolution dated
November 24, 2005 are AFFIRMED.

Costs against petitioners.

SO ORDERED.
G.R. No. 157479 November 24, 2010
PHILIP TURNER and ELNORA TURNER, Petitioners,
vs.
LORENZO SHIPPING CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
This case concerns the right of dissenting stockholders to demand payment
of the value of their shareholdings.
In the stockholders’ suit to recover the value of their shareholdings from the
corporation, the Regional Trial Court (RTC) upheld the dissenting
stockholders, herein petitioners, and ordered the corporation, herein
respondent, to pay. Execution was partially carried out against the
respondent. On the respondent’s petition for certiorari, however, the Court of
Appeals (CA) corrected the RTC and dismissed the petitioners’ suit on the
ground that their cause of action for collection had not yet accrued due to the
lack of unrestricted retained earnings in the books of the respondent.
Thus, the petitioners are now before the Court to challenge the CA’s decision
promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo
Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding
Judge of Branch 46 of the Regional Trial Court of Manila, et al.1
Antecedents
The petitioners held 1,010,000 shares of stock of the respondent, a domestic
corporation engaged primarily in cargo shipping activities. In June 1999, the
respondent decided to amend its articles of incorporation to remove the
stockholders’ pre-emptive rights to newly issued shares of stock. Feeling that
the corporate move would be prejudicial to their interest as stockholders, the
petitioners voted against the amendment and demanded payment of their
shares at the rate of ₱2.276/share based on the book value of the shares, or
a total of ₱2,298,760.00.
The respondent found the fair value of the shares demanded by the
petitioners unacceptable. It insisted that the market value on the date before
the action to remove the pre-emptive right was taken should be the value, or
₱0.41/share (or a total of ₱414,100.00), considering that its shares were
listed in the Philippine Stock Exchange, and that the payment could be made
only if the respondent had unrestricted retained earnings in its books to cover
the value of the shares, which was not the case.
The disagreement on the valuation of the shares led the parties to constitute
an appraisal committee pursuant to Section 82 of the Corporation Code, Page |
each of them nominating a representative, who together then nominated the 44
third member who would be chairman of the appraisal committee. Thus, the
appraisal committee came to be made up of Reynaldo Yatco, the petitioners’
nominee; Atty. Antonio Acyatan, the respondent’s nominee; and Leo Anoche
of the Asian Appraisal Company, Inc., the third member/chairman.
On October 27, 2000, the appraisal committee reported its valuation of
₱2.54/share, for an aggregate value of ₱2,565,400.00 for the petitioners.2
Subsequently, the petitioners demanded payment based on the valuation of
the appraisal committee, plus 2%/month penalty from the date of their
original demand for payment, as well as the reimbursement of the amounts
advanced as professional fees to the appraisers.3
In its letter to the petitioners dated January 2, 2001,4 the respondent refused
the petitioners’ demand, explaining that pursuant to the Corporation Code,
the dissenting stockholders exercising their appraisal rights could be paid
only when the corporation had unrestricted retained earnings to cover the fair
value of the shares, but that it had no retained earnings at the time of the
petitioners’ demand, as borne out by its Financial Statements for Fiscal Year
1999 showing a deficit of ₱72,973,114.00 as of December 31, 1999.
Upon the respondent’s refusal to pay, the petitioners sued the respondent for
collection and damages in the RTC in Makati City on January 22, 2001. The
case, docketed as Civil Case No. 01-086, was initially assigned to Branch
132.5
On June 26, 2002, the petitioners filed their motion for partial summary
judgment, claiming that:
7) xxx the defendant has an accumulated unrestricted retained
earnings of ELEVEN MILLION NINE HUNDRED SEVENTY FIVE
THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS,
Philippine Currency, evidenced by its Financial Statement as of the
Quarter Ending March 31, 2002; xxx
8) xxx the fair value of the shares of the petitioners as fixed by the
Appraisal Committee is final, that the same cannot be disputed xxx
 9) xxx there is no genuine issue to material fact and therefore, the
plaintiffs are entitled, as a matter of right, to a summary judgment.
xxx 6
The respondent opposed the motion for partial summary judgment, stating
that the determination of the unrestricted retained earnings should be made
at the end of the fiscal year of the respondent, and that the petitioners did not
have a cause of action against the respondent.
During the pendency of the motion for partial summary judgment, however,
the Presiding Judge of Branch 133 transmitted the records to the Clerk of
Court for re-raffling to any of the RTC’s special commercial courts in Makati
City due to the case being an intra-corporate dispute. Hence, Civil Case No.
01-086 was re-raffled to Branch 142.
Nevertheless, because the principal office of the respondent was in Manila,
Civil Case No. 01-086 was ultimately transferred to Branch 46 of the RTC in
Manila, presided by Judge Artemio Tipon,7 pursuant to the Interim Rules of
Procedure on Intra-Corporate Controversies (Interim Rules) requiring intra-
corporate cases to be brought in the RTC exercising jurisdiction over the
place where the principal office of the corporation was found.
After the conference in Civil Case No. 01-086 set on October 23, 2002, which
the petitioners’ counsel did not attend, Judge Tipon issued an
order,8 granting the petitioners’ motion for partial summary judgment, stating:
As to the motion for partial summary judgment, there is no question that the
3-man committee mandated to appraise the shareholdings of plaintiff
submitted its recommendation on October 27, 2000 fixing the fair value of the
shares of stocks of the plaintiff at P2.54 per share. Under Section 82 of the
Corporation Code:
"The findings of the majority of the appraisers shall be final, and the award
shall be paid by the corporation within thirty (30) days after the award is
made."
"The only restriction imposed by the Corporation Code is–"
"That no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earning in its books to cover such
payment."
The evidence submitted by plaintiffs shows that in its quarterly financial
statement it submitted to the Securities and Exchange Commission, the
defendant has retained earnings of P11,975,490 as of March 21, 2002. This
is not disputed by the defendant. Its only argument against paying is that
there must be unrestricted retained earning at the time the demand for Page |
payment is made. 45
This certainly is a very narrow concept of the appraisal right of a stockholder.
The law does not say that the unrestricted retained earnings must exist at the
time of the demand. Even if there are no retained earnings at the time the
demand is made if there are retained earnings later, the fair value of such
stocks must be paid. The only restriction is that there must be sufficient funds
to cover the creditors after the dissenting stockholder is paid. No such
allegations have been made by the defendant.9
On November 12, 2002, the respondent filed a motion for reconsideration.
On the scheduled hearing of the motion for reconsideration on November 22,
2002, the petitioners filed a motion for immediate execution and a motion to
strike out motion for reconsideration. In the latter motion, they pointed out
that the motion for reconsideration was prohibited by Section 8 of the Interim
Rules. Thus, also on November 22, 2002, Judge Tipon denied the motion for
reconsideration and granted the petitioners’ motion for immediate
execution.10
Subsequently, on November 28, 2002, the RTC issued a writ of execution.11
Aggrieved, the respondent commenced a special civil action for certiorari in
the CA to challenge the two aforecited orders of Judge Tipon, claiming that:
A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN
GRANTING SUMMARY JUDGMENT TO THE SPOUSES TURNER,
BECAUSE AT THE TIME THE "COMPLAINT" WAS FILED, LSC
HAD NO RETAINED EARNINGS, AND THUS WAS COMPLYING
WITH THE LAW, AND NOT VIOLATING ANY RIGHTS OF THE
SPOUSES TURNER, WHEN IT REFUSED TO PAY THEM THE
VALUE OF THEIR LSC SHARES. ANY RETAINED EARNINGS
MADE A YEAR AFTER THE "COMPLAINT" WAS FILED ARE
IRRELEVANT TO THE SPOUSES TURNER’S RIGHT TO
RECOVER UNDER THE "COMPLAINT", BECAUSE THE WELL-
SETTLED RULE, REPEATEDLY BROUGHT TO JUDGE TIPON’S
ATTENTION, IS "IF NO RIGHT EXISTED AT THE TIME (T)HE
 ACTION WAS COMMENCED THE SUIT CANNOT BE
MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY HAVE
ACCRUED THEREAFTER.
B.
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS
GRAVELY ABUSED HIS DISCRETION, WHEN HE GRANTED AND
ISSUED THE QUESTIONED "WRIT OF EXECUTION" DIRECTING
THE EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN
FAVOR OF THE SPOUSES TURNER, BECAUSE THAT
JUDGMENT IS NOT A FINAL JUDGMENT UNDER SECTION 1 OF
RULE 39 OF THE RULES OF COURT AND THEREFORE CANNOT
BE SUBJECT OF EXECUTION UNDER THE SUPREME COURT’S
CATEGORICAL HOLDING IN PROVINCE OF PANGASINAN VS.
