Corpo ESCRA Cases

No. L-19550. June 19, 1967.
HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS

and KARL BECK, petitioners, vs. HON. JOSE W. DIOKNO, in his
capacity as SECRETARY OF JUSTICE; JOSE LUKBAN, in his
capacity as Acting Director, National Bureau of Investigation;
SPECIAL PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA
and MANUEL VILLAREAL, JR., and ASST. FISCAL MANASES G.
REYES; JUDGE AMADO ROAN, Municipal Court of Manila;
JUDGE ROMAN CANSINO, Municipal Court of Manila; JUDGE
HERMOGENES CALUAG, Court of First Instance of Rizal-
Quezon City Branch and JUDGE DAMIAN JIMENEZ, Municipal
Court of Quezon City, respondents.

Constitutional Law; Search warrants; Corporations; Only party
affected may contest legality of seizure effected by search
warrants.Officers of certain corporations, from which
documents, papers and things were seized by means of
search warrants, have no cause of action to assail the legality
of the seizures because said corporations have personalities
distinct and separate from those of said officers. The legality
of a seizure can be contested only by the party whose rights
have been impaired thereby. The objection to an unlawful
search is purely personal and cannot be availed of by third
parties.

Same; Evidence: When illegally seized evidence is
admissible.Officers of certain corporations cannot validly
object to the use in evidence against them of the documents,
papers and things seized from the offices and premises of the
corporations since the right to object to their admission in
evidence belongs exclusively to the corporations, to which
the seized effects
belong, and may not be invoked by the corporate officers in
proceedings against them in their individual capacity.

Same; Requisites for issuing search warrants.The
Constitution provides that no warrant shall issue but upon
probable cause, to be determined by the judge, and that the
warrant shall particularly describe the things to be seized.

Same; General search warrants.Search warrants, issued
upon applications stating that the natural and juridical
persons therein named had committed a violation of Central
Bank laws, tariff and customs laws, Tax Code and Revised
Penal Code do not satisfy the constitutional requirements
because no specific offense had been alleged in said
applications. It was impossible for the judges, who issued the
warrants, to have found the existence of probable cause,
which presupposes the introduction of competent proof that
the party against whom it is sought has performed particular
acts or committed specific omissions in violation of a specific
penal provision.

Same; Why general warrants are outlawed.General search
warrants are outlawed because they place the sanctity of the
domicile and the privacy of communication and
correspondence at the mercy of the whims, caprice or
passion of peace officers.

Same; Provision of Revised Rules of Court.To prevent the
issuance of general warrants, the Supreme Court amended
the Old Rules of Court by providing in the Revised Rules of
Court that "no search warrant shall issue for more than one
specific offense".

Same; Warrants not describing particularly the things to be
seized.Search warrants authorizing the seizure of books of
accounts and records "showing all the business transactions"
of certain persons, regardless of whether the transactions
were legal or illegal, contravene the explicit command of the
Bill of Rights that the things to be seized should be
particularly described and defeat its major objective of
eliminating general warrants.

Same; Evidence; Abandonment of Moncado ruling; Illegally
seized documents are not admissible in evidence.The
Moncado ruling, that illegally seized documents, papers and
things are admissible in evidence, must be abandoned. The
exclusion of such evidence is the only practical means of
enforcing the constitutional injunction against unreasonable
searches and seizures. The non-exclusionary rule is contrary
to the letter and spirit of the prohibition against
unreasonable searches and seizures. If there is competent
evidence to establish probable cause of the commission of a
given crime by the party against whom the warrant is
intended, then there is no reason why the applicant should
not comply with the constitutional requirements If he has no
such evidence, then it is not possible for the judge to find that
there is a probable cause, and, hence, no justifica-
tion for the issuance of the warrant. The only possible
explanation for the issuance in that case is the necessity of
fishing for evidence of the commission of a crime. Such a
fishing expedition is indicative of the absence of evidence to
establish a probable cause.

CASTRO, J., concurring and dissenting:

Constitutional Law; Search and Seizure; Lack of standard of
petitioners cannot affect illegality of search and seizure.
That the petitioners have no legal standing to ask for the
suppression of the papers, things, and effects seized from
places other than their residences, cannot in any manner
affect, alter, or otherwise modify the intrinsic nullity of the
search warrants and the intrinsic illegality of the searches and
seizures made thereunder. Whether or not petitioners
possess legal standing, the said warrants are void and remain
void, and the searches and seizures were illegal and remain
illegal. No inference can be drawn from the words of the
Constitution that "legal standing", or the lack of it, is a
determinant of the nullity or validity of a Search warrant or of
the lawfulness or illegality of a search or seizure.

Same; Provision on search and seizure is derived from Federal
Constitution.Our constitutional provision on searches and
seizures was derived almost verbatim from the Fourth
Amendment to the United States Constitution. In the many
years of judicial construction and interpretation of the said
constitutional provision, our courts have invariably regarded
as doctrinal the pronouncements made on the Fourth
Amendment by federal courts, especially the Federal
Supreme Court and the Federal Circuit Courts of Appeals. The
U.S. doctrines and pertinent cases on standing to move for
the suppression or return of documents, papers and effects,
which are the fruits of an unlawful search and seizure, may be
summarized as follows: (a) ownership of documents, papers,
and effects gives "standing"; (b) ownership and/or control or
possessionactual or constructiveof premises searched
gives "standing"; and (c) the "aggrieved person" doctrine
where the search warrant and the sworn application for
search warrant are "primarily" directed solely and exclusively
'against the "aggrieved person", gives "standing". An
examination of the search warrants in this case will readily
show that, excepting three, all were directed against the
petitioners personally. In some of them, the petitioners were
named personally, followed by the designation, "The
President and/or General Manager" of the particular
corporation. The three warrants excepted named three
corporate defendants. But the
"office/house/warehouse/premises" mentioned in the said
three warrants were also the same
"office/house/warehouse/premises" declared to be owned
by or under the control of the petitioners in all the other
search

warrants directed against the petitioners and/or "the
corporation. The searches and seizures were to be made, and
were actually made, in the
"office/house/warehouse/premises" owned by or under the
control of the petitioners.

Same; Ownership of properties seized entitles petitioners to
bring motion to return and suppress and gives them standing
as persons aggrieved by unlawful search and seizure.
Ownership of the properties seized alone entitles the
petitioners to bring a motion to return and suppress, and
gives them standing as persons aggrieved by an unlawful
search and seizure regardless of their location at the time of
seizure. Under the constitutional provision against unlawful
searches and seizures, a person places himself or his property
within a constitutionally protected area, be it his home or his
office, his hotel room or his automobile.

Same; Control of premises searched gives "standing".
Independent of ownership or other personal interest in the
records and documents seized, the petitioners have standing
to move for return and suppression by virtue of their
proprietary or leasehold interest in many of the premises
searched. These proprietary and leasehold interests have
been sufficiently set forth in their motion for reconsideration
and need not be recounted here. It has never been held that
a person with requisite interest in the premises searched
must own the property seized in order to have standing in a
motion to return and suppress.

ORIGINAL ACTION in the Supreme Court. Certiorari,
prohibition. mandamus and injunction.

The facts are stated in the opinion of the Court.

Paredes, Poblador, Cruz & Nazareno and Meer, Meer &
Meer and Juan T. David for petitioners.

Solicitor General Arturo A. Alafriz, Assistant Solicitor
General Pacifico P. de Castro, Assistant Solicitor General Frine
C. Zaballero, Solicitor Camilo D, Quiason and Solicitor C.
Padua for respondents.

CONCEPCION, C.J.:

Upon application of the officers of the government named on
the margin1hereinafter referred to as Respondents-

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1 Hon. Jose W. Diokno, in his capacity as Secretary of Justice,
Jose Lukban, in his capacity as Acting Director, National
Bureau of Investigation, Special Prosecutors Pedro D. Cenzon,
Efren I. Plana and Manuel Villareal, Jr., and Assistant Fiscal
Maneses G. Reyes. City of Manila.

Prosecutorsseveral judges2hereinafter referred to as
Respondents-Judgesissued, on different dates,3 a total of
42 search warrants against petitioners herein4 and/or the
corporations of which they were officers,5 directed to any
peace officer, to search the persons above-named and/ or the
premises of their offices, warehouses and/or residences, and
to seize and take possession of the following personal
property to wit:

"Books of accounts, financial records, vouchers,
correspondence, receipts, ledgers, journals, portfolios, credit
journals, typewriters, and other documents and/or papers
showing all business transactions including disbursements
receipts, balance sheets and profit and loss statements and
Bobbins (cigarette wrappers)."

as "the subject of the offense; stolen or embezzled and
proceeds or fruits of the offense," or "used or intended to be
used as the means of committing the offense," which is
described in the applications adverted to above as "violation
of Central Bank Laws, Tariff and Customs Laws, Internal
Revenue (Code) and the Revised Penal Code." Alleging that
the aforementioned search warrants are null and void, as
contravening the Constitution and the Rules of Court
because, inter alia: (1) they do not describe with particularity
the documents, books and things

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2 Hon. Amado Roan, Judge of the Municipal (now City) Court
of Manila, Hon. Roman Cansino, Judge of the Municipal (now
City) Court of Manila, Hon. Hermogenes Caluag, Judge of the
Court of First Instance of Rizal, Quezon City Branch, Hon.
Eulogio Mencias, Judge of the Court of First Instance of Rizal,
Pasig Branch, and Hon, Damian Jimenez, Judge of the
Municipal (now City) Court of Quezon City.

3 Covering the period from March 3 to March 9, 1962.

4 Harry S, Stonehill, Robert P. Brooks, John J. Brooks and Karl
Beck.

5 U.S. Tobacco Corporation, Atlas Cement Corporation, Atlas
Development Corporation, Far East Publishing Corporation
(Evening News), Investment Inc., Industrial Business
Management Corporation, General Agricultural Corporation,
American Asiatic Oil Corporation, Investment Management
Corporation, Holiday Hills, Inc., Republic Glass Corporation,
Industrial and Business Management Corporation, United
Housing Corporation, The Philippine Tobacco-Flue-Curing and
Redrying Corporation, Republic Real Estate Corporation and
Merconsel Corporation.

to be seized; (2) cash money, not mentioned in the warrants,
were actually seized; (3) the warrants were issued to fish
evidence against the aforementioned petitioners in
deportation cases filed against them; (4) the searches and
seizures were made in an illegal manner; and (5) the
documents, papers and cash money seized were not
delivered to the courts that issued the warrants, to be
disposed of in accordance with lawon March 20, 1962, said
petitioners filed with the Supreme Court this original action
for certiorari, prohibition, mandamus and injunction, and
prayed that, pending final disposition of the present case, a
writ of preliminary injunction be issued restraining
RespondentsProsecutors, their agents and/or representatives
from using the effects seized as aforementioned, or any
copies thereof, in the deportation cases already adverted to,
and that, in due course, thereafter, decision be rendered
quashing the contested search warrants and declaring the
same null and void, and commanding the respondents, their
agents or representatives to return to petitioners herein, in
accordance with Section 3, Rule 67, of the Rules of Court, the
documents, papers, things and cash moneys seized or
confiscated under the search warrants in question.

In their answer, respondents-prosecutors alleged6 (1) that
the contested search warrants are valid and have been issued
in accordance with law; (2) that the defects of said warrants,
if any, were cured by petitioners' consent; and (3) that, in any
event, the effects seized are admissible in evidence against
herein petitioners, regardless of the alleged illegality of the
aforementioned searches and seizures.

On March 22, 1962, this Court issued the writ of preliminary
injunction prayed for in the petition. However, by resolution
dated June 29, 1962. the writ was partially lifted or dissolved,
insofar as the papers, documents and things seized from the
offices of the corporations above mentioned are concerned;
but, the injunction was maintained as regards the papers,
documents and things found and seized in the residences of
petitioners herein.7

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6 Inter alia,.

7 "Without prejudice to explaining the reasons for this order
in the decision to be rendered in the case, the writ of

389

VOL. 20, JUNE 19, 1967

389

Stonehill vs. Diokno

Thus, the documents, papers, and things seized under the
alleged authority of the warrants in question may be split into
two (2) major groups, namely: (a) those found and seized in
the off ices of the aforementioned corporations, and (b)
those found and seized in the residences of petitioners
herein.

As regards the first group, we hold that petitioners herein
have no cause of action to assail the legality of the contested
warrants and of the seizures made in pursuance thereof, for
the simple reason that said corporations have

________________

preliminary injunction issued by us in this case against the use
of the papers, documents and things from the following
premises: (1) The office of the U.S. Tobacco Corp. at the
Ledesma Bldg., Arzobispo St., Manila; (2) 932 Gonzales,
Ermita, Manila; (3) office at Atlanta St. bounded by Chicago,
15th & 14th Sts., Port Area, Manila; (4) 527 Rosario St, Mla.;
(5) Atlas Cement Corp. and/or Atlas Development Corp.,
Magsaysay Bldg., San Luis, Ermita, Mla.; (6) 205 13th St., Port
Area, Mla.; (7) No. 224 San Vicente St, Mla.; (8) Warehouse
No. 2 at Chicago & 23rd Sts., Mla.; (9) Warehouse at 23rd St.,
between Muelle de San Francisco & Boston, Port Area, Mla.;
(10) Investment Inc., 24th St. & Boston; (11) IBMC, Magsaysay
Bldg., San Luis, Mla.; (12) General Agricultural Corp.,
Magsaysay Bldg., San Luis, Manila; (13) American Asiatic Oil
Corp., Magsaysay Bldg., San Luis, Manila; (14) Room 91,
Carmen Apts., Dewey Blvd., Manila; (15) Warehouse Railroad
St. between 17 & 12 Sts., Port Area, Manila; (16) Rm. 304,
Army & Navy Club, Manila, South Blvd.; (17) Warehouse
Annex Bldg., 18th St., Port Area, Manila; (18) Rm. 81 Carmen
Apts., Dewey Blvd., Manila; (19) Holiday Hills, Inc., Trinity
Bldg,, San Luis, Manila; (20) No. 2008 Dewey Blvd.; (21)
Premises of 24th St. & Boston, Port Area, Manila; (22)
Republic Glass Corp., Trinity Bldg., San Luis. Manila; (23)
IBMC, 2nd Floor, Trinity Bldg., San Luis, Manila; (24) IBMC,
2nd Flr., Gochangco Blg., 610 San Luis, Manila; (25) United
Housing Corp., Trinity Bldg., San Luis, Manila; (26) Republic
Real Estate Corp., Trinity Bldg., San Luis, Manila; (27) 1437
Colorado St., Malate, Manila; (28) Phil. Tobacco Flue-Curing,
Magsaysay Bldg., San Luis, Manila and (29) 14 Baldwin St.,
Sta. Cruz, Manila, in the hearing of Deportation Cases Nos. R-
953 and 955 against petitioners, before the Deportation
Board, is hereby lifted. The preliminary injunction shall
continue as to the papers, documents and things found in the
other premises namely: in those of the residences of
petitioners, as follows: (1) 13 Narra Road, Forbes Park,
Makati, Rizal; (2) 15 Narra Road, Forbes Park, Makati, Rizal;
and (3) 8 Urdaneta Avenue, Urdaneta Village, Makati, Rizal."