COURT OF APPEALS.
Upon the respondent’s application, the CA issued a temporary restraining
order (TRO), enjoining the petitioners, and their agents and representatives
from enforcing the writ of execution. By then, however, the writ of execution
had been partially enforced.
The TRO lapsed without the CA issuing a writ of preliminary injunction to
prevent the execution. Thereupon, the sheriff resumed the enforcement of
the writ of execution.
The CA promulgated its assailed decision on March 4, 2003,12 pertinently
holding:
However, it is clear from the foregoing that the Turners’ appraisal right is
subject to the legal condition that no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained
earnings in its books to cover such payment. Thus, the Supreme Court held
that:
The requirement of unrestricted retained earnings to cover the shares is
based on the trust fund doctrine which means that the capital stock, property
and other assets of a corporation are regarded as equity in trust for the
payment of corporate creditors. The reason is that creditors of a corporation
are preferred over the stockholders in the distribution of corporate assets.
There can be no distribution of assets among the stockholders without first
paying corporate creditors. Hence, any disposition of corporate funds to the
prejudice of creditors is null and void. Creditors of a corporation have the
right to assume that so long as there are outstanding debts and liabilities, the
board of directors will not use the assets of the corporation to purchase its
own stock.
In the instant case, it was established that there were no unrestricted
retained earnings when the Turners filed their Complaint. In a letter dated 20 Page |
August 2000, petitioner informed the Turners that payment of their shares 46
could only be made if it had unrestricted earnings in its books to cover the
same. Petitioner reiterated this in a letter dated 2 January 2001 which further
informed the Turners that its Financial Statement for fiscal year 1999 shows
that its retained earnings ending December 31, 1999 was at a deficit in the
amount of ₱72,973,114.00, a matter which has not been disputed by private
respondents. Hence, in accordance with the second paragraph of sec. 82,
BP 68 supra, the Turners’ right to payment had not yet accrued when they
filed their Complaint on January 22, 2001, albeit their appraisal right already
existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the
Supreme Court declared that:
Now, before an action can properly be commenced all the essential elements
of the cause of action must be in existence, that is, the cause of action must
be complete. All valid conditions precedent to the institution of the particular
action, whether prescribed by statute, fixed by agreement of the parties or
implied by law must be performed or complied with before commencing the
action, unless the conduct of the adverse party has been such as to prevent
or waive performance or excuse non-performance of the condition.
It bears restating that a right of action is the right to presently enforce a
cause of action, while a cause of action consists of the operative facts which
give rise to such right of action. The right of action does not arise until the
performance of all conditions precedent to the action and may be taken away
by the running of the statute of limitations, through estoppel, or by other
circumstances which do not affect the cause of action. Performance or
fulfillment of all conditions precedent upon which a right of action depends
must be sufficiently alleged, considering that the burden of proof to show that
a party has a right of action is upon the person initiating the suit.
The Turners’ right of action arose only when petitioner had already retained
earnings in the amount of ₱11,975,490.00 on March 21, 2002; such right of
action was inexistent on January 22, 2001 when they filed the Complaint.
In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the
Supreme Court ruled:
Subject to certain qualifications, and except as otherwise provided by law, an
action commenced before the cause of action has accrued is prematurely
brought and should be dismissed. The fact that the cause of action accrues
after the action is commenced and while it is pending is of no moment. It is a
rule of law to which there is, perhaps, no exception, either at law or in equity,
that to recover at all there must be some cause of action at the
commencement of the suit. There are reasons of public policy why there
should be no needless haste in bringing up litigation, and why people who
are in no default and against whom there is as yet no cause of action should
not be summoned before the public tribunals to answer complaints which are
groundless. An action prematurely brought is a groundless suit. Unless the
plaintiff has a valid and subsisting cause of action at the time his action
is commenced, the defect cannot be cured or remedied by the acquisition or
accrual of one while the action is pending, and a supplemental complaint or
an amendment setting up such after-accrued cause of action is not
permissible.
The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao
vs. Court of Appeals.
The Turners’ apprehension that their claim for payment may prescribe if they
wait for the petitioner to have unrestricted retained earnings is misplaced. It
is the legal possibility of bringing the action that determines the starting point
for the computation of the period of prescription. Stated otherwise, the
prescriptive period is to be reckoned from the accrual of their right of action.
Accordingly, We hold that public respondent exceeded its jurisdiction when it
entertained the herein Complaint and issued the assailed Orders. Excess of
jurisdiction is the state of being beyond or outside the limits of jurisdiction,
and as distinguished from the entire absence of jurisdiction, means that the
act although within the general power of the judge, is not authorized and
therefore void, with respect to the particular case, because the conditions
which authorize the exercise of his general power in that particular case are
wanting, and hence, the judicial power is not in fact lawfully invoked.
We find no necessity to discuss the second ground raised in this petition.
WHEREFORE, upon the premises, the petition is GRANTED. The assailed
Orders and the corresponding Writs of Garnishment are NULLIFIED. Civil
Case No. 02-104692 is hereby ordered DISMISSED without prejudice to
refiling by the private respondents of the action for enforcement of their right
to payment as withdrawing stockholders.
SO ORDERED.
The petitioners now come to the Court for a review on certiorari of the CA’s
decision, submitting that:
I.
Page |
47
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW
WHEN IT GRANTED THE PETITION FOR CERTIORARI WHEN THE
REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND ITS
JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN GRANTING
THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND IN GRANTING
THE MOTION FOR IMMEDIATE EXECUTION OF JUDGMENT;
II.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW
WHEN IT ORDERED THE DISMISSAL OF THE CASE, WHEN THE
PETITION FOR CERTIORARI MERELY SOUGHT THE ANNULMENT OF
THE ORDER GRANTING THE MOTION FOR PARTIAL SUMMARY
JUDGMENT AND OF THE ORDER GRANTING THE MOTION FOR
IMMEDIATE EXECUTION OF THE JUDGMENT;
III.
THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF
SUBSTANCE NOT THEREFORE DETERMINED BY THIS HONORABLE
COURT AND/OR DECIDED IT IN A WAY NOT IN ACCORD WITH LAW OR
WITH JURISPRUDENCE.
Ruling
The petition fails.
The CA correctly concluded that the RTC had exceeded its jurisdiction in
entertaining the petitioners’ complaint in Civil Case No. 01-086, and in
rendering the summary judgment and issuing writ of execution.
A.