SUPREME COURT REPORTS ANNOTATED


their respective personalities, separate and distinct from the
personality of herein petitioners, regardless of the amount of
shares of stock or of the interest of each of them in said
corporations, and whatever the offices they hold therein may
be.8 Indeed, it is well settled that the legality of a seizure can
be contested only by the party whose rights have been
impaired thereby,9 and that the objection to an unlawful
search and seizure is purely personal and cannot be availed of
by third parties.10 Consequently, petitioners herein may not
validly object to the use in evidence against them of the
documents, papers and things seized from the offices and
premises of the corporations adverted to above, since the
right to object to the admission of said papers in evidence
belongs exclusively to the corporations, to whom the seized
effects belong, and may not be invoked by the corporate
officers in proceedings against them in their individual
capacity.11 Indeed, it has been held:

"x x x that the Government's action in gaining possession of
papers belonging to the corporation did not relate to nor did
it affect the personal defendants. If these papers were
unlawfully seized and thereby the constitutional rights of or
any one were invaded, they were the rights of the
corporation and not the rights of the other defendants, Next,
it is clear that a question of the lawfulness of a seizure can be
raised only by one whose rights have been invaded. Certainly,
such a seizure, if unlawful, could not affect the constitutional
rights of defendants whose property had not been seized or
the privacy of whose homes had not been disturbed; nor
could they claim for them-selves the benefits of the Fourth
Amendment, when its violation, if any, was with reference to
the rights of another. Remus vs. United States (C.C.A.) 291 F.
501, 511. It follows, therefore, that the question of the
admissibility of the evidence based on an alleged unlawful
search and seizure does not extend to the personal
defendants but embraces only the corporation whose
property was taken. x x x." (A. Guckenheimer & Bros. Co. vs
United. States, [1925] 3 F. 2d. 786, 789, Italics supplied.)

________________

With respect to the documents, papers and things seized in
the residences of petitioners herein, the aforementioned
resolution of June 29, 1962, lifted the writ of preliminary
injunction previously issued by this Court,12 thereby, in
effect, restraining herein Respondents-Prosecutors from
using them in evidence against petitioners herein.

In connection with said documents, papers and things, two
(2) important questions need be settled, namely: (1) whether
the search warrants in question, and the searches and
seizures made under the authority thereof, are valid or not,
and (2) if the answer to the preceding question is in the
negative, whether said documents, papers and things may be
used in evidence against petitioners herein.

Petitioners maintain that the aforementioned search
warrants are in the nature of general warrants and that,
accordingly, the seizures effected upon the authority thereof
are null and void. In this connection, the Constitution13
provides:

"The right of the people to be secure in their persons, houses,
papers, and effects against unreasonable searches and
seizures shall not be violated, and no warrants shall issue but
upon probable cause, to be determined by the judge after
examination under oath or affirmation of the complainant
and the witnesses he may produce, and particularly
describing the place to be searched, and the persons or
things to be seized."

Two points must be stressed in connection with this
constitutional mandate, namely: (1) that no warrant shall
issue but upon probable cause, to be determined by the
judge in the manner set forth in said provision; and (2) that
the warrant shall particularly describe the things to be seized.

None of these requirements has been complied with in the
contested warrants. Indeed, the same were issued upon
applications stating that the natural and juridical persons
therein named had committed a "violation of Central Bank
Laws, Tariff and Customs Laws, Internal Revenue (Code) and
Revised Penal Code." In other words, no specific offense had
been alleged in said applications. The averments thereof with
respect to the offense committed were abstract. As a
consequence, it was impossible for the

________________

12 On March 22, 1962.

13 Section 1, paragraph 3, of Article III thereof.

judges who issued the warrants to have found the existence
of probable cause, for the same presupposes the introduction
of competent proof that the party against whom it is sought
has performed particular acts, or committed specific
omissions, violating a given provision of our criminal laws. As
a matter of fact, the applications involved in this case do not
allege any specific acts performed by herein petitioners. It
would be a legal heresy, of the highest order, to convict
anybody of a "violation of Central Bank Laws, Tariff and
Customs Laws, Internal Revenue (Code) and Revised Penal
Code,"as alleged in the aforementioned applications
without reference to any determinate provision of said laws
or codes.

To uphold the validity of the warrants in question would be to
wipe out completely one of the most fundamental rights
guaranteed in our Constitution, for it would place the sanctity
of the domicile and the privacy of communication and
correspondence at the mercy of the whims, caprice or
passion of peace officers. This is precisely the evil sought to
be remedied by the constitutional provision above quoted
to outlaw the so-called general warrants. It is not difficult to
imagine ,what would happen, in times of keen political strife,
when the party in power feels that the minority is likely to
wrest it, even though by legal means,

Such is the seriousness of the irregularities committed in
connection with the disputed search warrants, that this Court
deemed it fit to amend Section 3 of Rule 122 of the former
Rules of Court14 by providing in its counterpart, under the
Revised Rules of Court15 that "a search warrant

________________

14 Reading: x x x A search warrant shall not issue but upon
probable cause to be determined by the judge or justice of
the peace after examination under oath or affirmation of the
complainant and the witnesses he may produce, and
particularly describing the place to be searched, and the
persons or things to be seized.

15 x x x A search warrant shall not issue but upon probable
cause in connection with one specific offense to be
determined by the judge or justice of the peace after
examination under oath or affirmation of the complainant
and the witnesses he may produce, and particularly
describing the place to be searched and persons or things to
be seized.

shall not issue but upon probable cause in connection with
one specific offense." Not satisfied with this qualification, the
Court added thereto a paragraph, directing that "no search
warrant shall issue for more than one specific offense."

The grave violation of the Constitution made in the
application for the contested search warrants was
compounded by the description therein made of the effects
to be searched for and seized to wit:

"Books of accounts, financial records, vouchers, journals,
correspondence, receipts, ledgers, portfolios, credit journals,
typewriters, and other documents and/or papers showing all
business transactions including disbursement receipts,
balance sheets and related profit and loss statements."

Thus, the warrants authorized the search for and seizure of
records pertaining to all business transactions of petitioners
herein, regardless of whether the transactions were legal or
illegal. The warrants sanctioned the seizure of all records of
the petitioners and the aforementioned corporations,
whatever their nature, thus openly contravening the explicit
command of our Bill of Rightsthat the things to be seized
be particularly describedas well as tending to defeat its
major objective: the elimination of general warrants.

Relying upon Moncado vs. People's Court (80 Phil. 1),
Respondents-Prosecutors maintain that, even if the searches
and seizures under consideration were unconstitutional, the
documents, papers and things thus seized are admissible in
evidence against petitioners herein. Upon mature
deliberation, however, we are unanimously of the opinion
that the position taken in the Moncado case must be
abandoned. Said position was in line with the American
common law rule, that the criminal should not be allowed to
go free merely "because the constable has blundered,"16
upon the theory that the constitutional prohibition against
unreasonable searches and seizures is protected by means
other than the exclusion of evidence unlawfully obtained,17
such as the

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No search warrant shall issue for more than one specific
offense. (Sec. 3, Rule 126.)



common-law action for damages against the searching
officer, against the party who procured the issuance of the
search warrant and against those assisting in the execution of
an illegal search, their criminal punishment, resistance,
without liability to an unlawful seizure, and such other legal
remedies as may be provided by other laws.

However, most common law jurisdictions have already given
up this approach and eventually adopted the exclusionary
rule, realizing that this is the only practical means of
enforcing the constitutional injunction against unreasonable
searches and seizures. In the language of Judge Learned
Hand:

"As we understand it, the reason for the exclusion of
evidence competent as such, which has been unlawfully
acquired, is that exclusion is the only practical way of
enforcing the constitutional privilege. In earlier times the
action of trespass against the offending official may have
been protection enough; but that is true no longer. Only in
case the prosecution which itself controls the seizing officials,
knows that it cannot profit by their wrong, will that wrong be
repressed."18

In fact, over thirty (30) years before, the Federal Supreme
Court had already declared:

"If letters and private documents can thus be seized and held
and used in evidence against a citizen accused of an offense,
the protection of the 4th Amendment, declaring his rights to
be secure against such searches and seizures, is of no value,
and, so far as those thus placed are concerned, might as well
be stricken from the Constitution. The efforts of the courts
and their officials to bring the guilty to punishment,
praiseworthy as they are, are not to be aided by the sacrifice
of those great principles established by years of endeavor and
suffering which have resulted in their embodiment in the
fundamental law of the land."19

This view was, not only reiterated, but. also, broadened in
subsequent decisions of the same Federal Court.20 After

_______________

reviewing previous decisions thereon, said Court held, in
Mapp vs. Ohio (supra.) :

"x x x Today we once again examine the Wolf's constitutional
documentation of the right of privacy free from unreasonable
state intrusion, and after its dozen years on our books, are
led by it to close the only courtroom door remaining open to
evidence secured by official lawlessness in flagrant abuse of
that basic right, reserved to all persons as a specific
guarantee against that very same unlawful conduct. We hold
that all evidence obtained by searches and seizures in
violation of the Constitution is, by that same authority,
inadmissible in a State court.

"Since the Fourth Amendment's right of privacy has been
declared enforceable against the States through the Due
Process Clause of the Fourteenth, it is enforceable against
them by the same sanction of exclusion as it used against the
Federal Government. Were it otherwise, then just as without
the Weeks rule the assurance against unreasonable federal
searches and seizures would be 'a form of words,' valueless
and underserving of mention in a perpetual charter of
inestimable human liberties, so too, without that rule the
freedom from state invasions of privacy would be so
ephemeral and so neatly severed from its conceptual nexus
with the freedom from all brutish means of coercing evidence
as not to permit this Court's high regard as a freedom 'implicit
in the concept of ordered liberty.' At the time that the Court
held in Wolf that the amendment was applicable to the
States through the Due Process Clause, the cases of this Court
as we have seen, had steadfastly held that as to federal
officers the Fourth Amendment included the exclusion of the
evidence seized in violation of its provisions. Even Wolf
'stoutly adhered' to that proposition. The right to privacy,
when conceded operatively enforceable against the States,
was not susceptible of destruction by avulsion of the sanction
upon which its protection and enjoyment had always been
deemed dependent under the Boyd, Weeks and Silverthorne
Cases. Therefore, in extending the substantive protections of
due process to all constitutionally unreasonable searches
state or federalit was logically and constitutionally
necessary that the exclusion doctrinean essential part of
the right to privacybe also insisted upon as an essential
ingredient of the right newly recognized by the Wolf Case. In
short, the admission of the new constitutional right by Wolf
could not consistently tolerate denial of its most important
constitutional privilege, namely, the exclusion of the evidence
which an accused had been forced to give by reason of the
unlawful seizure. To hold otherwise is to grant the right but in
reality to withhold its privilege and enjoyment. Only last year
the Court itself recognized that the purpose of the
exclusionary rule 'is to deterto compel respect for the
constitutional guaranty



in the only effectively available wayby removing the incen-
tive to disregard it' x x x.

"The ignoble shortcut to conviction left open to the State
tends to destroy the entire system of constitutional restraints
on which the liberties of the people rest. Having once
recognized that the right to privacy embodied in the Fourth
Amendment is enforceable against the States, and that the
right to be secure against rude invasions of privacy by state
officers is, therefore constitutional in origin. we can no longer
permit that right to remain an empty promise. Because it is
enforceable in the same manner and to like effect as other
basic rights secured by its Due Process Clause', we can no
longer permit it to be revocable at the whim of any police
officer who, in the name of law enforcement itself, chooses
to suspend its enjoyment. Our decision, founded on reason
and truth, gives to the individual no more than that which the
Constitution guarantees him, to the police officer no less than
that to which honest law enforce-ment is entitled, and, to the
courts, that judicial integrity so necessary in the true
administration of justice." (italics ours.)

Indeed, the non-exclusionary rule is contrary, not only to the
letter, but also, to the spirit of the constitutional injunction
against unreasonable searches and seizures. To be sure, if the
applicant for a search warrant has com-petent 'evidence to
establish probable cause of the commission of a given crime
by the party against 'whom the warrant is intended, then
there is no reason why the applicant should not comply with
the requirements of the fundamental law. Upon the other
hand, if he has no such competent evidence, then it is not
possible for the Judge to find that there is probable cause,
and, hence, no justification for the issuance of the warrant.
The only possible explanation (not 'justification) for its
issuance is the necessity of fishing evidence of the
commission of a crime. But, then, this fishing expedition is
indicative of the absence of evidence to establish a probable
cause.

Moreover, the theory that the criminal prosecution of those
who secure an illegal search warrant and/or make
unreasonable searches or seizures would suffice to protect
the constitutional guarantee under consideration, overlooks
the fact that violations thereof are, in general, committed by
agents of the party in power, for, certainly, those belonging
to the minority could not possibly abuse a power they do not
have. Regardless of the handicap under which the minority
usuallybut, understandablyfinds itself

in prosecuting agents of the majority, one must not lose sight
of the fact that the psychological and moral effect of the
possibility21 of securing their conviction, is watered down by
the pardoning power of the party for whose benefit the
illegality had been committed.

In their Motion for Reconsideration and Amendment of the
Resolution of this Court dated June 29, 1962, petitioners
allege that Rooms Nos. 81 and 91 of Carmen Apartments,
House No. 2008, Dewey Boulevard, House No. 1436, Colorado
Street, and Room No. 304 of the Army-Navy Club, should be
included among the premises considered in said Resolution
as residences of herein petitioners, Harry S. Stonehill, Robert
P. Brook, John J. Brooks and Karl Beck, respectively, and that,
furthermore, the records, papers and other effects seized in
the offices of the corporations above referred to include
personal belongings of said petitioners and other effects
under their exclusive possession and control, for the
exclusion of which they have a standing under the latest
rulings of the federal courts of the United States.22

We note, however, that petitioners' theory, regarding their
alleged possession of and control over the aforementioned
records, papers and effects, and the alleged "personal"
nature thereof, has been advanced, not in their petition or
amended petition herein, but in the Motion for
Reconsideration and Amendment of the Resolution of June
29, 1962. In other words. said theory would appear to be a
readjustment of that followed in said petitions, to suit the
approach intimated in the Resolution sought to be
reconsidered and amended. Then, too, some of the affidavits
or copies of alleged affidavits attached to said motion for
reconsideration, or submitted in support thereof, contain
either inconsistent allegations, or allegations inconsistent
with the theory now advanced by petitioners herein.

Upon the other hand, we are not satisfied that the allegations
of said petitions and motion for reconsideration, and

________________

the contents of the aforementioned affidavits and other
papers submitted in support of said motion, have sufficiently
established the facts or conditions contemplated in the cases
relied upon by the petitioners; to warrant application of the
views therein expressed, should we agree thereto. At any
rate, we do not deem it necessary to express our opinion
thereon, it being best to leave the matter open for
determination in appropriate cases in the future.

We hold, therefore, that the doctrine adopted in the
Moncado case must be, as it is hereby, abandoned; that the
warrants for the search of three (3) residences of herein
petitioners, as specified in the Resolution of June 29, 1962,
are null and void; that the searches and seizures therein
made are illegal; that the writ of preliminary injunction
heretofore issued, in connection with the documents, papers
and other effects thus seized in said residences of herein
petitioners is hereby made permanent; that the writs prayed
for are granted, insofar as the documents, papers and other
effects so seized in the aforementioned residences are
concerned; that the aforementioned motion for
Reconsideration and Amendment should be, as it is hereby,
denied; and that the petition herein is dismissed and the
writs prayed for denied, as regards the documents, papers
and other effects seized in the twenty-nine (29) places,
offices and other premises enumerated in the same
Resolution, without special pronouncement as to costs.

It is so ordered.

Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and
Sanchez, JJ., concur.

Castro, .J., concurring and dissenting:

From my analysis of the opinion written by Chief Justice
Roberto Concepcion and from the import of the deliberations
of the Court on this case, I gather the following distinct
conclusions:

1. All the search warrants served by the National Bureau of
Investigation in this case are general warrants and are
therefore proscribed by, and in violation of, paragraph 3 of
section 1 of Article III (Bill of Rights) of the Constitution;

2. All the searches and seizures conducted under the
authority of the said search warrants were consequently
illegal;

3. The non-exclusionary rule enunciated in Moncado vs.
People, 80 Phil. 1, should be, and is declared, abandoned;

4. The search warrants served at the three residences of the
petitioners are expressly declared null and void: the searches
and seizures therein made are expressly declared illegal; and
the writ of preliminary injunction heretofore issued against
the use of the documents, papers and effects seized in the
said residences is made permanent; and

5. Reasoning that the petitioners have not in their pleadings
satisfactorily demonstrated that they have legal standing to
move for the suppression of the documents, papers and
effects seized in the places other than the three residences
adverted to above, the opinion written by the Chief Justice
refrains from expressly declaring as null and void the such
warrants- served at such other places and as illegal the
searches and seizures made therein, and leaves "the matter
open for determination in appropriate cases in the future."

It is precisely the position taken by the Chief Justice
summarized in the immediately preceding paragraph
(numbered 5) with which I am not in accord.

I do not share his reluctance or unwillingness to expressly
declare, at this time, the nullity of the search warrants served
at places other than the three residences, and the illegality of
the searches and seizures conducted under the authority
thereof. In my view even the exacerbating passions and
prejudices inordinately generated by the environmental
political and moral developments of this case should not
deter this Court from forthrightly laying down the law not
only for this case but as well for future cases and future
generations. All the search warrants, without exception, in
this case are admittedly general, blanket and roving warrants
and are therefore admittedly and indisputably outlawed by
the Constitution; and the searches and seizures made were
therefore unlawful. That the peti-

tioners, let us assume in gratia argumente, have no legal
standing to ask for the suppression of the papers, things and
effects seized from places other than their residences, to my
mind, cannot in any manner affect, alter or otherwise modify
the intrinsic nullity of the search warrants and the intrinsic
illegality of the searches and seizures made thereunder.
Whether or not the petitioners possess legal standing the
said warrants are void and remain void, and the searches and
seizures were illegal and remain illegal. No inference can be
drawn from the words of the Constitution that "legal
standing" or the lack of it is a determinant of the nullity or
validity of a search warrant or of the lawfulness or illegality of
a search or seizure.

On the question of legal standing, I am of the conviction that,
upon the pleadings submitted to this Court the petitioners
have the requisite legal standing to move for the suppression
and return of the documents, papers and effects that were
seized from places other than their family residences.

Our constitutional provision on searches and seizures was
derived almost verbatim from the Fourth Amendment to the
United States Constitution. In the many years of judicial
construction and interpretation of the said constitutional
provision, our courts have invariably regarded as doctrinal
the pronouncement made on the Fourth Amendment by
federal courts, especially the Federal Supreme Court and the
Federal Circuit Courts of Appeals.

The U.S. doctrines and pertinent cases on standing to move
for the suppression or return of documents, papers and
effects which are the fruits of an unlawful search and seizure,
may be summarized as follows; (a) ownership of documents,
papers and effects gives "standing;" (b) ownership and/or
control or possessionactual or constructiveof premises
searched gives "standing"; and (c) the "aggrieved person"
doctrine where the search warrant and the sworn application
for search warrant are "primarily" directed solely and
exclusively against the "aggrieved person," gives "standing."

An examination of the search warrants in this case will readily
show that, excepting three, all were directed against the
petitioners personally. In some of them, the petitioners were
named personally, followed by the designation, "the
corporation. The three warrants excepted named three
corporate defendants. But the "office/house/
warehouse/premises" mentioned in the said three warrants
were also the same "office/house/warehouse/premises"
declared to be owned by or under the control of the
petitioners in all the other search warrants directed against
the petitioners and/or "the President and/or General
Manager" of the particular corporation. (see pages 5-24 of
Petitioners' Reply of April 2, 1962). The searches and seizures
were to be made, and were actually made, in the
"office/house/warehouse/premises" owned by or under the
control of the petitioners.

Ownership of matters seized gives "standing"

Ownership of the properties seized alone entitles the
petitioners to bring a motion to return and suppress, and
gives them standing as persons aggrieved by an unlawful
search and seizure regardless of their location at the time of
seizure. Jones vs. United States, 362 U.S. 257, 261 (1960)
(narcotics stored In the apartment of a friend of the
defendant); Henzel vs. United States, 296 F. 2d. 650, 652-53
(5th Cir. 1961), (personal and corporate papers of corporation
of which the defendant was president), United States vs.
Jeffers, 342 U.S. 48 (1951) (narcotics seized in an apartment
not belonging to the defendant); Pielow vs. United States, 8 F.
2d 492, 493 (9th Cir. 1925) (books seized from the
defendant's sister but belonging to the defendant); Cf. Villano
vs. United States, 310 F. 2d 680, 683 (10th Cir. 1962) (papers
seized in desk neither owned by nor in exclusive possession
of the def endant).

In a very recent case (decided by the U.S. Supreme Court on
December 12, 1966), it was held that under the constitutional
provision against unlawful searches and seizures. a person
places himself or his property within a



constitutionally protected area, be it his home or his office,
his hotel room or his automobile:

"Where the argument falls is in its misapprehension of the
fundamental nature and scope of Fourth Amendment
protection. What the Fourth Amendment protects is the
security a man relies upon when he places himself or his
property with-in a constitutionally protected area, be it his
home or his office, his hotel room or his automobile. There he
is protected from unwarranted governmental intrusion. And
when he puts something in his filing cabinet, in his desk
drawer, or in his pocket, he has the right to know it will be
secure from an unreasonable search or an unreasonable
seizure. So it was that the Fourth Amendment could not
tolerate the warrantless search of the hotel room in Jeffers,
the purloining of the petitioner's private papers in Gouled, or
the surreptitious electronic surveilance in Silverman.
Countless other cases which have come to this Court over the
years have involved a myriad of differing factual contexts in
which the protections of the Fourth Amendment have been
appropriately invoked. No doubt, the future will bring
countless others. By nothing we say here do we either
foresee or foreclose factual situations to which the Fourth
Amendment may be applicable." (Hoffa vs. U.S., 87 S. Ct. 408
(December 12, 1966). See also U.S, vs. Jeffers, 342 U.S. 48, 72
S. Ct. 93 (November 13, 1951). (Italics supplied).

Control of premises searched gives "standing."

Independent of ownership or other personal interest in the
records and documents seized, the petitioners have standing
to move for return and suppression by virtue of their
proprietary or leasehold interest in many of the premises
searched. These proprietary and leasehold interests have
been sufficiently set forth in their motion for reconsideration
and need not be recounted here, except to emphasize that
the petitioners paid rent, directly or in-directly, for practically
all the premises searched (Room 91, 84 Carmen Apts.; Room
304, Army & Navy Club; Premises 2008, Dewey Boulevard;
1436 Colorado Street); maintained personal offices within the
corporate offices (IBMC, USTC); had made improvements or
furnished such offices; or had paid for the filing cabinets in
which the papers were stored (Room 204, Army & Navy Club)
; and individually, or through their respective spouses, owned
the controlling stock of the corporations involved. The
petitioners' proprietary interest in most, if not all, of the
premises searched therefore independently gives


them standing to move for the return and suppression of the
books, papers and effects seized therefrom.

In Jones vs. United States, supra, the U.S. Supreme Court
delineated the nature and extent of the interest in the
searched premises necessary to maintain a motion to
suppress. After reviewing what it considered to be the unduly
technical standard of the then prevailing circuit court
decisions, the Supreme Court said (362 U.S. 266) :

"We do not lightly depart from this course of decisions by the
lower courts. We are persuaded, however, that it is
unnecessary and ill-advised to import into the law
surrounding the constitutional right to be free from
unreasonable searches and seizures subtle distinctions,
developed and refined by the common law in evolving the
body of private property law which, more than almost any
other branch of law, has been shaped by distinctions whose
validity is largely historical. Even in the area from which they
derive, due consideration has led to the discarding of those
distinctions in the homeland of the common law. See
Occupiers' Liability Act, 1957, 5 and 6 Eliz. 2, c, 31, carrying
out Law Reform Committee, Third Report, Cmd. 9305.
Distinctions such as those between 'lessee,' 'licensee,'
'invitee,' 'guest,' often only of gossamer strength, ought not
be determinative in fashioning procedures ultimately
referable to constitutional safeguards. See also Chapman vs.
United States, 354 U.S. 610, 616-17 (1961).

It has never been held that a person with requisite interest in
the premises searched must own the property seized in order
to have standing in a motion to return and suppress, In Alioto
vs. United States, 216 F. Supp. 48 (1963), a bookkeeper for
several corporations from whose apartment the corporate
records were seized successfully moved for their return. In
United States vs. Antonelli, Fireworks Co., 53 F. Supp. 870,
873 (W. D. N. Y. 1943), the corporation's president
successfully moved for the return and suppression as to him
of both personal and corporate documents seized from his
home during the course of an illegal search:

"The lawful possession by Antonelli of documents and
property," either his own or the corporation's was entitled to
protection against unreasonable search and seizure. Under
the circumstances in the case at bar, the search and seizure
were unreasonable and unlawful. The motion for the return
of seized articles and the suppression of the evidence so
obtained should be granted." (Italics supplied).

Time was when only a person who had property interest in
either the place searched or the articles seized had the
necessary standing to invoke the protection of the
exclusionary rule. But in MacDonald vs. United States, 335
U.S. 461 (1948), Justice Robert Jackson, joined by Justice Felix
Frankfurter, advanced the view that "even a guest may
expect the shelter of the rooftree he is under against criminal
intrusion." This view finally became the official view of the
U.S. Supreme Court and was articulated in United States vs.
Jeffers, 432 U.S. 48 (1951). Nine years later, in 1960, in Jones
vs. United States, 362 U.S. 257, 267, the U.S. Supreme Court
went a step further. Jones was a mere guest in the apartment
unlawfully searched, but the Court nonetheless declared that
the exclusionary rule protected him as well. The concept of
"person aggrieved by an unlawful search and' seizure" was
enlarged to include "anyone legitimately on premises where
the search occurs."

Shortly after the U.S. Supreme Court's Jones decision, the U.S.
Court of Appeals for the Fifth Circuit held that the defendant
organizer, sole stockholder and president of a corporation
had standing in a mail fraud prosecution against him to
demand the return and suppression of corporate property.
Henzel vs. United States, 296 F. 2d 650, 652 (5th Cir. 1961),
supra. The court concluded that the defendant had standing
on two independent grounds: Firsthe had a suff icient
interest in the property seized, and secondhe had an
adequate interest in the premises searched (just like in the
case at bar). A postal inspector had unlawfully searched the
corporation's premises and had seized most of the
corporation's books and records. Looking to Jones, the court
observed:

"Jones clearly tells us, therefore, what is not required to
qualify one as a 'person aggrieved by an unlawful search and
seizure.' It tells us that appellant should not have been
precluded from objecting to the Postal Inspector's search and
seizure of the corporation's books and records merely
because the appellant did not show ownership or possession
of the books and records or a substantial possessory interest
in the invaded premises xxx." (Henzel vs. United States, 296 F.
2d at 651).

Henzel was soon followed by Villano vs. United States, 310 F.
2d 680. 683, (10th Cir. 1962). In Villano,

police officers seized two notebooks from a desk in the
defendant's place of employment; the defendant did not
claim ownership of either; he asserted that several
employees (including himself) used the notebooks. The Court
held that the employee had a protected interest and that
there also was an invasion of privacy. Both Henzel and Villano
considered also the fact that the search and seizure were
"directed at" the moving defendant. Henzel vs. United States,
296 F. 2d at 682; Villano vs. United States, 310 F. 2d at 683.

In a case in which an attorney closed his law office, placed his
files in storage and went to Puerto Rico, the Court of Appeals
for the Eighth Circuit recognized his standing to move to
quash as unreasonable search and seizure under the Fourth
Amendment of the U.S. Constitution a grand jury subpoena
duces tecum directed to the custodian of his files. The
Government contended that the petitioner had no standing
because the books and papers were physically in the
possession of the custodian, and because the subpoena was
directed against the custodian. The court rejected the
contention, holding that

"Schwimmer legally had such possession, control and
unrelinquished personal rights in the books and papers as not
to enable the question of unreasonable search and seizure to
be escaped through the mere procedural device of
compelling a third-party naked possessor to produce and
deliver them." Schwimmer vs. United States, 232 F. 2d 855,
861 (8th Cir. 1956).

Aggrieved person doctrine where the search warrant is
primarily directed against said person gives "standing."

The latest United States decision squarely in point is United
States vs. Birrell, 242 F. Supp. 191 (1965, U.S.D.C., S.D.N.Y.).
The defendant had stored with an attorney certain files and
papers,' which attorney, by the name of Dunn, was not, at the
time of the seizing of the records, Birrell's attorney.* Dunn,,
in turn, had stored most of the records at his home in the
country and on a farm which, according to Dunn's affidavit,
was under his (Dunn's) "control and management." The
papers

________________

* Attorney-client relationship played no part in the decision
of the case.

turned out to be private, personal and business papers
together with corporate books and records of certain
unnamed corporations in which Birrell did not even claim
ownership. (All of these type records were seized in the case
at bar), Nevertheless, the search in Birrell was held invalid by
the court which held that even though Birrell did not own the
premises where the records were stored, he had "standing"
to move for the return of all the papers and properties seized.
The court, relying on Jones vs. U. S., supra; U.S. vs. Antonelli
Fireworks Co., 53 F. Supp. 870, Aff'd 155 F. 2d 631: Henzel vs.
U.S. supra; and Schwimmer vs. U.S., supra, pointed out that

"It is overwhelmingly established that the searches here in
question were directed solely and exclusively against Birrell.
The only person suggested in the papers as having violated
the law was Birrell. The first search warrant described the
records as having been used 'in committing a violation of Title
18, United States Code, Section 1341, by the use of the mails
by one Lowell M. Birrell, x x x.' The second search warrant
was captioned: 'United States of America vs. Lowell M,
Birrell." (p. 198)

"Possession (actual or constructive), no less than ownership,
gives standing to move to suppress. Such was the rule even
before Jones." (p, 199)

"If, as thus indicated, Birrell had at least constructive
possession of the records stored with Dunn, it matters not
whether he had any interest in the premises searched." See
also Jeffers v, United States, 88 U.S. Appl. D.C. 58, 187 F. 2d
498 (1950), affirmed 432 U.S. 48, 72 S. Ct. 93, 96 L. Ed. 459
(1951).

The ruling in the Birrell case was reaffirmed on motion for
reargument; the United States did not appeal from this
decision. The factual situation in Birrell is strikingly similar to
the case of the present petitioners; as in Birrell, many
personal and corporate papers were seized from premises
not petitioners' family residences; as in Birrell, the searches
were "PRIMARILY DIRECTED SOLELY AND EXCLUSIVELY"
against the petitioners. Still both types of documents were
suppressed in Birrell because of the illegal search. In the case
at bar, the petitioners connection with the premises raided is
much closer than in Birrell.