Stockholder’s Right of Appraisal, In General
A stockholder who dissents from certain corporate actions has the right to
demand payment of the fair value of his or her shares. This right, known as
 the right of appraisal, is expressly recognized in Section 81 of the
Corporation Code, to wit:
Section 81. Instances of appraisal right. - Any stockholder of a corporation
shall have the right to dissent and demand payment of the fair value of his
shares in the following instances:
1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or class
of shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate property
and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Clearly, the right of appraisal may be exercised when there is a fundamental
change in the charter or articles of incorporation substantially prejudicing the
rights of the stockholders. It does not vest unless objectionable corporate
action is taken.13 It serves the purpose of enabling the dissenting stockholder
to have his interests purchased and to retire from the corporation.141avvphil
Under the common law, there were originally conflicting views on whether a
corporation had the power to acquire or purchase its own stocks. In England,
it was held invalid for a corporation to purchase its issued stocks because
such purchase was an indirect method of reducing capital (which was
statutorily restricted), aside from being inconsistent with the privilege of
limited liability to creditors.15 Only a few American jurisdictions adopted by
decision or statute the strict English rule forbidding a corporation from
purchasing its own shares. In some American states where the English rule
used to be adopted, statutes granting authority to purchase out of surplus
funds were enacted, while in others, shares might be purchased even out of
capital provided the rights of creditors were not prejudiced.16 The reason
underlying the limitation of share purchases sprang from the necessity of
imposing safeguards against the depletion by a corporation of its assets and
against the impairment of its capital needed for the protection of creditors.17
Now, however, a corporation can purchase its own shares, provided payment
is made out of surplus profits and the acquisition is for a legitimate corporate
purpose.18 In the Philippines, this new rule is embodied in Section 41 of the
Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall have
the power to purchase or acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the following cases:
Provided, That the corporation has unrestricted retained earnings in its books
to cover the shares to be purchased or acquired: Page |
48
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment
for their shares under the provisions of this Code. (n)
The Corporation Code defines how the right of appraisal is exercised, as well
as the implications of the right of appraisal, as follows:
1. The appraisal right is exercised by any stockholder who has voted against
the proposed corporate action by making a written demand on the
corporation within 30 days after the date on which the vote was taken for the
payment of the fair value of his shares. The failure to make the demand
within the period is deemed a waiver of the appraisal right.19
2. If the withdrawing stockholder and the corporation cannot agree on the fair
value of the shares within a period of 60 days from the date the stockholders
approved the corporate action, the fair value shall be determined and
appraised by three disinterested persons, one of whom shall be named by
the stockholder, another by the corporation, and the third by the two thus
chosen. The findings and award of the majority of the appraisers shall be
final, and the corporation shall pay their award within 30 days after the award
is made. Upon payment by the corporation of the agreed or awarded price,
the stockholder shall forthwith transfer his or her shares to the corporation.20
3. All rights accruing to the withdrawing stockholder’s shares, including voting
and dividend rights, shall be suspended from the time of demand for the
payment of the fair value of the shares until either the abandonment of the
corporate action involved or the purchase of the shares by the corporation,
except the right of such stockholder to receive payment of the fair value of
the shares.21
4. Within 10 days after demanding payment for his or her shares, a
dissenting stockholder shall submit to the corporation the certificates of stock
representing his shares for notation thereon that such shares are dissenting
shares. A failure to do so shall, at the option of the corporation, terminate his
rights under this Title X of the Corporation Code. If shares represented by the
certificates bearing such notation are transferred, and the certificates are
consequently canceled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have all the
rights of a regular stockholder; and all dividend distributions that would have
accrued on such shares shall be paid to the transferee.22
5. If the proposed corporate action is implemented or effected, the
corporation shall pay to such stockholder, upon the surrender of the
certificates of stock representing his shares, the fair value thereof as of the
day prior to the date on which the vote was taken, excluding any appreciation
or depreciation in anticipation of such corporate action.23
Notwithstanding the foregoing, no payment shall be made to any dissenting
stockholder unless the corporation has unrestricted retained earnings in its
books to cover the payment. In case the corporation has no available
unrestricted retained earnings in its books, Section 83 of the Corporation
Code provides that if the dissenting stockholder is not paid the value of his
shares within 30 days after the award, his voting and dividend rights shall
immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted retained
earnings to fund the payment of the shares of stocks of the withdrawing
stockholders. Under the doctrine, the capital stock, property, and other
assets of a corporation are regarded as equity in trust for the payment of
corporate creditors, who are preferred in the distribution of corporate
assets.24 The creditors of a corporation have the right to assume that the
board of directors will not use the assets of the corporation to purchase its
own stock for as long as the corporation has outstanding debts and
liabilities.25 There can be no distribution of assets among the stockholders
without first paying corporate debts. Thus, any disposition of corporate funds
and assets to the prejudice of creditors is null and void.26
B.
Petitioners’ cause of action was premature
That the respondent had indisputably no unrestricted retained earnings in its
books at the time the petitioners commenced Civil Case No. 01-086 on
January 22, 2001 proved that the respondent’s legal obligation to pay the
value of the petitioners’ shares did not yet arise. Thus, the CA did not err in
holding that the petitioners had no cause of action, and in ruling that the RTC
did not validly render the partial summary judgment.
A cause of action is the act or omission by which a party violates a right of
another.27 The essential elements of a cause of action are: (a) the existence
of a legal right in favor of the plaintiff; (b) a correlative legal duty of the
defendant to respect such right; and (c) an act or omission by such
defendant in violation of the right of the plaintiff with a resulting injury or Page |
damage to the plaintiff for which the latter may maintain an action for the 49
recovery of relief from the defendant.28 Although the first two elements may
exist, a cause of action arises only upon the occurrence of the last element,
giving the plaintiff the right to maintain an action in court for recovery of
damages or other appropriate relief.29
Section 1, Rule 2, of the Rules of Court requires that every ordinary civil
action must be based on a cause of action. Accordingly, Civil Case No. 01-
086 was dismissible from the beginning for being without any cause of
action.
The RTC concluded that the respondent’s obligation to pay had accrued by
its having the unrestricted retained earnings after the making of the demand
by the petitioners. It based its conclusion on the fact that the Corporation
Code did not provide that the unrestricted retained earnings must already
exist at the time of the demand.
The RTC’s construal of the Corporation Code was unsustainable, because it
did not take into account the petitioners’ lack of a cause of action against the
respondent. In order to give rise to any obligation to pay on the part of the
respondent, the petitioners should first make a valid demand that the
respondent refused to pay despite having unrestricted retained earnings.
Otherwise, the respondent could not be said to be guilty of any actionable
omission that could sustain their action to collect.
Neither did the subsequent existence of unrestricted retained earnings after
the filing of the complaint cure the lack of cause of action in Civil Case No.
01-086. The petitioners’ right of action could only spring from an existing
cause of action. Thus, a complaint whose cause of action has not yet
accrued cannot be cured by an amended or supplemental pleading alleging
the existence or accrual of a cause of action during the pendency of the
action.30 For, only when there is an invasion of primary rights, not before,
does the adjective or remedial law become operative.31 Verily, a premature
invocation of the court’s intervention renders the complaint without a cause of
action and dismissible on such ground.32 In short, Civil Case No. 01-086,
being a groundless suit, should be dismissed.
Even the fact that the respondent already had unrestricted retained earnings
more than sufficient to cover the petitioners’ claims on June 26, 2002 (when
they filed their motion for partial summary judgment) did not rectify the
absence of the cause of action at the time of the commencement of Civil
Case No. 01-086. The motion for partial summary judgment, being a mere
application for relief other than by a pleading,33 was not the same as the
complaint in Civil Case No. 01-086. Thereby, the petitioners did not meet the
requirement of the Rules of Court that a cause of action must exist at the
commencement of an action, which is "commenced by the filing of the
original complaint in court."34
The petitioners claim that the respondent’s petition for certiorari sought only
the annulment of the assailed orders of the RTC (i.e., granting the motion for
partial summary judgment and the motion for immediate execution); hence,
the CA had no right to direct the dismissal of Civil Case No. 01-086.
The claim of the petitioners cannot stand.
The argument of the petitioners is baseless. The RTC was guilty of an error
of jurisdiction, for it exceeded its jurisdiction by taking cognizance of the
complaint that was not based on an existing cause of action.
WHEREFORE, the petition for review on certiorari is denied for lack of merit. Page |
50
We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No.
74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his
capacity as Presiding Judge of Branch 46 of the Regional Trial Court of
Manila, et al.
Costs of suit to be paid by the petitioners.
SO ORDERED.

Although the respondent’s petition for certiorari targeted only the RTC’s
orders granting the motion for partial summary judgment and the motion for
immediate execution, the CA’s directive for the dismissal of Civil Case No.
01-086 was not an abuse of discretion, least of all grave, because such
dismissal was the only proper thing to be done under the circumstances.
According to Surigao Mine Exploration Co., Inc. v. Harris:35

Subject to certain qualification, and except as otherwise provided by law, an

action commenced before the cause of action has accrued is
prematurely brought and should be dismissed. The fact that the cause of
action accrues after the action is commenced and while the case is pending
is of no moment. It is a rule of law to which there is, perhaps no exception,
either in law or in equity, that to recover at all there must be some cause of
action at the commencement of the suit. There are reasons of public policy
why there should be no needless haste in bringing up litigation, and why
people who are in no default and against whom there is as yet no cause of
action should not be summoned before the public tribunals to answer
complaints which are groundless. An action prematurely brought is a
groundless suit. Unless the plaintiff has a valid and subsisting cause of
action at the time his action is commenced, the defect cannot be cured
or remedied by the acquisition or accrual of one while the action is
pending, and a supplemental complaint or an amendment setting up such
after-accrued cause of action is not permissible.

Lastly, the petitioners argue that the respondent’s recourse of a special

action for certiorari was the wrong remedy, in view of the fact that the
granting of the motion for partial summary judgment constituted only an error
of law correctible by appeal, not of jurisdiction.
G.R. No. 177549 June 18, 2009
ANTHONY S. YU, ROSITA G. YU and JASON G. YU, Petitioners,
vs.
JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L.
YUKAYGUAN, and JILL NESLIE L. YUKAYGUAN, [on their own behalf
and on behalf of] WINCHESTER INDUSTRIAL SUPPLY,
INC., Respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari1 under Rule 45 of the Rules
of Court, which seeks to reverse and set aside the Resolutions dated 18 July
20062 and 19 April 20073 of the Court of Appeals in CA-G.R. SP No. 00185.
Upon herein respondents’ motion, the Court of Appeals rendered the
assailed Resolution dated 18 July 2006, reconsidering its Decision4 dated 15
February 2006; and remanding the case to the Regional Trial Court (RTC) of
Cebu City, Branch 11, for necessary proceedings, in effect, reversing the
Decision5 dated 10 November 2004 of the RTC which dismissed
respondents’ Complaint in SRC Case No. 022-CEB. Herein petitioners’
Motion for Reconsideration of the Resolution dated 18 July 2006 was denied
by the appellate court in the other assailed Resolution dated 19 April 2007.