Thus, the petitioners have full standing to move for the
quashing of all the warrants regardless whether these

were directed against residences in the narrow sense of the
word, as long as the documents were personal papers of the
petitioners or (to the extent that they were corporate papers)
were held by them in a personal capacity or under their
personal control.

Prescinding from the foregoing, this Court, at all events,
should order the return to the petitioners all personal and
private papers and effects seized, no matter where these
were seized, whether from their residences or corporate
offices or any other place or places. The uncontradicted
sworn statements of the petitioners in their various pleadings
submitted to this Court indisputably show that amongst the
things seized from the corporate offices and other places
were personal and private papers and effects belonging to
the petitioners.

If there should be any categorization of the documents,
"papers and things which where the objects of the unlawful
searches and seizures, I submit that the grouping should be:
(a) personal or private papers of the petitioners wherever
they were unlawfully seized, be it their family residences,
offices, warehouses and/or premises owned and/or
controlled and/or possessed (actually or constructively) by
them as shown in all the search warrants and in the sworn
applications filed in securing the void search warrants, and (b)
purely corporate papers belonging to corporations. Under
such categorization or grouping, the determination of which
unlawfully seized papers, documents and things are
personal/private of the petitioners or purely corporate
papers will have to be left to the lower courts which issued
the void search warrants in ultimately effecting the
suppression and/or return of the said documents.

'And as unequivocally indicated by the authorities above
cited, the petitioners likewise have clear legal standing to
move for the suppression of purely corporate papers as
"President and/or General Manager" of the corporations
involved as specifically mentioned in the void search
warrants.

Finally, I must articulate my persuasion that although the
cases cited in my disquisition were criminal prosecutions, the
great clauses of the constitutional proscription

on illegal searches and seizures do not withhold the mantle of
their protection from cases not criminal in origin or nature.

Writs granted in part and denied in part; motion for
reconsideration denied. [Stonehill vs. Diokno, 20 SCRA
383(1967)]

G.R. No. 108670. September 21, 1994.*
LBC EXPRESS, INC., petitioner, vs. THE COURT OF APPEALS,
ADOLFO M. CARLOTO, and RURAL BANK OF LABASON, INC.,
respondents.

Damages; Moral damages cannot be awarded to a
corporation, an artificial person which has no feelings,
emotions or senses, and which cannot experience physical
suffering and mental anguish.The respondent court erred
in awarding moral damages to the Rural Bank of Labason,
Inc., an artificial person. Moral damages are granted in
recompense for physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. A
corporation, being an artificial person and having existence
only in legal contemplation, has no feelings, no emotions, no
senses; therefore, it cannot experience physical suffering and
mental anguish. Mental suffering can be experienced only by
one having a nervous system and it flows from real ills,
sorrows, and griefs of lifeall of which cannot be suffered by
respondent bank as an artificial person.

Same; Equity; The right to recover moral damages is based on
equity and he who comes to court to demand equity must
come with clean hands.We can neither sustain the award
of moral damages in favor of the private respondents. The
right to recover moral damages is based on equity. Moral
damages are recoverable only if the case falls under Article
2219 of the Civil Code in relation to Article 21. Part of
conventional wisdom is that he who comes to court to
demand equity, must come with clean hands. In the case at
bench, respondent Carloto

_______________

* SECOND DIVISION.

603

VOL. 236, SEPTEMBER 21, 1994

603

LBC Express, Inc. vs. Court of Appeals

is not without fault. He was fully aware that his rural banks
obligation would mature on November 21, 1984 and his bank
has set aside cash for these bills payable. He was all set to go
to Manila to settle this obligation. He has received the
documents necessary for the approval of their rediscounting
application with the Central Bank. He has also received the
plane ticket to go to Manila. Nevertheless, he did not
immediately proceed to Manila but instead tarried for days
allegedly claiming his ONE THOUSAND PESOS (P1,000.00)
pocket money. Due to his delayed trip, he failed to submit the
rediscounting papers to the Central Bank on time and his
bank was penalized THIRTY-TWO THOUSAND PESOS
(P32,000.00) for failure to pay its obligation on its due date.
The undue importance given by respondent Carloto to his
ONE THOUSAND PESOS (P1,000.00) pocket money is
inexplicable for it was not indispensable for him to follow up
his banks rediscounting application with Central Bank.

Same; Same; The attitude of a party in needing the money to
invite people for snack or dinner in the course of following-
up official business with the Central Bank speaks ill of his
business dealings.According to said respondent, he needed
the money to invite people for a snack or dinner. The
attitude of said respondent speaks ill of his ways of business
dealings and cannot be countenanced by this Court. Verily, it
will be revolting to our sense of ethics to use it as basis for
awarding damages in favor of private respondent Carloto and
the Rural Bank of Labason, Inc.

Same; Same; Bad faith under the law cannot be presumed
and it must be established by clear and convincing
evidence.We also hold that respondents failed to show that
petitioner LBCs late delivery of the cashpack was motivated
by personal malice or bad faith, whether intentional or thru
gross negligence. In fact, it was proved during the trial that
the cashpack was consigned on November 16, 1984, a Friday.
It was sent to Cebu on November 19, 1984, the next business
day. Considering this circumstance, petitioner cannot be
charged with gross neglect of duty. Bad faith under the law
can not be presumed; it must be established by clear and
convincing evidence.

Same; Same; Contracts; In breach of contract cases where the
defendant is not shown to have acted fraudulently or in bad
faith, liability for damages is limited to the natural and
probable consequences of the breach of the obligation which
the parties had foreseen or could reasonably have
foreseen.Again, the unbroken jurisprudence is that in
breach of contract cases where the defendant is not shown to
have acted fraudulently or in bad faith, liability for damages is
limited to the

604

604



the parties had foreseen or could reasonably have foreseen.
The damages, however, will not include liability for moral
damages.

Same; Same; Same; In a contractual or quasi-contractual
relationship, exemplary damages may be awarded only if the
defendant had acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.Prescinding from these
premises, the award of exemplary damages made by the
respondent court would have no legal leg to support itself.
Under Article 2232 of the Civil Code, in a contractual or
quasicontractual relationship, exemplary damages may be
awarded only if the defendant had acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner. The
established facts do not so warrant the characterization of
the action of petitioner LBC.

PETITION for review on certiorari of a decision of the Court of
Appeals.


Emmanuel D. Agustin for petitioner.

Bernardo P. Concha for private respondents.

PUNO, J.:

In this Petition for Review on Certiorari, petitioner LBC
questions the decision1 of respondent Court of Appeals
affirming the judgment of the Regional Trial Court of Dipolog
City, Branch 8, awarding moral and exemplary damages,
reimbursement of P32,000.00, and costs of suit; but deleting
the amount of attorneys fees.

Private respondent Adolfo Carloto, incumbent President-
Man-ager of private respondent Rural Bank of Labason,
alleged that on November 12, 1984, he was in Cebu City
transacting business with the Central Bank Regional Office.
He was instructed to proceed to Manila on or before
November 21, 1984 to follow-up the Rural Banks plan of
payment of rediscounting obligations with Central Banks
main office in Manila.2 He then purchased a

_______________

1 Herrera, Manuel, J., Ponente; Torres, Justo, and Gutierrez,
Angelina, JJ., concurring.

2 Rollo, Court of Appeals Decision, p. 78.

605


605


Carloto-Concha to send him ONE THOUSAND PESOS
(P1,000.00) for his pocket money in going to Manila and
some rediscounting papers thru petitioners LBC Office at
Dipolog City.3

On November 16, 1984, Mrs. Concha thru her clerk, Adelina
Antigo consigned thru LBC Dipolog Branch the pertinent
documents and the sum of ONE THOUSAND PESOS
(P1,000.00) to respondent Carloto at No. 2 Greyhound
Subdivision, Kinasangan, Pardo, Cebu City. This was
evidenced by LBC Air Cargo, Inc., Cashpack Delivery Receipt
No. 34805.

On November 17, 1984, the documents arrived without the
cashpack. Respondent Carloto made personal follow-ups on
that same day, and also on November 19 and 20, 1984 at
LBCs office in Cebu but petitioner failed to deliver to him the
cashpack.

Consequently, respondent Carloto said he was compelled to
go to Dipolog City on November 24, 1984 to claim the money
at LBCs office. His effort was once more in vain. On
November 27, 1984, he went back to Cebu City at LBCs
office. He was, however, advised that the money has been
returned to LBCs office in Dipolog City upon shippers
request. Again, he demanded for the ONE THOUSAND PESOS
(P1,000.00) and refund of FORTY-NINE PESOS (P49.00) LBC
revenue charges. He received the money only on December
15, 1984 less the revenue charges.

Respondent Carloto claimed that because of the delay in the
transmittal of the cashpack, he failed to submit the
rediscounting documents to Central Bank on time. As a
consequence, his rural bank was made to pay the Central
Bank THIRTY-TWO THOUSAND PESOS (P32,000.00) as penalty
interest.4 He allegedly suffered embarrassment and
humiliation.

Petitioner LBC, on the other hand, alleged that the cashpack
was forwarded via PAL to LBC Cebu City branch on November
22, 1984.5 On the same day, it was delivered at respondent
Carlotos residence at No. 2 Greyhound Subdivision,
Kinasangan, Pardo, Cebu City. However, he was not around to
receive it. The delivery man served instead a claim notice to
insure he would

______________

3 Ibid.

4 Ibid., p. 79.

5 Ibid.

606

606



Delivery Receipt No. 342805. Notwithstanding the said
notice, respondent Carloto did not claim the cashpack at LBC
Cebu. On November 23, 1984, it was returned to the shipper,
Elsie CarlotoConcha at Dipolog City.

Claiming that petitioner LBC wantonly and recklessly
disregarded its obligation, respondent Carloto instituted an
action for Damages Arising from Non-performance of
Obligation docketed as Civil Case No. 3679 before the
Regional Trial Court of Dipolog City on January 4, 1985. On
June 25, 1988, an amended complaint was filed where
respondent rural bank joined as one of the plain-tiffs and
prayed for the reimbursement of THIRTY-TWO THOUSAND
PESOS (P32,000.00).

After hearing, the trial court rendered its decision, the
dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered:

1. Ordering the defendant LBC Air Cargo, Inc. to pay unto
plaintiff Adolfo M. Carloto and Rural Bank of Labason, Inc.,
moral damages in the amount of P10,000.00; exemplary
damages in the amount of P5,000.00; attorneys fees in the
amount of P3,000.00 and litigation expenses of P1,000.00;
2. Sentencing defendant LBC Air Cargo, Inc., to reimburse
plaintiff Rural Bank of Labason, Inc. the sum of P32,000.00
which the latter paid as penalty interest to the Central Bank
of the Philippines as penalty interest for failure to rediscount
its due bills on time arising from the defendants failure to
deliver the cashpack, with legal interest computed from the
date of filing of this case; and
3. Ordering defendant to pay the costs of these
proceedings.

SO ORDERED.6

On appeal, respondent court modified the judgment by
deleting the award of attorneys fees. Petitioners Motion for
Reconsideration was denied in a Resolution dated January 11,
1993.

Hence, this petition raising the following questions, to wit:

1. Whether or not respondent Rural Bank of Labason, Inc.,
being an artificial person should be awarded moral damages.

________________

6 Rollo, pp. 127-128, penned by Regional Trial Court Judge
Pelagio R. Lachica.

607


607


2. Whether or not the award of THIRTY-TWO THOUSAND
PESOS (P32,000.00) was made with grave abuse of discretion.
3. Whether or not the respondent Court of Appeals gravely
abused its discretion in affirming the trial courts decision
ordering petitioner LBC to pay moral and exemplary damages
despite performance of its obligation.

We find merit in the petition.

The respondent court erred in awarding moral damages to
the Rural Bank of Labason, Inc., an artificial person.

Moral damages are granted in recompense for physical
suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social
humiliation, and similar injury.7 A corporation, being an
artificial person and having existence only in legal
contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental
anguish.8 Mental suffering can be experienced only by one
having a nervous system and it flows from real ills, sorrows,
and griefs of life9all of which cannot be suffered by
respondent bank as an artificial person.

We can neither sustain the award of moral damages in favor
of the private respondents. The right to recover moral
damages is based on equity. Moral damages are recoverable
only if the case falls under Article 2219 of the Civil Code in
relation to Article 21.10 Part of conventional wisdom is that
he who comes to court to demand equity, must come with
clean hands.

In the case at bench, respondent Carloto is not without fault.
He was fully aware that his rural banks obligation would
mature on November 21, 1984 and his bank has set aside
cash for these bills payable.11 He was all set to go to Manila
to settle this obligation. He has received the documents
necessary for the approval of their rediscounting application
with the Central Bank. He has also received the plane ticket
to go to Manila. Nevertheless, he

________________

7 Civil Code, Article 2217.

8 Tamayo vs. University of Negros Occidental, 58 OG No. 37,
p. 6023, September 10, 1962.

9 Supra., at p. 6032.

10 Garciano vs. Court of Appeals, G.R. No. 96126, August 10,
1992, 212 SCRA 436.

11 Rollo, p. 214.

608

608



did not immediately proceed to Manila but instead tarried for
days allegedly claiming his ONE THOUSAND PESOS
(P1,000.00) pocket money. Due to his delayed trip, he failed
to submit the rediscounting papers to the Central Bank on
time and his bank was penalized THIRTY-TWO THOUSAND
PESOS (P32,000.00) for failure to pay its obligation on its due
date. The undue importance given by respondent Carloto to
his ONE THOUSAND PESOS (P1,000.00) pocket money is
inexplicable for it was not indispensable for him to follow up
his banks rediscounting application with Central Bank.
According to said respondent, he needed the money to
invite people for a snack or dinner.12 The attitude of said
respondent speaks ill of his ways of business dealings and
cannot be countenanced by this Court. Verily, it will be
revolting to our sense of ethics to use it as basis for awarding
damages in favor of private respondent Carloto and the Rural
Bank of Labason, Inc.

We also hold that respondents failed to show that petitioner
LBCs late delivery of the cashpack was motivated by personal
malice or bad faith, whether intentional or thru gross
negligence. In fact, it was proved during the trial that the
cashpack was consigned on November 16, 1984, a Friday. It
was sent to Cebu on November 19, 1984, the next business
day. Considering this circumstance, petitioner cannot be
charged with gross neglect of duty. Bad faith under the law
can not be presumed; it must be established by clear and
convincing evidence.13 Again, the unbroken jurisprudence is
that in breach of contract cases where the defendant is not
shown to have acted fraudulently or in bad faith, liability for
damages is limited to the natural and probable consequences
of the breach of the obligation which the parties had
foreseen or could reasonably have foreseen. The damages,
however, will not include liability for moral damages.14

Prescinding from these premises, the award of exemplary
damages made by the respondent court would have no legal
leg to support itself. Under Article 2232 of the Civil Code, in a

______________

12 Id., p. 216.

13 See Peoples Bank and Trust Co. vs. Syvels Inc., No. L-
29280, August 11, 1988, 164 SCRA 247.

14 See China Airlines Limited vs. Court of Appeals, G.R. No.
94590, July 29, 1992, 211 SCRA 897.

609


609


contractual or quasi-contractual relationship, exemplary
damages may be awarded only if the defendant had acted in
a wanton, fraudulent, reckless, oppressive, or malevolent
manner. The established facts do not so warrant the
characterization of the action of petitioner LBC.

IN VIEW WHEREOF, the Decision of the respondent court
dated September 30, 1992 is REVERSED and SET ASIDE; and
the Complaint in Civil Case No. 3679 is ordered DISMISSED.
No costs.

SO ORDERED.

Narvasa (C.J., Chairman), Padilla, Regalado and Mendoza,
JJ., concur.

Judgment reversed and set aside.

Notes.The National Telecommunications Commission has
no jurisdiction to impose a fine. (Radio Communications of
the Philippines, Inc. vs. National Telecommunications
Commission, 215 SCRA 455 [1992])

The award of attorneys fees must be disallowed where the
award of exemplary damages is eliminated. (Albenson
Enterprises Corporation vs. Court of Appeals, 217 SCRA 16
[1993]) [LBC Express, Inc. vs. Court of Appeals, 236 SCRA
602(1994)]

G.R. No. L-13203 January 28, 1961
YUTIVO SONS HARDWARE COMPANY, petitioner,
vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL
REVENUE, respondents.
Sycip, Quisumbing, Salazar & Associates for petitioner.
Office of the Solicitor General for respondents.
GUTIERREZ DAVID, J.:
This is a petition for review of a decision of the Court of Tax
Appeals ordering petitioner to pay to respondent Collector of
Internal Revenue the sum of P1,266,176.73 as sales tax
deficiency for the third quarter of 1947 to the fourth quarter
of 1950; inclusive, plus 75% surcharge thereon, equivalent to
P349,632.54, or a sum total of P2,215,809.27, plus costs of
the suit.
From the stipulation of facts and the evidence adduced by
both parties, it appears that petitioner Yutivo Sons Hardware
Co. (hereafter referred to as Yutivo) is a domestic
corporation, organized under the laws of the Philippines, with
principal office at 404 Dasmarias St., Manila. Incorporated in
1916, it was engaged, prior to the last world war, in the
importation and sale of hardware supplies and equipment.
After the liberation, it resumed its business and until June of
1946 bought a number of cars and trucks from General
Motors Overseas Corporation (hereafter referred to as GM
for short), an American corporation licensed to do business in
the Philippines. As importer, GM paid sales tax prescribed by
sections 184, 185 and 186 of the Tax Code on the basis of its
selling price to Yutivo. Said tax being collected only once on
original sales, Yutivo paid no further sales tax on its sales to
the public.
On June 13, 1946, the Southern Motors, Inc. (hereafter
referred to as SM) was organized to engage in the business of
selling cars, trucks and spare parts. Its original authorized
capital stock was P1,000,000 divided into 10,000 shares with
a par value of P100 each.
At the time of its incorporation 2,500 shares worth P250,000
appear to have been subscribed into equal proportions by Yu
Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and
Washington Sycip. The first three named subscribers are
brothers, being sons of Yu Tiong Yee, one of Yutivo's
founders. The latter two are respectively sons of Yu Tiong Sin
and Albino Sycip, who are among the founders of Yutivo.
After the incorporation of SM and until the withdrawal of GM
from the Philippines in the middle of 1947, the cars and
tracks purchased by Yutivo from GM were sold by Yutivo to
SM which, in turn, sold them to the public in the Visayas and
Mindanao.
When GM decided to withdraw from the Philippines in the
middle of 1947, the U.S. manufacturer of GM cars and trucks
appointed Yutivo as importer for the Visayas and Mindanao,
and Yutivo continued its previous arrangement of selling
exclusively to SM. In the same way that GM used to pay sales
taxes based on its sales to Yutivo, the latter, as importer, paid
sales tax prescribed on the basis of its selling price to SM, and
since such sales tax, as already stated, is collected only once
on original sales, SM paid no sales tax on its sales to the
public.
On November 7, 1950, after several months of investigation
by revenue officers started in July, 1948, the Collector of
Internal Revenue made an assessment upon Yutivo and
demanded from the latter P1,804,769.85 as deficiency sales
tax plus surcharge covering the period from the third quarter
of 1947 to the fourth quarter of 1949; or from July 1, 1947 to
December 31, 1949, claiming that the taxable sales were the
retail sales by SM to the public and not the sales at wholesale
made by, Yutivo to the latter inasmuch as SM and Yutivo
were one and the same corporation, the former being the
subsidiary of the latter.
The assessment was disputed by the petitioner, and a
reinvestigation of the case having been made by the agents
of the Bureau of Internal Revenue, the respondent Collector
in his letter dated November 15, 1952 countermanded his
demand for sales tax deficiency on the ground that "after
several investigations conducted into the matter no sufficient
evidence could be gathered to sustain the assessment of this
Office based on the theory that Southern Motors is a mere
instrumentality or subsidiary of Yutivo." The withdrawal was
subject, however, to the general power of review by the now
defunct Board of Tax Appeals. The Secretary of Finance to
whom the papers relative to the case were endorsed,
apparently not agreeing with the withdrawal of the
assessment, returned them to the respondent Collector for
reinvestigation.
After another investigation, the respondent Collector, in a
letter to petitioner dated December 16, 1954, redetermined
that the aforementioned tax assessment was lawfully due the
government and in addition assessed deficiency sales tax due
from petitioner for the four quarters of 1950; the
respondents' last demand was in the total sum of
P2,215,809.27 detailed as follows:

Deficiency
Sales Tax
75%
Surcharge
Total Amount
Due
Assessment (First) of November 7, 1950 for
deficiency sales Tax for the period from 3rd Qrtr
1947 to 4th Qrtr 1949 inclusive P1,031,296.60 P773,473.45 P1,804,769.05
Additional Assessment for period from 1st to 4th
Qrtr 1950, inclusive 234,880.13 176,160.09 411,040.22
Total amount demanded per letter of December
16, 1954 P1,266,176.73 P949,632.54 P2,215,809.27
This second assessment was contested by the petitioner
Yutivo before the Court of Tax Appeals, alleging that there is
no valid ground to disregard the corporate personality of SM
and to hold that it is an adjunct of petitioner Yutivo; (2) that
assuming the separate personality of SM may be disregarded,
the sales tax already paid by Yutivo should first be deducted
from the selling price of SM in computing the sales tax due on
each vehicle; and (3) that the surcharge has been erroneously
imposed by respondent. Finding against Yutivo and sustaining
the respondent Collector's theory that there was no
legitimate or bona fide purpose in the organization of SM
the apparent objective of its organization being to evade the
payment of taxes and that it was owned (or the majority of
the stocks thereof are owned) and controlled by Yutivo and is
a mere subsidiary, branch, adjunct, conduit, instrumentality
or alter ego of the latter, the Court of Tax Appeals with
Judge Roman Umali not taking part disregarded its
separate corporate existence and on April 27, 1957, rendered
the decision now complained of. Of the two Judges who
signed the decision, one voted for the modification of the
computation of the sales tax as determined by the
respondent Collector in his decision so as to give allowance
for the reduction of the tax already paid (resulting in the
reduction of the assessment to P820,509.91 exclusive of
surcharges), while the other voted for affirmance. The
dispositive part of the decision, however, affirmed the
assessment made by the Collector. Reconsideration of this
decision having been denied, Yutivo brought the case to this
Court thru the present petition for review.
It is an elementary and fundamental principle of corporation
law that a corporation is an entity separate and distinct from
its stockholders and from other corporation petitions to
which it may be connected. However, "when the notion of
legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime," the law will regard
the corporation as an association of persons, or in the case of
two corporations merge them into one. (Koppel [Phil.], Inc.
vs. Yatco, 77 Phil. 496, citing I Fletcher Cyclopedia of
Corporation, Perm Ed., pp. 135 136; United States vs.
Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per
Sanborn, J.) Another rule is that, when the corporation is the
"mere alter ego or business conduit of a person, it may be
disregarded." (Koppel [Phil.], Inc. vs. Yatco, supra.)
After going over the voluminous record of the present case,
we are inclined to rule that the Court of Tax Appeals was not
justified in finding that SM was organized for no other
purpose than to defraud the Government of its lawful
revenues. In the first place, this corporation was organized in
June, 1946 when it could not have caused Yutivo any tax
savings. From that date up to June 30, 1947, or a period of
more than one year, GM was the importer of the cars and
trucks sold to Yutivo, which, in turn resold them to SM.
During that period, it is not disputed that GM as importer,
was the one solely liable for sales taxes. Neither Yutivo or SM
was subject to the sales taxes on their sales of cars and
trucks. The sales tax liability of Yutivo did not arise until July
1, 1947 when it became the importer and simply continued
its practice of selling to SM. The decision, therefore, of the
Tax Court that SM was organized purposely as a tax evasion
device runs counter to the fact that there was no tax to
evade.
Making the observation from a newspaper clipping (Exh. "T")
that "as early as 1945 it was known that GM was preparing to
leave the Philippines and terminate its business of importing
vehicles," the court below speculated that Yutivo anticipated
the withdrawal of GM from business in the Philippines in
June, 1947. This observation, which was made only in the
resolution on the motion for reconsideration, however, finds
no basis in the record. On the other hand, GM had been an
importer of cars in the Philippines even before the war and
had but recently resumed its operation in the Philippines in
1946 under an ambitious plan to expand its operation by
establishing an assembly plant here, so that it could not have
been expected to make so drastic a turnabout of not merely
abandoning the assembly plant project but also totally
ceasing to do business as an importer. Moreover, the
newspaper clipping, Exh. "T", was published on March 24,
1947, and clipping, merely reported a rumored plan that GM
would abandon the assembly plant project in the Philippines.
There was no mention of the cessation of business by GM
which must not be confused with the abandonment of the
assembly plant project. Even as respect the assembly plant,
the newspaper clipping was quite explicit in saying that the
Acting Manager refused to confirm that rumor as late as
March 24, 1947, almost a year after SM was organized.
At this juncture, it should be stated that the intention to
minimize taxes, when used in the context of fraud, must be
proved to exist by clear and convincing evidence amounting
to more than mere preponderance, and cannot be justified by
a mere speculation. This is because fraud is never lightly to be
presumed. (Vitelli & Sons vs. U.S 250 U.S. 355; Duffin vs.
Lucas, 55 F (2d) 786; Budd vs. Commr., 43 F (2d) 509;
Maryland Casualty Co. vs. Palmette Coal Co., 40 F (2d) 374;
Schoonfield Bros., Inc. vs. Commr., 38 BTA 943; Charles Heiss
vs. Commr 36 BTA 833; Kerbaugh vs. Commr 74 F (2d) 749;
Maddas vs. Commr., 114 F. (2d) 548; Moore vs. Commr., 37
BTA 378; National City Bank of New York vs. Commr., 98 (2d)
93; Richard vs. Commr., 15 BTA 316; Rea Gane vs. Commr., 19
BTA 518). (See also Balter, Fraud Under Federal Law, pp. 301-
302, citing numerous authorities: Arroyo vs. Granada, et al.,
18 Phil. 484.) Fraud is never imputed and the courts never
sustain findings of fraud upon circumstances which, at the
most, create only suspicion. (Haygood Lumber & Mining Co.
vs. Commr., 178 F (2d) 769; Dalone vs. Commr., 100 F (2d)
507).
In the second place, SM was organized and it operated, under
circumstance that belied any intention to evade sales taxes.
"Tax evasion" is a term that connotes fraud thru the use of
pretenses and forbidden devices to lessen or defeat taxes.
The transactions between Yutivo and SM, however, have
always been in the open, embodied in private and public
documents, constantly subject to inspection by the tax
authorities. As a matter of fact, after Yutivo became the
importer of GM cars and trucks for Visayas and Mindanao, it
merely continued the method of distribution that it had
initiated long before GM withdrew from the Philippines.
On the other hand, if tax saving was the only justification for
the organization of SM, such justification certainly ceased
with the passage of Republic Act No. 594 on February 16,
1951, governing payment of advance sales tax by the
importer based on the landed cost of the imported article,
increased by mark-ups of 25%, 50%, and 100%, depending on
whether the imported article is taxed under sections 186, 185
and 184, respectively, of the Tax Code. Under Republic Act
No. 594, the amount at which the article is sold is immaterial
to the amount of the sales tax. And yet after the passage of
that Act, SM continued to exist up to the present and
operates as it did many years past in the promotion and
pursuit of the business purposes for which it was organized.
In the third place, sections 184 to 186 of the said Code
provides that the sales tax shall be collected "once only on
every original sale, barter, exchange . . , to be paid by the
manufacturer, producer or importer." The use of the word
"original" and the express provision that the tax was
collectible "once only" evidently has made the provisions
susceptible of different interpretations. In this connection, it
should be stated that a taxpayer has the legal right to
decrease the amount of what otherwise would be his taxes or
altogether avoid them by means which the law permits. (U.S.
vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S.
465, 469; Commr. vs. Tower, 327 U.S. 280; Lawton vs. Commr
194 F (2d) 380). Any legal means by the taxpayer to reduce
taxes are all right Benry vs. Commr. 25 T. Cl. 78). A man may,
therefore, perform an act that he honestly believes to be
sufficient to exempt him from taxes. He does not incur fraud
thereby even if the act is thereafter found to be insufficient.
Thus in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531,
it was held that though an incorrect position in law had been
taken by the corporation there was no suppression of the
facts, and a fraud penalty was not justified.
The evidence for the Collector, in our opinion, falls short of
the standard of clear and convincing proof of fraud. As a
matter of fact, the respondent Collector himself showed a
great deal of doubt or hesitancy as to the existence of fraud.
He even doubted the validity of his first assessment dated
November 7, 1959. It must be remembered that the fraud
which respondent Collector imputed to Yutivo must be
related to its filing of sales tax returns of less taxes than were
legally due. The allegation of fraud, however, cannot be
sustained without the showing that Yutivo, in filing said
returns, did so fully knowing that the taxes called for therein
called for therein were less than what were legally due.
Considering that respondent Collector himself with the aid of
his legal staff, and after some two years of investigation and
duty of investigation and study concluded in 1952 that
Yutivo's sales tax returns were correct only to reverse
himself after another two years it would seem harsh and
unfair for him to say in 1954 that Yutivo fully knew in October
1947 that its sales tax returns were inaccurate.
On this point, one other consideration would show that the
intent to save taxes could not have existed in the minds of
the organizers of SM. The sales tax imposed, in theory and in
practice, is passed on to the vendee, and is usually billed
separately as such in the sales invoice. As pointed out by
petitioner Yutivo, had not SM handled the retail, the
additional tax that would have been payable by it, could have
been easily passed off to the consumer, especially since the
period covered by the assessment was a "seller's market" due
to the post-war scarcity up to late 1948, and the imposition of
controls in the late 1949.
It is true that the arrastre charges constitute expenses of
Yutivo and its non-inclusion in the selling price by Yutivo cost
the Government P4.00 per vehicle, but said non-inclusion was
explained to have been due to an inadvertent accounting
omission, and could hardly be considered as proof of willful
channelling and fraudulent evasion of sales tax. Mere
understatement of tax in itself does not prove fraud. (James
Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in
Merten's Sec. 55.11 p. 21) The amount involved, moreover, is
extremely small inducement for Yutivo to go thru all the
trouble of organizing SM. Besides, the non-inclusion of these
small arrastre charges in the sales tax returns of Yutivo is
clearly shown in the records of Yutivo, which is
uncharacteristic of fraud (See Insular Lumber Co. vs.
Collector, G.R. No. L-719, April 28, 1956.)
We are, however, inclined to agree with the court below that
SM was actually owned and controlled by petitioner as to
make it a mere subsidiary or branch of the latter created for
the purpose of selling the vehicles at retail and maintaining
stores for spare parts as well as service repair shops. It is not
disputed that the petitioner, which is engaged principally in
hardware supplies and equipment, is completely controlled
by the Yutivo, Young or Yu family. The founders of the
corporation are closely related to each other either by blood
or affinity, and most of its stockholders are members of the
Yu (Yutivo or Young) family. It is, likewise, admitted that SM
was organized by the leading stockholders of Yutivo headed
by Yu Khe Thai. At the time of its incorporation 2,500 shares
worth P250,000.00 appear to have been subscribed in five
equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu
Eng Poh and Washington Sycip. The first three named
subscribers are brothers, being the sons of Yu Tien Yee, one
of Yutivo's founders. Yu Eng Poh and Washington Sycip are
respectively sons of Yu Tiong Sing and Alberto Sycip who are
co-founders of Yutivo. According to the Articles of
Incorporation of the said subscriptions, the amount of
P62,500 was paid by the aforenamed subscribers, but actually
the said sum was advanced by Yutivo. The additional
subscriptions to the capital stock of SM and subsequent
transfers thereof were paid by Yutivo itself. The payments
were made, however, without any transfer of funds from
Yutivo to SM. Yutivo simply charged the accounts of the
subscribers for the amount allegedly advanced by Yutivo in
payment of the shares. Whether a charge was to be made
against the accounts of the subscribers or said subscribers
were to subscribe shares appears to constitute a unilateral
act on the part of Yutivo, there being no showing that the
former initiated the subscription.
The transactions were made solely by and between SM and
Yutivo. In effect, it was Yutivo who undertook the
subscription of shares, employing the persons named or
"charged" with corresponding account as nominal
stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong
and Yu Eng Poh were manifestly aware of these subscriptions,
but considering that they were the principal officers and
constituted the majority of the Board of Directors of both
Yutivo and SM, their subscriptions could readily or easily be
that of Yutivo's Moreover, these persons were related to
death other as brothers or first cousins. There was every
reason for them to agree in order to protect their common
interest in Yutivo and SM.
The issued capital stock of SM was increased by additional
subscriptions made by various person's but except Ng Sam
Bak and David Sycip, "payments" thereof were effected by
merely debiting 'or charging the accounts of said stockholders
and crediting the corresponding amounts in favor of SM,
without actually transferring cash from Yutivo. Again, in this
instance, the "payments" were Yutivo, by effected by the
mere unilateral act of Yutivo a accounts of the virtue of its
control over the individual persons charged, would
necessarily exercise preferential rights and control directly or
indirectly, over the shares, it being the party which really
undertook to pay or underwrite payment thereof.
The shareholders in SM are mere nominal stockholders
holding the shares for and in behalf of Yutivo, so even
conceding that the original subscribers were stockholders
bona fide Yutivo was at all times in control of the majority of
the stock of SM and that the latter was a mere subsidiary of
the former.
True, petitioner and other recorded stockholders transferred
their shareholdings, but the transfers were made to their
immediate relatives, either to their respective spouses and
children or sometimes brothers or sisters. Yutivo's shares in
SM were transferred to immediate relatives of persons who
constituted its controlling stockholders, directors and officers.
Despite these purported changes in stock ownership in both
corporations, the Board of Directors and officers of both
corporations remained unchanged and Messrs. Yu Khe Thai,
Yu Khe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or
Young family) continued to constitute the majority in both
boards. All these, as observed by the Court of Tax Appeals,
merely serve to corroborate the fact that there was a
common ownership and interest in the two corporations.
SM is under the management and control of Yutivo by virtue
of a management contract entered into between the two
parties. In fact, the controlling majority of the Board of
Directors of Yutivo is also the controlling majority of the
Board of Directors of SM. At the same time the principal
officers of both corporations are identical. In addition both
corporations have a common comptroller in the person of
Simeon Sy, who is a brother-in-law of Yutivo's president, Yu
Khe Thai. There is therefore no doubt that by virtue of such
control, the business, financial and management policies of
both corporations could be directed towards common ends.
Another aspect relative to Yutivo's control over SM
operations relates to its cash transactions. All cash assets of
SM were handled by Yutivo and all cash transactions of SM
were actually maintained thru Yutivo. Any and all receipts of
cash by SM including its branches were transmitted or
transferred immediately and directly to Yutivo in Manila upon
receipt thereof. Likewise, all expenses, purchases or other
obligations incurred by SM are referred to Yutivo which in
turn prepares the corresponding disbursement vouchers and
payments in relation there, the payment being made out of
the cash deposits of SM with Yutivo, if any, or in the absence
thereof which occurs generally, a corresponding charge is
made against the account of SM in Yutivo's books. The
payments for and charges against SM are made by Yutivo as a
matter of course and without need of any further request,
the latter would advance all such cash requirements for the
benefit of SM. Any and all payments and cash vouchers are
made on Yutivo stationery and made under authority of
Yutivo's corporate officers, without any copy thereof being
furnished to SM. All detailed records such as cash
disbursements, such as expenses, purchases, etc. for the
account of SM, are kept by Yutivo and SM merely keeps a
summary record thereof on the basis of information received
from Yutivo.
All the above plainly show that cash or funds of SM, including
those of its branches which are directly remitted to Yutivo,
are placed in the custody and control of Yutivo, resources and
subject to withdrawal only by Yutivo. SM's being under
Yutivo's control, the former's operations and existence
became dependent upon the latter.
Consideration of various other circumstances, especially
when taken together, indicates that Yutivo treated SM merely
as its department or adjunct. For one thing, the accounting
system maintained by Yutivo shows that it maintained a high
degree of control over SM accounts. All transactions between
Yutivo and SM are recorded and effected by mere debit or
credit entries against the reciprocal account maintained in
their respective books of accounts and indicate the
dependency of SM as branch upon Yutivo.
Apart from the accounting system, other facts corroborate or
independently show that SM is a branch or department of
Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and
Davao treat Yutivo Manila as their "Head Office" or "Home
Office" as shown by their letters of remittances or other
correspondences. These correspondences were actually
received by Yutivo and the reference to Yutivo as the head or
home office is obvious from the fact that all cash collections
of the SM's branches are remitted directly to Yutivo. Added
to this fact, is that SM may freely use forms or stationery of
Yutivo
The fact that SM is a mere department or adjunct of Yutivo is
made more patent by the fact that arrastre conveying, and
charges paid for the "operation of receiving, loading or
unloading" of imported cars and trucks on piers and wharves,
were charged against SM. Overtime charges for the unloading
of cars and trucks as requested by Yutivo and incurred as part
of its acquisition cost thereof, were likewise charged against
and treated as expenses of SM. If Yutivo were the importer,
these arrastre and overtime charges were Yutivo's expenses
in importing goods and not SM's. But since those charges
were made against SM, it plainly appears that Yutivo had sole
authority to allocate its expenses even as against SM in the
sense that the latter is a mere adjunct, branch or department
of the former.
Proceeding to another aspect of the relation of the parties,
the management fees due from SM to Yutivo were taken up
as expenses of SM and credited to the account of Yutivo. If it
were to be assumed that the two organizations are separate
juridical entities, the corresponding receipts or receivables
should have been treated as income on the part of Yutivo.
But such management fees were recorded as "Reserve for
Bonus" and were therefore a liability reserve and not an
income account. This reserve for bonus were subsequently
distributed directly to and credited in favor of the employees
and directors of Yutivo, thereby clearly showing that the
management fees were paid directly to Yutivo officers and
employees.
Briefly stated, Yutivo financed principally, if not wholly, the
business of SM and actually extended all the credit to the
latter not only in the form of starting capital but also in the
form of credits extended for the cars and vehicles allegedly
sold by Yutivo to SM as well as advances or loans for the
expenses of the latter when the capital had been exhausted.
Thus, the increases in the capital stock were made in
advances or "Guarantee" payments by Yutivo and credited in
favor of SM. The funds of SM were all merged in the cash
fund of Yutivo. At all times Yutivo thru officers and directors
common to it and SM, exercised full control over the cash
funds, policies, expenditures and obligations of the latter.
Southern Motors being but a mere instrumentality, or
adjunct of Yutivo, the Court of Tax Appeals correctly
disregarded the technical defense of separate corporate
entity in order to arrive at the true tax liability of Yutivo.
Petitioner contends that the respondent Collector had lost his
right or authority to issue the disputed assessment by reason
of prescription. The contention, in our opinion, cannot be
sustained. It will be noted that the first assessment was made
on November 7, 1950 for deficiency sales tax from 1947 to
1949. The corresponding returns filed by petitioner covering
the said period was made at the earliest on October 1, as
regards the third quarter of 1947, so that it cannot be
claimed that the assessment was not made within the five-
year period prescribed in section 331 of the Tax Code invoked
by petitioner. The assessment, it is admitted, was withdrawn
by the Collector on insufficiency of evidence, but November
15, 1952 due to insufficiency of evidence, but the withdrawal
was made subject to the approval of the Secretary of Finance
and the Board of Tax Appeals, pursuant to the provisions of
section 9 of Executive Order No. 401-A, series of 1951. The
decision of the previous assessment of November 7, Collector
countermanding the as 1950 was forwarded to the Board of
Tax Appeals through the Secretary of Finance but that official,
apparently disagreeing with the decision, sent it back for re-
investigation. Consequently, the assessment of November 7,
1950 cannot be considered to have been finally withdrawn.
That the assessment was subsequently reiterated in the
decision of respondent Collector on December 16, 1954 did
not alter the fact that it was made seasonably. In this
connection, it would appear that a warrant of distraint and
levy had been issued on March 28, 1951 in relation with this
case and by virtue thereof the properties of Yutivo were
placed under constructive distraint. Said warrant and
constructive distraint have not been lifted up to the present,
which shows that the assessment of November 7, 1950 has
always been valid and subsisting.
Anent the deficiency sale tax for 1950, considering that the
assessment thereof was made on December 16, 1954, the
same was assessed well within the prescribed five-year
period.
Petitioner argues that the original assessment of November
7, 1950 did not extend the prescriptive period on assessment.
The argument is untenable, for, as already seen, the
assessment was never finally withdrawn, since it was not
approved by the Secretary of Finance or of the Board of Tax
Appeals. The authority of the Secretary to act upon the
assessment cannot be questioned, for he is expressly granted
such authority under section 9 of Executive Order No. 401-
And under section 79 (c) of the Revised Administrative Code,
he has "direct control, direction and supervision over all
bureaus and offices under his jurisdiction and may, any
provision of existing law to the contrary not withstanding,
repeal or modify the decision of the chief of said Bureaus or
offices when advisable in public interest."
It should here also be stated that the assessment in question
was consistently protested by petitioner, making several
requests for reinvestigation thereof. Under the
circumstances, petitioner may be considered to have waived
the defense of prescription.
"Estoppel has been employed to prevent the
application of the statute of limitations against the
government in certain instances in which the
taxpayer has taken some affirmative action to
prevent the collection of the tax within the statutory
period. It is generally held that a taxpayer is
estopped to repudiate waivers of the statute of
limitations upon which the government relied. The
cases frequently involve dissolved corporations. If no
waiver has been given, the cases usually show come
conduct directed to a postponement of collection,
such, for example, as some variety of request to
apply an overassessment. The taxpayer has
'benefited' and 'is not in a position to contest' his tax
liability. A definite representation of implied
authority may be involved, and in many cases the
taxpayer has received the 'benefit' of being saved
from the inconvenience, if not hardship of
immediate collection. "
Conceivably even in these cases a fully informed
Commissioner may err to the sorrow of the
revenues, but generally speaking, the cases present
a strong combination of equities against the
taxpayer, and few will seriously quarrel with their
application of the doctrine of estoppel." (Mertens
Law of Federal Income Taxation, Vol. 10-A, pp. 159-
160.)
It is also claimed that section 9 of Executive Order No. 401-A,
series of 1951 es involving an original assessment of more
than P5,000 refers only to compromises and refunds of
taxes, but not to total withdrawal of the assessment. The
contention is without merit. A careful examination of the
provisions of both sections 8 and 9 of Executive Order No.
401-A, series of 1951, reveals the procedure prescribed
therein is intended as a check or control upon the powers of
the Collector of Internal Revenue in respect to assessment
and refunds of taxes. If it be conceded that a decision of the
Collector of Internal Revenue on partial remission of taxes is
subject to review by the Secretary of Finance and the Board
of Tax Appeals, then with more reason should the power of
the Collector to withdraw totally an assessment be subject to
such review.
We find merit, however, in petitioner's contention that the
Court of Tax Appeals erred in the imposition of the 5% fraud
surcharge. As already shown in the early part of this decision,
no element of fraud is present.
Pursuant to Section 183 of the National Internal Revenue
Code the 50% surcharge should be added to the deficiency
sales tax "in case a false or fraudulent return is willfully
made." Although the sales made by SM are in substance by
Yutivo this does not necessarily establish fraud nor the willful
filing of a false or fraudulent return.
The case of Court Holding Co. v. Commissioner of Internal
Revenue (August 9, 1943, 2 TC 531, 541-549) is in point. The
petitioner Court Holding Co. was a corporation consisting of
only two stockholders, to wit: Minnie Miller and her husband
Louis Miller. The only assets of third husband and wife
corporation consisted of an apartment building which had
been acquired for a very low price at a judicial sale. Louis
Miller, the husband, who directed the company's business,
verbally agreed to sell this property to Abe C. Fine and
Margaret Fine, husband and wife, for the sum of $54,000.00,
payable in various installments. He received $1,000.00 as
down payment. The sale of this property for the price
mentioned would have netted the corporation a handsome
profit on which a large corporate income tax would have to
be paid. On the afternoon of February 23, 1940, when the
Millers and the Fines got together for the execution of the
document of sale, the Millers announced that their attorney
had called their attention to the large corporate tax which
would have to be paid if the sale was made by the
corporation itself. So instead of proceeding with the sale as
planned, the Millers approved a resolution to declare a
dividend to themselves "payable in the assets of the
corporation, in complete liquidation and surrender of all the
outstanding corporate stock." The building, which as above
stated was the only property of the corporation, was then
transferred to Mr. and Mrs. Miller who in turn sold it to Mr.
and Mrs. Fine for exactly the same price and under the same
terms as had been previously agreed upon between the
corporation and the Fines.
The return filed by the Court Holding Co. with the respondent
Commissioner of Internal Revenue reported no taxable gain
as having been received from the sale of its assets. The
Millers, of course, reported a long term capital gain on the
exchange of their corporate stock with the corporate
property. The Commissioner of Internal Revenue contended
that the liquidating dividend to stockholders had no purpose
other than that of tax avoidance and that, therefore, the sale
by the Millers to the Fines of the corporation's property was
in substance a sale by the corporation itself, for which the
corporation is subject to the taxable profit thereon. In
requiring the corporation to pay the taxable profit on account
of the sale, the Commissioner of Internal Revenue, imposed a
surcharge of 25% for delinquency, plus an additional
surcharge as fraud penalties.
The U. S. Court of Tax Appeals held that the sale by the
Millers was for no other purpose than to avoid the tax and
was, in substance, a sale by the Court Holding Co., and that,
therefore, the said corporation should be liable for the
assessed taxable profit thereon. The Court of Tax Appeals
also sustained the Commissioner of Internal Revenue on the
delinquency penalty of 25%. However, the Court of Tax
Appeals disapproved the fraud penalties, holding that an
attempt to avoid a tax does not necessarily establish fraud;
that it is a settled principle that a taxpayer may diminish his
tax liability by means which the law permits; that if the
petitioner, the Court Holding Co., was of the opinion that the
method by which it attempted to effect the sale in question
was legally sufficient to avoid the imposition of a tax upon it,
its adoption of that methods not subject to censure; and that
in taking a position with respect to a question of law, the
substance of which was disclosed by the statement indorsed
on it return, it may not be said that that position was taken
fraudulently. We quote in full the pertinent portion of the
decision of the Court of Tax Appeals: .
". . . The respondent's answer alleges that the
petitioner's failure to report as income the taxable
profit on the real estate sale was fraudulent and
with intent to evade the tax. The petitioner filed a
reply denying fraud and averring that the loss
reported on its return was correct to the best of its
knowledge and belief. We think the respondent has
not sustained the burden of proving a fraudulent
intent. We have concluded that the sale of the
petitioner's property was in substance a sale by the
petitioner, and that the liquidating dividend to
stockholders had no purpose other than that of tax
avoidance. But the attempt to avoid tax does not
necessarily establish fraud. It is a settled principle
that a taxpayer may diminish his liability by any
means which the law permits. United States v.
Isham, 17 Wall. 496; Gregory v. Helvering, supra;
Chrisholm v. Commissioner, 79 Fed. (2d) 14. If the
petitioner here was of the opinion that the method
by which it attempted to effect the sale in question
was legally sufficient to avoid the imposition of tax
upon it, its adoption of that method is not subject to
censure. Petitioner took a position with respect to a
question of law, the substance of which was
disclosed by the statement endorsed on its return.
We can not say, under the record before us, that
that position was taken fraudulently. The
determination of the fraud penalties is reversed."
When GM was the importer and Yutivo, the wholesaler, of
the cars and trucks, the sales tax was paid only once and on
the original sales by the former and neither the latter nor SM
paid taxes on their subsequent sales. Yutivo might have,
therefore, honestly believed that the payment by it, as
importer, of the sales tax was enough as in the case of GM
Consequently, in filing its return on the basis of its sales to SM
and not on those by the latter to the public, it cannot be said
that Yutivo deliberately made a false return for the purpose
of defrauding the government of its revenues which will
justify the imposition of the surcharge penalty.
We likewise find meritorious the contention that the Tax
Court erred in computing the alleged deficiency sales tax on
the selling price of SM without previously deducting
therefrom the sales tax due thereon. The sales tax provisions
(sees. 184.186, Tax Code) impose a tax on original sales
measured by "gross selling price" or "gross value in money".
These terms, as interpreted by the respondent Collector, do
not include the amount of the sales tax, if invoiced
separately. Thus, General Circular No. 431 of the Bureau of
Internal Revenue dated July 29, 1939, which implements
sections 184.186 of the Tax Code provides: "
. . .'Gross selling price' or gross value in money' of
the articles sold, bartered, exchanged, transferred as
the term is used in the aforecited sections (sections
184, 185 and 186) of the National Internal Revenue
Code, is the total amount of money or its equivalent
which the purchaser pays to the vendor to receive or
get the goods. However, if a manufacturer,
producer, or importer, in fixing the gross selling price
of an article sold by him has included an amount
intended to cover the sales tax in the gross selling
price of the articles, the sales tax shall be based on
the gross selling price less the amount intended to
cover the tax, if the same is billed to the purchaser
as a separate item.
General Circular No. 440 of the same Bureau reads:
Amount intended to cover the tax must be billed as a
separate em so as not to pay a tax on the tax. On
sales made after he third quarter of 1939, the
amount intended to cover the sales tax must be
billed to the purchaser as separate items in the,
invoices in order that the reduction thereof from the
gross ailing price may be allowed in the computation
of the merchants' percentage tax on the sales.
Unless billed to the purchaser as a separate item in
the invoice, the amounts intended to cover the sales
tax shall be considered as part of the gross selling
price of the articles sold, and deductions thereof will
not be allowed, (Cited in Dalupan, Nat. Int. Rev.
Code, Annotated, Vol. II, pp. 52-53.)
Yutivo complied with the above circulars on its sales to SM,
and as separately billed, the sales taxes did not form part of
the "gross selling price" as the measure of the tax. Since
Yutivo had previously billed the sales tax separately in its
sales invoices to SM General Circulars Nos. 431 and 440
should be deemed to have been complied. Respondent
Collector's method of computation, as opined by Judge Nable
in the decision complained of
. . . is unfair, because . . .(it is) practically imposing
tax on a tax already paid. Besides, the adoption of
the procedure would in certain cases elevate the
bracket under which the tax is based. The late
payment is already penalized, thru the imposition of
surcharges, by adopting the theory of the Collector,
we will be creating an additional penalty not
contemplated by law."
If the taxes based on the sales of SM are computed in
accordance with Gen. Circulars Nos. 431 and 440 the total
deficiency sales taxes, exclusive of the 25% and 50%
surcharges for late payment and for fraud, would amount
only to P820,549.91 as shown in the following computation:
Rates of Gross Sales of Sales Taxes Due and Total Gross Selling
Sales Tax Vehicles Exclusive of
Sales Tax
Computed under
Gen. Cir Nos. 431 &
400
Price Charged to the
Public
5 % P11,912,219.57 P595,610.98 P12,507,83055
7% 909,559.50 63,669.16 973,228.66
10% 2,618,695.28 261,869.53 2,880,564.81
15% 3,602,397.65 540,359.65 4,142,757.30
20% 267,150.50 53,430.10 320,580.60
30% 837,146.97 251,114.09 1,088,291.06
50% 74,244.30 37,122.16 111,366.46
75% 8,000.00 6,000.00 14,000.00
TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44