Herein petitioners are members of the Yu Family, particularly, the father,
Anthony S. Yu (Anthony); the wife, Rosita G. Yu (Rosita); and their son,
Jason G. Yu (Jason).
Herein respondents composed the Yukayguan Family, namely, the father,
Joseph S. Yukayguan (Joseph); the wife, Nancy L. Yukayguan (Nancy); and
their children Jerald Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan
(Jill).
Petitioner Anthony is the older half-brother of respondent Joseph.
Petitioners and the respondents were all stockholders of Winchester
Industrial Supply, Inc. (Winchester, Inc.), a domestic corporation engaged in
the operation of a general hardware and industrial supply and equipment
business.
On 15 October 2002, respondents filed against petitioners a verified
Complaint for Accounting, Inspection of Corporate Books and Damages
through Embezzlement and Falsification of Corporate Records and
Accounts6 before the RTC of Cebu. The said Complaint was filed by
respondents, in their own behalf and as a derivative suit on behalf of
Winchester, Inc., and was docketed as SRC Case No. 022-CEB. The factual
background of the Complaint was stated in the attached Affidavit executed by Page |
respondent Joseph. 51
According to respondents,7 Winchester, Inc. was established and
incorporated on 12 September 1977, with petitioner Anthony as one of the
incorporators, holding 1,000 shares of stock worth ₱100,000.00.8 Petitioner
Anthony paid for the said shares of stock with respondent Joseph’s money,
thus, making the former a mere trustee of the shares for the latter. On 14
November 1984, petitioner Anthony ceded 800 of his 1,000 shares of stock in
Winchester, Inc. to respondent Joseph, as well as Yu Kay Guan,9 Siao So
Lan, and John S. Yu.10 Petitioner Anthony remained as trustee for
respondent Joseph of the 200 shares of stock in Winchester, Inc., still in
petitioner Anthony’s name.
Respondents then alleged that on 30 June 1985, Winchester, Inc. bought
from its incorporators, excluding petitioner Anthony, their accumulated 8,500
shares in the corporation.11 Subsequently, on 7 November 1995, Winchester,
Inc. sold the same 8,500 shares to other persons, who included respondents
Nancy, Jerald, and Jill; and petitioners Rosita and Jason.12
Respondents further averred that although respondent Joseph appeared as
the Secretary and Treasurer in the corporate records of Winchester, Inc.,
petitioners actually controlled and ran the said corporation as if it were their
own family business. Petitioner Rosita handled the money market
placements of the corporation to the exclusion of respondent Joseph, the
designated Treasurer of Winchester, Inc. Petitioners were also
misappropriating the funds and properties of Winchester, Inc. by understating
the sales, charging their personal and family expenses to the said
corporation, and withdrawing stocks for their personal use without paying for
the same. Respondents attached to the Complaint various receipts13 to prove
the personal and family expenses charged by petitioners to Winchester, Inc.
Respondents, therefore, prayed that respondent Joseph be declared the
owner of the 200 shares of stock in petitioner Anthony’s name. Respondents
also prayed that petitioners be ordered to: (1) deposit the corporate books
and records of Winchester, Inc. with the Branch Clerk of Court of the RTC for
respondents’ inspection; (2) render an accounting of all the funds of
Winchester, Inc. which petitioners misappropriated; (3) reimburse the
personal and family expenses which petitioners charged to Winchester, Inc.,
as well as the properties of the corporation which petitioners withheld without
payment; and (4) pay respondents’ attorney’s fees and litigation expenses. In
the meantime, respondents sought the appointment of a Management
Committee and the freezing of all corporate funds by the trial court.
On 13 November 2002, petitioners filed an Answer with Compulsory
Counterclaim,14 attached to which was petitioner Anthony’s
Affidavit.15 Petitioners vehemently denied the allegation that petitioner
Anthony was a mere trustee for respondent Joseph of the 1,000 shares of
stock in Winchester, Inc. in petitioner Anthony’s name. For the incorporation
of Winchester, Inc., petitioner Anthony contributed ₱25,000.00 paid-up
capital, representing 25% of the total par value of the 1,000 shares he
subscribed to, the said amount being paid out of petitioner Anthony’s
personal savings and petitioners Anthony and Rosita’s conjugal funds.
Winchester, Inc. was being co-managed by petitioners and respondents, and
the attached receipts, allegedly evidencing petitioners’ use of corporate funds
for personal and family expenses, were in fact signed and approved by
respondent Joseph.
By way of special and affirmative defenses, petitioners contended in their
Answer with Compulsory Counterclaim that respondents had no cause of
action against them. Respondents’ Complaint was purely intended for
harassment. It should be dismissed under Section 1(j), Rule 1616 of the Rules
of Court for failure to comply with conditions precedent before its filing. First,
there was no allegation in respondents’ Complaint that earnest efforts were
exerted to settle the dispute between the parties. Second, since respondents’
Complaint purportedly constituted a derivative suit, it noticeably failed to
allege that respondents exerted effort to exhaust all available remedies in the
Articles of Incorporation and By-Laws of Winchester, Inc., as well as in the
Corporation Code. And third, given that respondents’ Complaint was also for
inspection of corporate books, it lacked the allegation that respondents made
a previous demand upon petitioners to inspect the corporate books but
petitioners refused. Prayed for by petitioners, in addition to the dismissal of
respondents’ Complaint, was payment of moral and exemplary damages,
attorney’s fees, litigation expenses, and cost of suit.
On 30 October 2002, the hearing on the application for the appointment of a
Management Committee was commenced. Respondent Joseph submitted
therein, as his direct testimony, the same Affidavit that he executed, which
was attached to the respondents’ Complaint. On 4 November 2002,
respondent Joseph was cross-examined by the counsel for petitioners.
Thereafter, the continuation of the hearing was set for 29 November 2002, in
order for petitioners to adduce evidence in support of their opposition to the
application for the appointment of a Management Committee.17
During the hearing on 29 November 2002, the parties manifested before the
RTC that there was an ongoing mediation between them, and so the hearing
on the appointment of a Management Committee was reset to another date.
In amicable settlement of their dispute, the petitioners and respondents Page |
agreed to a division of the stocks in trade,18 the real properties, and the other 52
assets of Winchester, Inc. In partial implementation of the afore-mentioned
amicable settlement, the stocks in trade and real properties in the name of
Winchester, Inc. were equally distributed among petitioners and respondents.
As a result, the stockholders and members of the Board of Directors of
Winchester, Inc. passed, on 4 January 2003, a unanimous
Resolution19 dissolving the corporation as of said date.
On 22 February 2004, respondents filed their pre-trial brief.20
On 25 June 2004, petitioners filed a Manifestation21 informing the RTC of the
existence of their amicable settlement with respondents. Respondents,
however, made their own manifestation before the RTC that they were
repudiating said settlement, in view of the failure of the parties thereto to
divide the remaining assets of Winchester, Inc. Consequently, respondents
moved to have SRC Case No. 022-CEB set for pre-trial.
On 23 August 2004, petitioners filed their pre-trial brief.22
On 26 August 2004, instead of holding a formal pre-trial conference and
resuming the hearing on the application for the appointment of a
Management Committee, petitioners and respondents agreed that the RTC
may already render a judgment based on the pleadings. In accordance with
the agreement of the parties, the RTC issued, on even date, an
Order23 which stated:
ORDER
During the pre-trial conference held on August 26, 2004, counsels of the
parties manifested, agreed and suggested that a judgment may be rendered
by the Court in this case based on the pleadings, affidavits, and other
evidences on record, or to be submitted by them, pursuant to the provision of
Rule 4, Section 4 of the Rule on Intra-Corporate Controversies. The
suggestion of counsels was approved by the Court.
Accordingly, the Court hereby orders the counsels of the parties to file
simultaneously their respective memoranda within a non-extendible period of
twenty (20) days from notice hereof. Thereafter, the instant case will be
deemed submitted for resolution.
xxxx
Cebu City, August 26, 2004.
(signed)
SILVESTRE A. MAAMO, JR.
Acting Presiding Judge
Petitioners and respondents duly filed their respective
Memoranda,24 discussing the arguments already set forth in the pleadings
they had previously submitted to the RTC. Respondents, though, attached to
their Memorandum a Supplemental Affidavit25 of respondent Joseph,
containing assertions that refuted the allegations in petitioner Anthony’s
Affidavit, which was earlier submitted with petitioners’ Answer with
Compulsory Counterclaim. Respondents also appended to their
Memorandum additional documentary evidence,26 consisting of original and
duplicate cash invoices and cash disbursement receipts issued by
Winchester, Inc., to further substantiate their claim that petitioners were
understating sales and charging their personal expenses to the corporate
funds.
The RTC subsequently promulgated its Decision on 10 November 2004
dismissing SRC Case No. 022-CEB. The dispositive portion of said Decision
reads:
WHEREFORE, in view of the foregoing premises and for lack of merit, this
Court hereby renders judgment in this case DISMISSING the complaint filed
by the [herein respondents].
The Court also hereby dismisses the [herein petitioners’] counterclaim
because it has not been indubitably shown that the filing by the [respondents]
of the latter’s complaint was done in bad faith and with malice.27
The RTC declared that respondents failed to show that they had complied
with the essential requisites for filing a derivative suit as set forth in Rule 8 of
the Interim Rules of Procedure Governing Intra-Corporate Controversies:
(1) He was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time the action
was filed;
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under
the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of;
and Page |
53
(4) The suit is not a nuisance or harassment suit.
As to respondents’ prayer for the inspection of corporate books and records,
the RTC adjudged that they had likewise failed to comply with the requisites
entitling them to the same. Section 2, Rule 7 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies requires that the
complaint for inspection of corporate books or records must state that:
(1) The case is for the enforcement of plaintiff's right of inspection of
corporate orders or records and/or to be furnished with financial
statements under Sections 74 and 75 of the Corporation Code of the
Philippines;
(2) A demand for inspection and copying of books and records
and/or to be furnished with financial statements made by the plaintiff
upon defendant;
(3) The refusal of defendant to grant the demands of the plaintiff and
the reasons given for such refusals, if any; and
(4) The reasons why the refusal of defendant to grant the demands
of the plaintiff is unjustified and illegal, stating the law and
jurisprudence in support thereof.
The RTC further noted that respondent Joseph was the corporate secretary
of Winchester, Inc. and, as such, he was supposed to be the custodian of the
corporate books and records; therefore, a court order for respondents’
inspection of the same was no longer necessary. The RTC similarly denied
respondents’ demand for accounting as it was clear that Winchester, Inc. had
been engaging the services of an audit firm. Respondent Joseph himself
described the audit firm as competent and independent, and believed that
the audited financial statements the said audit firm prepared were true,
faithful, and correct.
Finding the claims of the parties for damages against each other to be
unsubstantiated, the RTC thereby dismissed the same.
Respondents challenged the foregoing RTC Decision before the Court of
Appeals via a Petition for Review under Rule 43 of the Rules of Court,
docketed as CA-G.R. SP No. 00185.
On 15 February 2006, the Court of Appeals rendered its Decision, affirming
the 10 December 2004 Decision of the RTC. Said the appellate court:
After a careful and judicious scrutiny of the extant records of the case,
together with the applicable laws and jurisprudence, WE see no reason or
justification for granting the present appeal.
xxxx
x x x [T]his Court sees that the instant petition would still fail taking into
consideration all the pleadings and evidence of the parties except the
supplemental affidavit of [herein respondent] Joseph and its corresponding
annexes appended in [respondents’] memorandum before the Court a quo.
The Court a quo have (sic) outrightly dismissed the complaint for its failure to
comply with the mandatory provisions of the Interim Rules of Procedure for
Intra-Corporate Controversies particularly Rule 2, Section 4(3), Rule 8,
Section [1(2)] and Rule 7, Section 2 thereof, which reads as follows:
RULE 2
COMMENCEMENT OF ACTION AND PLEADINGS
Sec. 4. Complaint. – The complaint shall state or contain:
xxxx
(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;
xxxx
RULE 8
DERIVATIVE SUITS
Sec. 1. Derivative action. – x x x
xxxx
(2) He exerted all reasonable efforts, and alleges the same with particularity
in the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership
to obtain the relief he desires.
xxxx
Page |
RULE 7 54
INSPECTION OF CORPORATE BOOKS AND RECORDS
Sec. 2. Complaint – In addition to the requirements in section 4, Rule 2 of
these Rules, the complaint must state the following:
(1) The case is set (sic) for the enforcement of plaintiff’s right of
inspection of corporate orders or records and/or to be furnished with
financial statements under Section 74 and 75 of the Corporation
Code of the Philippines;
(2) A demand for inspection and copying of books [and/or] to be
furnished with financial statements made by the plaintiffs upon
defendant;
(3) The refusal of the defendant to grant the demands of the plaintiff
and the reasons given for such refusal, if any; and
(4) The reasons why the refusal of defendant to grant the demands
of the plaintiff is unjustified and illegal, stating the law and
jurisprudence in support thereof.
xxxx
A perusal of the extant record shows that [herein respondents] have not
complied with the above quoted provisions. [Respondents] should be mindful
that in filing their complaint which, as admitted by them, is a derivative suit,
should have first exhausted all available remedies under its (sic) Articles of
Incorporation, or its by-laws, or any laws or rules governing the corporation.
The contention of [respondent Joseph] that he had indeed made several
talks to (sic) his brother [herein petitioner Anthony] to settle their differences
is not tantamount to exhaustion of remedies. What the law requires is to
bring the grievance to the Board of Directors or Stockholders for the latter to
take the opportunity to settle whatever problem in its regular meeting or
special meeting called for that purpose which [respondents] failed to do. x x x
The requirements laid down by the Interim Rules of Procedure for Intra-
Corporate Controversies are mandatory which cannot be dispensed with by
any stockholder of a corporation before filing a derivative suit.28 (Emphasis
ours.)
The Court of Appeals likewise sustained the refusal by the RTC to consider
respondent Joseph’s Supplemental Affidavit and other additional evidence,
which respondents belatedly submitted with their Memorandum to the said
trial court. The appellate court ratiocinated that:
With regard to the claim of [herein respondents] that the supplemental
affidavit of [respondent] Joseph and its annexes appended to their
memorandum should have been taken into consideration by the Court a quo
to support the reliefs prayed [for] in their complaint. (sic) This Court rules that
said supplemental affidavit and its annexes is (sic) inadmissible.
A second hard look of (sic) the extant records show that during the pre-trial
conference conducted on August 26, 2004, the parties through their
respective counsels had come up with an agreement that the lower court
would render judgment based on the pleadings and evidence submitted. This
agreement is in accordance with Rule 4, Sec. 4 of the Interim Rules of
Procedure for Intra-Corporate Controversies which explicitly states:
SECTION. 4. Judgment before pre-trial. – If, after submission of the pre-trial
briefs, the court determines that, upon consideration of the pleadings, the
affidavits and other evidence submitted by the parties, a judgment may be
rendered, the court may order the parties to file simultaneously their
respective memoranda within a non-extendible period of twenty (20) days
from receipt of the order. Thereafter, the court shall render judgment, either
full or otherwise, not later than ninety (90) days from the expiration of the
period to file the memoranda.
xxxx
Clearly, the supplemental affidavit and its appended documents which were
submitted only upon the filing of the memorandum for the [respondents] were
not submitted in the pre-trial briefs for the stipulation of the parties during the
pre-trial, hence, it cannot be accepted pursuant to Rule 2, Sec. 8 of the same
rules which reads as follows:
SEC. 8. Affidavits, documentary and other evidence. – Affidavits shall be
based on personal knowledge, shall set forth such facts as would be
admissible in evidence, and shall show affirmatively that the affiant is
competent to testify on the matters stated therein. The affidavits shall be in
question and answer form, and shall comply with the rules on admissibility of
evidence.
Affidavits of witnesses as well as documentary and other evidence shall be
attached to the appropriate pleading; Provided, however, that affidavits,
documentary and other evidence not so submitted may be attached to the
pre-trial brief required under these Rules. Affidavits and other evidence not
so submitted shall not be admitted in evidence, except in the following cases: Page |
55
(1) Testimony of unwilling, hostile, or adverse party witnesses. A
witness is presumed prima facie hostile if he fails or refuses to
execute an affidavit after a written request therefor;
(2) If the failure to submit the evidence is for meritorious and
compelling reasons; and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted
not later than five (5) days prior to its introduction in evidence.
There is no showing in the case at bench that the supplemental affidavit and
its annexes falls (sic) within one of the exceptions of the above quoted
proviso, hence, inadmissible.
It must be noted that in the case at bench, like any other civil cases, "the
party making an allegation in a civil case has the burden of proving it by
preponderance of evidence." Differently stated, upon the plaintiff in [a] civil
case, the burden of proof never parts. That is, appellants must adduce
evidence that has greater weight or is more convincing that (sic) which is
offered to oppose it. In the case at bar, no one should be blamed for the
dismissal of the complaint but the [respondents] themselves for their
lackadaisical attitude in setting forth and appending their defences belatedly.