Less Taxes Paid by Yutivo 988,655.76
Deficiency Tax still due P820,549.91
This is the exact amount which, according to Presiding Judge
Nable of the Court of Tax Appeals, Yutivo would pay,
exclusive of the surcharges.
Petitioner finally contends that the Court of Tax Appeals
erred or acted in excess of its jurisdiction in promulgating
judgment for the affirmance of the decision of respondent
Collector by less than the statutory requirement of at least
two votes of its judges. Anent this contention, section 2 of
Republic Act No. 1125, creating the Court of Tax Appeals,
provides that "Any two judges of the Court of Tax Appeals
shall constitute a quorum, and the concurrence of two judges
shall be necessary to promulgate decision thereof. . . . " It is
on record that the present case was heard by two judges of
the lower court. And while Judge Nable expressed his opinion
on the issue of whether or not the amount of the sales tax
should be excluded from the gross selling price in computing
the deficiency sales tax due from the petitioner, the opinion,
apparently, is merely an expression of his general or "private
sentiment" on the particular issue, for he concurred the
dispositive part of the decision. At any rate, assuming that
there is no valid decision for lack of concurrence of two
judges, the case was submitted for decision of the court
below on March 28, 1957 and under section 13 of Republic
Act 1125, cases brought before said court hall be decided
within 30 days after submission thereof. "If no decision is
rendered by the Court within thirty days from the date a case
is submitted for decision, the party adversely affected by said
ruling, order or decision, may file with said Court a notice of
his intention to appeal to the Supreme Court, and if no
decision has as yet been rendered by the Court, the aggrieved
party may file directly with the Supreme Court an appeal
from said ruling, order or decision, notwithstanding the
foregoing provisions of this section." The case having been
brought before us on appeal, the question raised by
petitioner as become purely academic.
IN VIEW OF THE FOREGOING, the decision of the Court of Tax
Appeals under review is hereby modified in that petitioner
shall be ordered to pay to respondent the sum of
P820,549.91, plus 25% surcharge thereon for late payment.
So ordered without costs.

No. L-18216. October 30, 1962.
STOCKHOLDERS OF F. GUANZON AND SONS,INC., petitioners-
appellants, vs. REGISTER OF DEEDS OF MANILA, respondent-
appellee.

Corporations; Liquidation and distribution of assets for
transfer to stockholders; Certificate of liquidation in the
nature of transfer or conveyance.Where the purpose of the
liquidation, as well as the distribution of the assets of the
corporation, is to transfer their title from the corporation to
the stockholders in

374

374


Stockholders of F. Guanzon and Sons, Inc. vs. Register of
Deeds of Manila

proportion to their shareholdings, that transfer cannot be
effected without the corresponding deed of conveyance from
the corporation to the stockholders, and the certificate
should be considered as one in the nature of a transfer or
conveyance.

APPEAL from a decision of the Land Registration Commission.


Ramon C. Fernandez for petitioners-appellants.

Solicitor General for respondent-appellee.

BAUTISTA ANGELO, J.:

On September 19, 1960, the five stockholders of the F.
Guanzon and Sons, Inc. executed a certificate of liquidation of
the assets of the corporation reciting, among other things,
that by virtue of a resolution of the stockholders adopted on
September 17, 1960, dissolving the corporation, they have
distributed among themselves in proportion to their
shareholdings, as liquidating dividends, the assets of said
corporation, including real properties located in Manila.

The certificate of liquidation, when presented to the Register
of Deeds of Manila, was denied registration on seven
grounds, of which the following were disputed by the
stockholders:

3. The number of parcels not certified to in the
acknowledgment ;
5. P430.50 Reg. fees need be paid;
6. P940.45 documentary stamps need be attached to the
document;
7. The judgment of the Court approving the dissolution
and directing the disposition of the assets of the corporation
need be presented (Rules of Court, Rule 104, Sec. 3).

Deciding the consulta elevated by the stockholders, the
Commissioner of Land Registration overruled ground No. 7
and sustained requirements Nos. 3, 5 and 6.

The stockholders interposed the present appeal. As correctly
stated by the Commissioner of Land Registration, the
propriety or impropriety of the three grounds on which the
denial of the registration of the certificate of liquidation was
predicated hinges on whether or not that certificate merely
involves a distribution of the cor-

375

VOL. 6 OCTOBER 30, 1962

375

Stockholders of F. Guanzon and Sons, Inc. vs. Register of
Deeds of Manila

porations assets or should be considered a transfer or
conveyance.

Appellants contend that the certificate of liquidation is not a
conveyance or transfer but merely a distribution of the assets
of the corporation which has ceased to exist for having been
dissolved. This is apparent in the minutes of dissolution
attached to the document. Not being a conveyance the
certificate need not contain a statement of the number of
parcel of land involved in the distribution in the
acknowledgment appearing therein. Hence the amount of
documentary stamps to be affixed thereon should only be
P0.30 and not P940.45, as required by the register of deeds.
Neither is it correct to require appellants to pay the amount
of P430.50 as registration fee.

The Commissioner of Land Registration, however,
entertained a different opinion. He concurred in the view
expressed by the register of deeds to the effect that the
certificate of liquidation in question, though it involves a
distribution of the corporations assets, in the last analysis
represents a transfer of said assets from the corporation to
the stockholders. Hence, in substance it is a transfer or
conveyance.

We agree with the opinion of these two officials. A
corporation is a juridical person distinct from the members
composing it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct
from its members. While shares of stock constitute personal
property, they do not represent property of the corporation.
The corporation has property of its own which consists chiefly
of real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75;
Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock
only typifies an aliquot part of the corporations property, or
the right to share in its proceeds to that extent when
distributed according to law and equity (Hall & Faley v.
Alabama Terminal, 173 Ala., 398, 56 So., 235), but its holder is
not the owner of any part of the capital of the corporation
(Bradley v. Bauder, 36 Ohio St., 28). Nor is he entitled to the
possession of any definite portion of its property or assets
(Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio

376

376


Philippine Land-Air-Sea Labor Union (PLASLU) vs. Kin San Rice
and Corn Mill Co.

St., 474). The stockholder is not a co-owner or tenant in
common of the corporate property (Harton v. Hohnston, 166
Ala., 317, 51 So., 992).

On the basis of the foregoing authorities, it is clear that the
act of liquidation made by the stockholders of the F. Guanzon
and Sons, Inc. of the latters assets is not and cannot be
considered a partition of community property, but rather a
transfer or conveyance of the title of its assets to the
individual stockholders. Indeed, since the purpose of the
liquidation, as well as the distribution of the assets of the
corporation, is to transfer their title from the corporation to
the stockholders in proportion to their shareholdings,and
this is in effect the purpose which they seek to obtain from
the Register of Deeds of Manila,that transfer cannot be
effected without the corresponding deed of conveyance from
the corporation to the stockholders. It is, therefore, fair and
logical to consider the certificate of liquidation as one in the
nature of a transfer or conveyance.

WHEREFORE, we affirm the resolution appealed from, with
costs against appellants.

Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala
and Makalintal, JJ., concur.

Barrera, J., took no part.

Resolution affirmed. [Stockholders of F. Guanzon and Sons,
Inc. vs. Register of Deeds of Manila, 6 SCRA 373(1962)]

No. L-45911. April 11, 1979.*
JOHN GOKONGWEI, JR., petitioner, vs. SECURITIES AND
EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M.
SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO
BUAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO
PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO,
SR., and EDUARDO R. VISAYA, respondents.

Supreme Court; Judgments; Securities and Exchange
Commission; Corporation Law; Supreme Court always strives
to settle a legal controversy in a single proceeding.xxx In
the case at bar, there are facts which cannot be denied, viz.:
that the amended by-laws were adopted by the Board of
Directors of the San Miguel Corporation in the exercise of the
power delegated by the stockholders ostensibly pursuant to
section 22 of the Corporation Law; that in a special meeting
on February 10, 1977 held specially for that purpose, the
amended by-laws were ratified by more than 80% of the
stockholders of record; that the foreign investment in the
Hongkong Brewery and Distillery, a beer manufacturing
company in Hongkong, was made

________________

* EN BANC.

337

VOL. 89, APRIL 11, 1979

337

Gokongwei, Jr. vs. Securities and Exchange Commission

by the San Miguel Corporation in 1948; and that in the
stockholders annual meeting held in 1972 and 1977, all
foreign investments and operations of San Miguel
Corporation were ratified by the stockholders.

Corporation Law; While reasonableness of a by-law is a legal
question, where reasonableness of a by-law provision is one
in which reasonable minds may differ a court will not be
justified in subsisting its judgment for those authorized to
make the by-laws.The validity or reasonableness of a by-
law of a corporation is purely a question of law. Whether the
by-law is in conflict with the law of the land, or with the
charter of the corporation, or is in a legal sense unreasonable
and therefore unlawful is a question of law. This rule is
subject, however, to the limitation that where the
reasonableness of a by-law is a mere matter of judgment, and
one upon which reasonable minds must necessarily differ, a
court would not be warranted in substituting its judgment
instead of the judgment of those who are authorized to make
by-laws and who have exercised their authority.

Same; Under the Corporation Law a corporation is authorized
to prescribe the qualification of its directors.In this
jurisdiction, under Section 21 of the Corporation Law, a
corporation may prescribed in its by-laws the qualifications,
duties and compensation of directors, officers and employees
***. This must necessarily refer to a qualification in addition
to that specified by section 30 of the Corporation Law, which
provides that every director must own in his right at least
one share of the capital stock of the stock corporation of
which he is a director * * *.

Same; Stockholder has no vested right to be elected as
stockholder.Any person who buys stock in a corporation
does so with the knowledge that its affairs are dominated by
a majority of the stockholders and that he implied contracts
that the will of the majority shall govern in all matters within
the limits of the act of incorporation and lawfully enacted by-
laws and not forbidden by law. To this extent, therefore, the
stockholder may be considered to have parted with his
personal right or privilege to regulate the disposition of his
property which he has invested in the capital stock of the
corporation and surrendered it to the will of the majority or
his fellow incorporators. **** It can not therefore be justly
said that the contract, express or implied, between the
corporation and the stockholders is infringed *** by any act
of the former which is authorized by a majority, ***.