To admit them would be a denial of due process for the opposite party which
this Court cannot allow.29
Ultimately, the Court of Appeals decreed:
WHEREFORE, judgment is hereby rendered DISMISSING the instant
petition and the assailed Decision of the Regional Trial Court (RTC), 7th
Judicial Region, Branch II, Cebu City, dated November 10, 2004, in SRC
Case No. 022-CEB is AFFIRMED in toto. Cost against the [herein
respondents].30
Unperturbed, respondents filed before the Court of Appeals, on 23 February
2006, a Motion for Reconsideration and Motion to Set for Oral Arguments the
Motion for Reconsideration,31 invoking the following grounds:
(1) The [herein respondents] have sufficiently exhausted all remedies
before filing the present action; and
(2) [The] Honorable Court erred in holding that the supplemental
affidavit and its annexes is (sic) inadmissible because the rules and
the lower court expressly allowed the submission of the same in its
order dated August 26, 2004 x x x.32
In a Resolution33 dated 8 March 2006, the Court of Appeals granted
respondents’ Motion to Set for Oral Arguments the Motion for
Reconsideration.
On 4 April 2006, the Court of Appeals issued a Resolution34 setting forth the
events that transpired during the oral arguments, which took place on 30
March 2006. Counsels for the parties manifested before the appellate court
that they were submitting respondents’ Motion for Reconsideration for
resolution. Justice Magpale, however, still called on the parties to talk about
the possible settlement of the case considering their familial relationship.
Independent of the resolution of respondents’ Motion for Reconsideration,
the parties were agreeable to pursue a settlement for the dissolution of the
corporation, which they had actually already started.
In a Resolution35 dated 11 April 2006, the Court of Appeals ordered the
parties to submit, within 10 days from notice, their intended amicable
settlement, since the same would undeniably affect the resolution of
respondents’ pending Motion for Reconsideration. If the said period should
lapse without the parties submitting an amicable settlement, then they were
directed by the appellate court to file within 10 days thereafter their position
papers instead.
On 5 May 2006, respondents submitted to the Court of Appeals their Position
Paper,36 stating that the parties did not reach an amicable settlement.
Respondents informed the appellate court that prior to the filing with the
Securities and Exchange Commission (SEC) of a petition for dissolution of
Winchester, Inc., the parties already divided the stocks in trade and the real
assets of the corporation among themselves. Respondents posited, though,
that the afore-mentioned distribution of the assets of Winchester, Inc. among
the parties was null and void, as it violated the last paragraph of Section 122
of the Corporation Code, which provides that, "[e]xcept by a decrease of
capital stock and as otherwise allowed by the Corporation Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities." At the same time,
however, respondents brought to the attention of the Court of Appeals that
the parties did eventually file with the SEC a petition for dissolution of
Winchester, Inc., which the SEC approved.37 Page |
56
Respondents no longer discussed in their Position Paper the grounds they
previously invoked in their Motion for Reconsideration of the Court of
Appeals Decision dated 15 February 2006, affirming in toto the RTC Decision
dated 10 November 2004. They instead argued that the RTC Decision in
question was null and void as it did not clearly state the facts and the law on
which it was based. Respondents sought the remand of the case to the RTC
for further proceedings on their derivative suit and completion of the
dissolution of Winchester, Inc., including the legalization of the prior partial
distribution among the parties of the assets of said corporation.
Petitioners filed their Position Paper38 on 23 May 2006, wherein they accused
respondents of attempting to incorporate extraneous matters into the latter’s
Motion for Reconsideration. Petitioners pointed out that the issue before the
Court of Appeals was not the dissolution and division of assets of
Winchester, Inc., thus, a remand of the case to the RTC was not necessary.
On 18 July 2006, the Court of Appeals rendered the assailed Resolution,
granting respondents’ Motion for Reconsideration. The Court of Appeals
reasoned in this wise:
After a second look and appreciation of the facts of the case, vis-à-vis the
issues raised by the [herein respondents’] motion for reconsideration and in
view of the formal dissolution of the corporation which leaves unresolved up
to the present the settlement of the properties and assets which are now in
danger of dissipation due to the unending litigation, this Court finds the need
to remand the instant case to the lower court (commercial court) as the
proper forum for the adjudication, disposition, conveyance and distribution of
said properties and assets between and amongst its stockholders as final
settlement pursuant to Sec. 122 of the Corporation Code after payment of all
its debts and liabilities as provided for under the same proviso. This is in
accord with the pronouncement of the Supreme Court in the case of
Clemente et. al. vs. Court of Appeals, et. al. where the high court ruled and
which WE quote, viz:
"the corporation continues to be a body corporate for three (3) years after its
dissolution for purposes of prosecuting and defending suits by and against it
and for enabling it to settle and close its affairs, culminating in the disposition
and distribution of its remaining assets. It may, during the three-year term,
appoint a trustee or a receiver who may act beyond that period. The
termination of the life of a juridical entity does not by itself cause the
extinction or diminution of the rights and liabilities of such entity x x x nor
those of its owners and creditors. If the three-year extended life has expired
without a trustee or receiver having been expressly designated by the
corporation within that period, the board of directors (or trustees) xxx may be
permitted to so continue as "trustees" by legal implication to complete the
corporate liquidation. Still in the absence of a board of directors or trustees,
those having any pecuniary interest in the assets, including not only the
shareholders but likewise the creditors of the corporation, acting for and in its
behalf, might make proper representation with the Securities and Exchange
Commission, which has primary and sufficiently broad jurisdiction in matters
of this nature, for working out a final settlement of the corporate concerns."
In the absence of a trustee or board of director in the case at bar for
purposes above mentioned, the lower court under Republic Act No. [8799]
(otherwise known as the Securities and Exchange Commission) as
implemented by A.M. No. 00-8-10-SC (Transfer of Cases from the Securities
and Exchange Commission to the Regional Trial Courts) which took effect on
October 1, 2001, is the proper forum for working out the final settlement of
the corporate concern.39
Hence, the Court of Appeals ruled:
WHEREFORE, premises considered, the motion for reconsideration is
GRANTED. The order dated February 15, 2006 is hereby SET ASIDE and
the instant case is REMANDED to the lower court to take the necessary
proceedings in resolving with deliberate dispatch any and all corporate
concerns towards final settlement.40
Petitioners filed a Motion for Reconsideration41 of the foregoing Resolution,
but it was denied by the Court of Appeals in its other assailed Resolution
dated 19 April 2007.
In the Petition at bar, petitioners raise the following issues:
I.
WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED
THE CONSTITUTION OF THE PHILIPPINES, JURISPRUDENCE AND THE
LAW[,] ARE NULL AND VOID[.]
II.
WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED
WITHOUT JURISDICTION[.]
III.
Page |
57
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
SERIOUSLY ERRED IN REMANDING THIS CASE TO THE LOWER
COURT FOR THE REASON CITED IN THE ASSAILED RESOLUTIONS,
AND WITHOUT RESOLVING THE GROUNDS FOR THE [RESPONDENTS’]
MOTION FOR RECONSIDERATION. (sic) INASMUCH AS [THE] REASON
CITED WAS A NON-ISSUE IN THE CASE.
IV.
WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL
COURT VIOLATES THE SUMMARY PROCEDURE FOR INTRA-
CORPORATE CASES.42
The crux of petitioners’ contention is that the Court of Appeals committed
grievous error in reconsidering its Decision dated 15 February 2006 on the
basis of extraneous matters, which had not been previously raised in
respondents’ Complaint before the RTC, or in their Petition for Review and
Motion for Reconsideration before the appellate court; i.e., the adjudication,
disposition, conveyance, and distribution of the properties and assets of
Winchester, Inc. among its stockholders, allegedly pursuant to the amicable
settlement of the parties. The fact that the parties were able to agree before
the Court of Appeals to submit for resolution respondents’ Motion for
Reconsideration of the 15 February 2006 Decision of the same court,
independently of any intended settlement between the parties as regards the
dissolution of the corporation and distribution of its assets, only proves the
distinction and independence of these matters from one another. Petitioners
also contend that the assailed Resolution dated 18 July 2006 of the Court of
Appeals, granting respondents’ Motion for Reconsideration, failed to clearly
and distinctly state the facts and the law on which it was based. Remanding
the case to the RTC, petitioners maintain, will violate the very essence of the
summary nature of the Interim Rules of Procedure Governing Intra-Corporate
Controversies, as this will just entail delay, protract litigation, and revert the
case to square one.
The Court finds the instant Petition meritorious.
To recapitulate, the case at bar was initiated before the RTC by respondents
as a derivative suit, on their own behalf and on behalf of Winchester, Inc.,
primarily in order to compel petitioners to account for and reimburse to the
said corporation the corporate assets and funds which the latter allegedly
misappropriated for their personal benefit. During the pendency of the
proceedings before the court a quo, the parties were able to reach an
amicable settlement wherein they agreed to divide the assets of Winchester,
Inc. among themselves. This amicable settlement was already partially
implemented by the parties, when respondents repudiated the same, for
which reason the RTC proceeded with the case on its merits. On 10
November 2004, the RTC promulgated its Decision dismissing respondents’
Complaint for failure to comply with essential pre-requisites before they could
avail themselves of the remedies under the Interim Rules of Procedure
Governing Intra-Corporate Controversies; and for inadequate substantiation
of respondents’ allegations in said Complaint after consideration of the
pleadings and evidence on record.
In its Decision dated 15 February 2006, the Court of Appeals affirmed, on
appeal, the findings of the RTC that respondents did not abide by the
requirements for a derivative suit, nor were they able to prove their case by a
preponderance of evidence. Respondents filed a Motion for Reconsideration
of said judgment of the appellate court, insisting that they were able to meet
all the conditions for filing a derivative suit. Pending resolution of
respondents’ Motion for Reconsideration, the Court of Appeals urged the
parties to again strive to reach an amicable settlement of their dispute, but
the parties were unable to do so. The parties were not able to submit to the
appellate court, within the given period, any amicable settlement; and filed,
instead, their Position Papers. This effectively meant that the parties opted to
submit respondents’ Motion for Reconsideration of the 15 February 2006
Decision of the Court of Appeals, and petitioners’ opposition to the same, for
resolution by the appellate court on the merits.
It was at this point that the case took an unexpected turn.
In accordance with respondents’ allegation in their Position Paper that the
parties subsequently filed with the SEC, and the SEC already approved, a
petition for dissolution of Winchester, Inc., the Court of Appeals remanded
the case to the RTC so that all the corporate concerns between the parties
regarding Winchester, Inc. could be resolved towards final settlement.
In one stroke, with the use of sweeping language, which utterly lacked
support, the Court of Appeals converted the derivative suit between the
parties into liquidation proceedings.
The general rule is that where a corporation is an injured party, its power to
sue is lodged with its board of directors or trustees. Nonetheless, an
individual stockholder is permitted to institute a derivative suit on behalf of
the corporation wherein he holds stocks in order to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to sue, or
are the ones to be sued, or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest. A derivative action is a suit by a Page |
shareholder to enforce a corporate cause of action. The corporation is a 58
necessary party to the suit. And the relief which is granted is a judgment
against a third person in favor of the corporation. Similarly, if a corporation
has a defense to an action against it and is not asserting it, a stockholder
may intervene and defend on behalf of the corporation.43 By virtue of
Republic Act No. 8799, otherwise known as the Securities Regulation Code,
jurisdiction over intra-corporate disputes, including derivative suits, is now
vested in the Regional Trial Courts designated by this Court pursuant to A.M.
No. 00-11-03-SC promulgated on 21 November 2000.
In contrast, liquidation is a necessary consequence of the dissolution of a
corporation. It is specifically governed by Section 122 of the Corporation
Code, which reads:
SEC. 122. Corporate liquidation. – Every corporation whose charter expires
by its own limitation or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated in any other manner,
shall nevertheless be continued as a body corporate for three (3) years after
the time when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which it was
established.
At any time during said three (3) years, said corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and
after any such conveyance by the corporation of its property in trust for the
benefit of its stockholders, members, creditors and others in interest, all
interest which the corporation had in the property terminates, the legal
interest vests in the trustees, and the beneficial interest in the stockholders,
members, creditors or other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found shall
be escheated to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code,
no corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.
Following the voluntary or involuntary dissolution of a corporation, liquidation
is the process of settling the affairs of said corporation, which consists of
adjusting the debts and claims, that is, of collecting all that is due the
corporation, the settlement and adjustment of claims against it and the
payment of its just debts.44 More particularly, it entails the following:
Winding up the affairs of the corporation means the collection of all assets,
the payment of all its creditors, and the distribution of the remaining assets, if
any among the stockholders thereof in accordance with their contracts, or if
there be no special contract, on the basis of their respective interests. The
manner of liquidation or winding up may be provided for in the corporate by-
laws and this would prevail unless it is inconsistent with law.45
It may be undertaken by the corporation itself, through its Board of Directors;
or by trustees to whom all corporate assets are conveyed for liquidation; or
by a receiver appointed by the SEC upon its decree dissolving the
corporation.46lawphil.net
Glaringly, a derivative suit is fundamentally distinct and independent from
liquidation proceedings. They are neither part of each other nor the
necessary consequence of the other. There is totally no justification for the
Court of Appeals to convert what was supposedly a derivative suit instituted
by respondents, on their own behalf and on behalf of Winchester, Inc.
against petitioners, to a proceeding for the liquidation of Winchester, Inc.
While it may be true that the parties earlier reached an amicable settlement,
in which they agreed to already distribute the assets of Winchester, Inc., and
in effect liquidate said corporation, it must be pointed out that respondents
themselves repudiated said amicable settlement before the RTC, even after
the same had been partially implemented; and moved that their case be set
for pre-trial. Attempts to again amicably settle the dispute between the
parties before the Court of Appeals were unsuccessful.
Moreover, the decree of the Court of Appeals to remand the case to the RTC
for the "final settlement of corporate concerns" was solely grounded on
respondents’ allegation in its Position Paper that the parties had already filed
before the SEC, and the SEC approved, the petition to dissolve Winchester,
Inc. The Court notes, however, that there is absolute lack of evidence on
record to prove said allegation. Respondents failed to submit copies of such
petition for dissolution of Winchester, Inc. and the SEC Certification
approving the same. It is a basic rule in evidence that each party must prove
his affirmative allegation. Since it was respondents who alleged the voluntary
dissolution of Winchester, Inc., respondents must, therefore, prove it.47 This
respondents failed to do.
Page |
Even assuming arguendo that the parties did submit a petition for the 59
dissolution of Winchester, Inc. and the same was approved by the SEC, the
Court of Appeals was still without jurisdiction to order the final settlement by
the RTC of the remaining corporate concerns. It must be remembered that
the Complaint filed by respondents before the RTC essentially prayed for the
accounting and reimbursement by petitioners of the corporate funds and
assets which they purportedly misappropriated for their personal use;
surrender by the petitioners of the corporate books for the inspection of
respondents; and payment by petitioners to respondents of damages. There
was nothing in respondents’ Complaint which sought the dissolution and
liquidation of Winchester, Inc. Hence, the supposed dissolution of
Winchester, Inc. could not have resulted in the conversion of respondents’
derivative suit to a proceeding for the liquidation of said corporation, but only
in the dismissal of the derivative suit based on either compromise agreement
or mootness of the issues.
Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April
2007, the Court of Appeals already went beyond the issues raised in
respondents’ Motion for Reconsideration. Instead of focusing on whether it
erred in affirming, in its 15 February 2006 Decision, the dismissal by the RTC
of respondents’ Complaint due to respondents’ failure to comply with the
requirements for a derivative suit and submit evidence to support their
allegations, the Court of Appeals unduly concentrated on respondents’
unsubstantiated allegation that Winchester, Inc. was already dissolved and
speciously ordered the remand of the case to the RTC for proceedings so
vitally different from that originally instituted by respondents.
Despite the foregoing, the Court still deems it appropriate to already look into
the merits of respondents’ Motion for Reconsideration of the 15 February
2006 Decision of the Court of Appeals, for the sake of finally putting an end
to the case at bar.
In their said Motion for Reconsideration, respondents argued that: (1) they
had sufficiently exhausted all remedies before filing the derivative suit; and
(2) respondent Joseph’s Supplemental Affidavit and its annexes should have
been taken into consideration, since the submission thereof was allowed by
the rules of procedure, as well as by the RTC in its Order dated 26 August
2004.
As regards the first ground of sufficient exhaustion by respondents of all
remedies before filing a derivative suit, the Court subscribes to the ruling to
the contrary of the Court of Appeals in its Decision dated 16 February
2006.1avvphi1
The Court has recognized that a stockholder’s right to institute a derivative
suit is not based on any express provision of the Corporation Code, or even
the Securities Regulation Code, but is impliedly recognized when the said
laws make corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties. Hence,
a stockholder may sue for mismanagement, waste or dissipation of corporate
assets because of a special injury to him for which he is otherwise without
redress. In effect, the suit is an action for specific performance of an
obligation owed by the corporation to the stockholders to assist its rights of
action when the corporation has been put in default by the wrongful refusal of
the directors or management to make suitable measures for its protection.
The basis of a stockholder’s suit is always one in equity. However, it cannot
prosper without first complying with the legal requisites for its institution.48
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies lays down the following requirements which a
stockholder must comply with in filing a derivative suit:
Sec. 1. Derivative action. – A stockholder or member may bring an action in
the name of a corporation or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time the action
was filed;
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under
the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of;
and
(4) The suit is not a nuisance or harassment suit.
A perusal of respondents’ Complaint before the RTC would reveal that the
same did not allege with particularity that respondents exerted all reasonable
efforts to exhaust all remedies available under the articles of incorporation,
by-laws, laws or rules governing Winchester, Inc. to obtain the relief they
desire.
Respondents assert that their compliance with said requirement was
contained in respondent Joseph’s Affidavit, which was attached to Page |
respondents’ Complaint. Respondent Joseph averred in his Affidavit that he 60
tried for a number of times to talk to petitioner Anthony to settle their
differences, but the latter would not listen. Respondents additionally claimed
that taking further remedies within the corporation would have been idle
ceremony, considering that Winchester, Inc. was a family corporation and it
was impossible to expect petitioners to take action against themselves who
were the ones accused of wrongdoing.
The Court is not persuaded.
The wordings of Section 1, Rule 8 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies are simple and do not leave room
for statutory construction. The second paragraph thereof requires that the
stockholder filing a derivative suit should have exerted all reasonable efforts
to exhaust all remedies available under the articles of incorporation, by-laws,
laws or rules governing the corporation or partnership to obtain the relief he
desires; and to allege such fact with particularity in the complaint. The
obvious intent behind the rule is to make the derivative suit the final recourse
of the stockholder, after all other remedies to obtain the relief sought had
failed.
The allegation of respondent Joseph in his Affidavit of his repeated attempts
to talk to petitioner Anthony regarding their dispute hardly constitutes "all
reasonable efforts to exhaust all remedies available." Respondents did not
refer to or mention at all any other remedy under the articles of incorporation
or by-laws of Winchester, Inc., available for dispute resolution among
stockholders, which respondents unsuccessfully availed themselves of. And
the Court is not prepared to conclude that the articles of incorporation and
by-laws of Winchester, Inc. absolutely failed to provide for such remedies.
Neither can this Court accept the reasons proffered by respondents to
excuse themselves from complying with the second requirement under
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies. They are flimsy and insufficient, compared to the
seriousness of respondents’ accusations of fraud, misappropriation, and
falsification of corporate records against the petitioners. The fact that
Winchester, Inc. is a family corporation should not in any way exempt
respondents from complying with the clear requirements and formalities of
the rules for filing a derivative suit. There is nothing in the pertinent laws or
rules supporting the distinction between, and the difference in the
requirements for, family corporations vis-à-vis other types of corporations, in
the institution by a stockholder of a derivative suit.
The Court further notes that, with respect to the third and fourth requirements
of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies, the respondents’ Complaint failed to allege,
explicitly or otherwise, the fact that there were no appraisal rights available
for the acts of petitioners complained of, as well as a categorical statement
that the suit was not a nuisance or a harassment suit.
As to respondents’ second ground in their Motion for Reconsideration, the
Court agrees with the ruling of the Court of Appeals, in its 15 February 2006
Decision, that respondent Joseph’s Supplemental Affidavit and additional
evidence were inadmissible since they were only appended by respondents
to their Memorandum before the RTC. Section 8, Rule 2 of the Interim Rules
of Procedure Governing Intra-Corporate Controversies is crystal clear that:
Sec. 8. Affidavits, documentary and other evidence. – Affidavits shall be
based on personal knowledge, shall set forth such facts as would be
admissible in evidence, and shall show affirmatively that the affiant is
competent to testify on the matters stated therein. The affidavits shall be in
question and answer form, and shall comply with the rules on admissibility of
evidence.
Affidavits of witnesses as well as documentary and other evidence shall be
attached to the appropriate pleading, Provided, however, that affidavits,
documentary and other evidence not so submitted may be attached to the
pre-trial brief required under these Rules. Affidavits and other evidence not
so submitted shall not be admitted in evidence, except in the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A
witness is presumed prima facie hostile if he fails or refuses to
execute an affidavit after a written request therefor;
(2) If the failure to submit the evidence is for meritorious and
compelling reasons; and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted
not later than five (5) days prior to its introduction in evidence. (Emphasis
ours.)
According to the afore-quoted provision, the parties should attach the
affidavits of witnesses and other documentary evidence to the appropriate
pleading, which generally should mean the complaint for the plaintiff and the
answer for the respondent. Affidavits and documentary evidence not so
submitted must already be attached to the respective pre-trial briefs of the Page |
parties. That the parties should have already identified and submitted to the 61
trial court the affidavits of their witnesses and documentary evidence by the
time of pre-trial is strengthened by the fact that Section 1, Rule 4 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies require
that the following matters should already be set forth in the parties’ pre-trial
briefs:
Section 1. Pre-trial conference, mandatory nature. – Within five (5) days after
the period for availment of, and compliance with, the modes of discovery
prescribed in Rule 3 hereof, whichever comes later, the court shall issue and
serve an order immediately setting the case for pre-trial conference, and
directing the parties to submit their respective pre-trial briefs. The parties
shall file with the court and furnish each other copies of their respective pre-
trial brief in such manner as to ensure its receipt by the court and the other
party at least five (5) days before the date set for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other matters, the
following:
xxxx
(4) Documents not specifically denied under oath by either or both parties;
xxxx
(7) Names of witnesses to be presented and the summary of their testimony
as contained in their affidavits supporting their positions on each of the
issues;
(8) All other pieces of evidence, whether documentary or otherwise and their
respective purposes.
Also, according to Section 2, Rule 4 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies,49 it is the duty of the court to
ensure during the pre-trial conference that the parties consider in detail,
among other things, objections to the admissibility of testimonial,
documentary, and other evidence, as well as objections to the form or
substance of any affidavit, or part thereof.
Obviously, affidavits of witnesses and other documentary evidence are
required to be attached to a party’s pre-trial brief, at the very last instance, so
that the opposite party is given the opportunity to object to the form and
substance, or the admissibility thereof. This is, of course, to prevent unfair
surprises and/or to avoid the granting of any undue advantage to the other
party to the case.
True, the parties in the present case agreed to submit the case for judgment
by the RTC, even before pre-trial, in accordance with Section 4, Rule 4 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies:
recognized under Section 8, Rule 2 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies.
WHEREFORE, premises considered, the Petition for Review under Rule 45
of the Rules of Court is hereby GRANTED. The assailed Resolutions dated Page |
18 July 2006 and 19 April 2007 of the Court of Appeals in CA-G.R. SP No. 62
00185 are hereby REVERSED AND SET ASIDE. The Decision dated 15
February 2006 of the Court of Appeals is hereby AFFIRMED. No costs.
SO ORDERED.

Sec. 4. Judgment before pre-trial. – If after submission of the pre-trial briefs,

the court determines that, upon consideration of the pleadings, the affidavits
and other evidence submitted by the parties, a judgment may be rendered,
the court may order the parties to file simultaneously their respective
memoranda within a non-extendible period of twenty (20) days from receipt
of the order. Thereafter, the court shall render judgment, either full or
otherwise, not later than ninety (90) days from the expiration of the period to
file the memoranda.

Even then, the afore-quoted provision still requires, before the court makes a
determination that it can render judgment before pre-trial, that the parties had
submitted their pre-trial briefs and the court took into consideration the
pleadings, affidavits and other evidence submitted by the parties. Hence,
cases wherein the court can render judgment prior to pre-trial, do not depart
from or constitute an exception to the requisite that affidavits of witnesses
and documentary evidence should be submitted, at the latest, with the
parties’ pre-trial briefs. Taking further into account that under Section 4, Rule
4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies
parties are required to file their memoranda simultaneously, the same would
mean that a party would no longer have any opportunity to dispute or rebut
any new affidavit or evidence attached by the other party to its memorandum.
To violate the above-quoted provision would, thus, irrefragably run afoul the
former party’s constitutional right to due process.

In the instant case, therefore, respondent Joseph’s Supplemental Affidavit

and the additional documentary evidence, appended by respondents only to
their Memorandum submitted to the RTC, were correctly adjudged as
inadmissible by the Court of Appeals in its 15 February 2006 Decision for
having been belatedly submitted. Respondents neither alleged nor proved
that the documents in question fall under any of the three exceptions to the
requirement that affidavits and documentary evidence should be attached to
the appropriate pleading or pre-trial brief of the party, which is particularly