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Same; A director stands in a fiduciary relation to the
competition and its stockholders. The disqualification of a
competition from being elected to the board of directors is a
reasonable exercise of corporate authority. Although in the
strict and technical sense, directors of a private corporation
are not regarded as trustees, there cannot be any doubt that
their character is that of a fiduciary insofar as the corporation
for the collective benefit of the stockholders, they occupy a
fiduciary relation, and in these sense the relation is one of
trust.

Same; Same.It is obviously to prevent the creation of an
opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of competing
corporation, from taking advantage of the information which
he acquires as director to promote his individual or corporate
interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws
was made. Certainly, where two corporations are competitive
in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge
effectively his duty, to satisfy his loyalty to both corporations
and place the performance of his corporate duties above his
personal concerns.

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

Same; Another reason for upholding a by-law provision that
forbids a competitor to be elected as corporate director are
the laws prohibiting cartels.There is another important
consideration in determining whether or not the amended
by-laws are reasonable. The Constitution and the law prohibit
combinations in restraint of trade or unfair competition.
Thus, Section 2 of Article XIV of the Constitution provides:
That State shall regulate or prohibit private monopolies
when the public interest so requires. No combinations in
restraint of trade or unfair competition shall be allowed.

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

Same; Election of petitioner as San Miguel Corporation
Director may run counter to the prohibition contained in
Section 13(5) of Corporation Law on investments in
corporations engaged in agriculture.Finally, considering
that both Robina and SMC are, to a certain extent, engaged in
agriculture, then the election of petitioner to the Board of
SMC may constitute a violation of the prohibition contained
in Section 13(5) of the Corporation Law. Said section provides
in part that any stockholder of more than one corporation
organized for the purpose of engaging in agriculture may hold
his stock in such corporations solely for investment and not
for the purpose of bringing about or attempting to bring
about a combination to exercise control of such corporations.
***.

Same; The by-law amendment of SMC applies equally to all
and does not discriminate against petitioner only.However,
the by-law, by its terms, applies to all stockholders. The equal
protection clause of the Constitution requires only that the
by-laws operate equally upon all persons of a class. Besides,
before petitioner can be declared ineligible to run for
director, there must be hearing and evidence must be
submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and
management, therefore, support the view that a by-law
which disqualifies a competitor from election to the Board of
Directors of another corporation is valid and reasonable.

Same; Petitioner is not ipso facto disqualified to run on SMC
director. He must be given full opportunity by the SEC to
show that he is not covered by the disqualification.While
We here sustain the

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validity of the amended by-laws, it does not follow as a
necessary consequence that petitioner is ipso facto
disqualified. Consonant with the requirement of due process,
there must be due hearing at which the petitioner must be
given the fullest opportunity to show that he is not covered
by the disqualification. As trustees of the corporation and of
the stockholders, it is the responsibility of directors to act
with fairness to the stockholders. Pursuant to this obligation
and to remove any suspicion that this power may be utilized
by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a
candidate for the Board of Directors should be reviewed by
the Securities and Exchange Commission en banc and its
decision shall be final unless reversed by this Court on
certiorari.

Same; Every stockholder has the right to inspect corporate
books and records.The stockholders right of inspection of
the corporations books and records is based upon their
ownership of the assets and property of the corporation. It is,
therefore, an incident of ownership of the corporate
property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a quasi-
ownership. This right is predicated upon the necessity of
selfprotection. It is generally held by majority of the courts
that where the right is granted by statute to the stockholder,
it is given to him as such and must be exercised by him with
respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation. In
other words, the inspection has to germane to the
petitioners interest as a stockholder, and has to be proper
and lawful in character and not inimical to the interest of the
corporation.

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

Same; Purely ultra vires corporate acts of corporate officers
to invest corporate funds in another business or corporation,
i.e., acts not contrary to law, morals, public order as public
policy, may be ratified

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by the stockholders holding 2/3 of the voting power.
Assuming arguendo that the Board of Directors of San Miguel
Corporation had no authority to make the assailed
investment, there is no question that a corporation, like an
individual, may ratify and thereby render binding upon it the
originally unauthorized acts of its officers or other agents.
This is true because the questioned investment is neither
contrary to law, morals, public order or public policy. It is a
corporate transaction or contract which is within the
corporate powers, but which is defective from a purported
failure to observe in its execution the requirement of the law
that the investment must be authorized by the affirmative
vote of the stockholders holding twothirds of the voting
power. This requirement is for the benefit of the
stockholders. The stockholders for whose benefit the
requirement was enacted may, therefore, ratify the
investment and its ratification by said stockholders
obliterates any defect which it may have had at the outset.
Mere ultra vires acts, said this Court in Pirovano, or those
which are not illegal and void ab initio, but are not merely
within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when
ratified by the stockholders.

Corporation Law; Judgment; The doctrine of the law of the
case.We hold on our part that the doctrine of the law of
the case invoked by Mr. Justice Barredo has no applicability
for the following reasons: a) Our jurisprudence is quite clear
that this doctrine may be invoked only where there has been
a final and conclusive determination of an issue in the first
case later invoked as the law of the case.

Same; Same; When doctrine of the law of the case not
applicable.The doctrine of the law of the case, therefore,
has no applicability whatsoever herein insofar as the question
of the validity or invalidity of the amended by-laws is
concerned. The Courts judgment of April 11, 1979 clearly
shows that the voting on this question inconclusive with six
against four Justices and two other Justices (the Chief Justice
and Mr. Justice Fernando) expressly reserving their votes
thereon, and Mr. Justice Aquino while taking no part in effect
likewise expressly reserved his vote thereon. No final aad
conclusive determination could be reached on the issue and
pursuant to the provisions of Rule 56, section 11, since this
special civil action originally commenced in this Court, the
action was simply dismissed with the result that no law of the
case was laid down insofar as the issue of the validity or
invalidity of the questioned by-laws is con-

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342



cerned, and the relief sought herein by petitioner that this
Court bypass the SEC which has yet to hear and determine
the same issue pending before it below and that this Court
itself directly resolve the said issue stands denied.

Same; Same; Constitutional Law; Due Process; When
procedural due process was not observed.The entire Court,
therefore, recognized that petitioner had not been given
procedural due process by the SMC board on the matter of
his disqualification and that he was entitled to a new and
proper hearing. It stands to reason that in such hearing,
petitioner could raise not only questions of fact but questions
of law, particularly questions of law affecting the investing
public and their right to representation on the board as
provided by lawnot to mention that as borne out by the
fact that no restriction whatsoever appears in the Courts
decision, it was never contemplated that petitioner was to be
limited questions of fact and could not raise the fundamental
question of law bearing on the invalidity of the questioned
amended by-laws at such hearing before the SMC board.
Furthermore, it was expressly provided unanimously in the
Courts decision that the SMC boards decision on the
disqualification of petitioner (assuming the board of
directors of San Miguel Corporation should, after the proper
hearing, disqualify him as qualified in Mr. Justice Barredos
own separate opinion, at page 2) shall be appealable to
respondent Securities and Exchange Commission
deliberating and acting en banc and ultimately to this
Court.

Same; Same; Reservation of the vote of the Chief Justice.As
expressly stated in the Chief Justices reservation of his vote,
the matter of the question of the applicability of the said
section 13(5) to petitioner would be heard by this Court at
the appropriate time after the proceedings below (and
necessarily the question of the validity of the amended by-
laws would be taken up anew and the Court would at that
time be able to reach a final and conclusive vote).

Same; Same; Validity of the amended by-laws.The six votes
cast by Justices Makasiar, Antonio, Santos, Abad Santos, De
Castro and this writer in favor of validity of the amended by-
laws in question, with only four members of this Court,
namely, Justices Teehankee, Concepcion Jr., Fernandez and
Guerrero opining otherwise, and with Chief Justice Castro and
Justice Fernando reserving their votes thereon and Justice
Aquino and Melencio Herrera not

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343


voting, thereby resulting in the dismissal of the petition
insofar as it assails the validity of the amended by-laws . . . .
for lack of necessary votes, has no other legal consequence
than that it is the law of the case far as the parties herein are
concerned, albeit the majority opinion of six against four
Justices is not doctrinal in the sense that it cannot be cited as
necessarily a precedent for subsequent cases. This means
that petitioner Gokongwei and the respondents, including the
Securities and Exchange Commission, are bound by the
foregoing result, namely, that the Court en banc has not
found merit in the claim that the amended by-laws in
question are invalid. Indeed, it is one thing to say that
dismissal of the case is not doctrinal and entirely another
thing to maintain that such dismissal leaves the issue
unsettled.

Same; Same; Where petitioner can no longer revive the issue
validity of the amended by-laws.I reiterate, therefore, that
as between the parties herein, the issue of validity of the
challenged bylaws is already settled. From which it follows
that the same are already enforceable insofar as they are
concerned. Petitioner Gokongwei may not hereafter act on
the assumption that he can revive the issue of validity
whether in the Securities Exchange Commission, in this Court
or in any other forum, unless he proceeds on the basis of a
factual milieu different from the setting of this case. Not even
the Securities and Exchange Commission may pass on such
question anymore at the instance of herein petitioner or
anyone acting in his stead or on his behalf. The vote of four
justices to remand the case thereto cannot alter the
situation.

Same; Same; Where Court has not found merit in the claim
that the amended by-laws in question are valid.I concur in
Justice Barredos statement that the dismissal (for lack of
necessary votes) of the petition to the extent that it assails
the validity of the amended by-laws, is the law of the case at
bar, which means in effect that as far and only in so far as the
parties and the Securities and Exchange Commission are
concerned, the Court has not found merit in the claim that
the amended by-laws in question are valid.

Same; Same; Term and meaning of farming.This is my
view, even as I am for a restrictive interpretation of Section
13(5) of the Philippine Corporation Law, under which I would
limit the scope of the provision to corporations engaged in
agriculture, but only as the word agriculture refers to its
more limited meaning as distinguish-

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344



ed from its general and broad connotation. The term would
then mean farming or raising the natural products of the
soil, such as by cultivation, in the acquisition of agricultural
land such as by homestead, before the patent may be issued.

Same; Same; Poultry raising or piggery is included in the term
agriculture.It is my opinion that under the public land
statute, the development of a certain portion of the land
applied for a specified in the law as a condition precedent
before the applicant may obtain a patent, is cultivation, not
let us say, poultry raising or piggery, which may be included in
the term Agriculture in its broad sense. For under Section
13(5) of the Philippine Corporation Law, construed not in the
strict way as I believe it should because the provision is in
derogation of property rights, the petitioner in this case
would be disqualified from becoming an officer of either the
San Miguel Corporation or his own supposedly agricultural
corporations.

ORIGINAL ACTION in the Supreme Court. Certiorari,
mandamus and injunction.


De Santos, Balgos & Perez for petitioner.

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

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

R. T. Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

The instant petition for certiorari, mandamus and injunction,
with prayer for issuance of writ of preliminary injunction,
arose out of two cases filed by petitioner with the Securities
and Exchange Commission, as follows:
SEC CASE NO. 1375

On October 22, 1976, petitioner, as stockholder of
respondent San Miguel Corporation, filed with the Securities
and Exchange Commission (SEC) a petition for declaration of
nullity

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

As a first cause of action, petitioner alleged that on
September 18, 1976, individual respondents amended by
bylaws of the corporation, basing their authority to do so on a
resolution of the stockholders adopted on March 13, 1961,
when the outstanding capital stock of respondent
corporation was only P70,139,740.00, divided into 5,513,974
common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment,
the outstanding and paid up shares totalled 30,127,043 with
a total par value of P301,270,430.00. It was contended that
according to section 22 of the Corporation Law and Article
VIII of the by-laws of the corporation, the power to amend,
modify, repeal or adopt new by-laws may be delegated to the
Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed
and paid up capital stock of the corporation, which 2/3
should have been computed on the basis of the capitalization
at the time of the amendment. Since the amendment was
based on the 1961 authorization, petitioner contended that
the Board acted without authority and in usurpation of the
power of the stockholders.

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

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

As a fourth cause of action, it was claimed that prior to the
questioned amendment, petitioner had all the qualifications
to

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be a director of respondent corporation, being a substantial
stockholder thereof; that as a stockholder, petitioner had
acquired rights inherent in stock ownership, such as the rights
to vote and to be voted upon in the election of directors; and
that in amending the by-laws, respondents purposely
provided for petitioners disqualification and deprived him of
his vested right as afore-mentioned, hence the amended by-
laws are null and void.1

________________

1 The pertinent amendment reads as follows: RESOLVED,
That Section 2, Article III of the By-laws of San Miguel
Corporation, which reads as follows:

SECTION 2. Any stockholder having at least five thousand
shares registered in his name may be elected director, but he
shall not be qualified to hold office unless he pledges said five
thousand shares to the Corporation to answer for his
conduct. be, and the same hereby is, amended, to read as
follows;

SECTION 2. Any stockholder having at least five thousand
shares registered in his name may be elected Director,
provided, however, that no person shall qualify or be eligible
for nomination or election to the Board of Directors if he is
engaged in any business which competes with or is
antagonistic to that of the Corporation. Without limiting the
generality of the foregoing, a person shall be deemed to be
so engaged:

(a) if he is an officer, manager or controlling person of, or the
owner (either of record or beneficially) of 10% or more of any
outstanding class of shares of, any corporation (other than
one in which the corporation owns at least 30% of the capital
stock) engaged in a business which the Board, by at least
three-fourths vote, determines to be competitive or
antagonistic to that of the Corporation; or

(b) If he is an officer, manager or controlling person of, or the
owner (either of record or beneficially) of 10% or more of any
outstanding class of shares of, any other corporation or entity
engaged in any line of business of the Corporation, when in
the judgment of the Board, by at least three-fourths vote, the
laws against combinations in restraint of trade shall be
violated by such persons membership in the Board of
Directors.

(c) If the Board, in the exercise of its judgment in good faith,
determines by at least three-fourths vote that he is the
nominee of any person set forth in (a) or (b).

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

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

On October 28, 1976, in connection with the same case,
petitioner filed with the Securities and Exchange Commission
an Urgent Motion for Production and Inspection of
Documents, alleging that the Secretary of respondent
corportion refused to allow him to inspect its records despite
request made by petitioner for production of certain
documents enumerated in the request, and that respondent
corporation

________________

In determining whether or not a person is a controlling
person, beneficial owner, or the nominee of another, the
Board may take into account such factors as business and
family relationship. For the proper implementation of this
provision, all nominations for election of Directors by the
stockholders shall be submitted in writing to the Board of
Directors at least five working days before the date of the
Annual Meeting. (Rollo, pp. 402-463.)

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had been attempting to suppress information from its
stockholders despite a negative reply by the SEC to its query
regarding their authority to do so. Among the documents
requested to be copied were (a) minutes of che stockholders
meeting held on March 13, 1961; (b) copy of the
management contract between San Miguel Corporation and
A. Soriano Corporation (ANSCOR); (c) latest balance sheet of
San Miguel International, Inc.; (d) authority of the
stockholders to invest the funds of respondent corporation in
San Miguel International, Inc.; and (e) lists of salaries,
allowances, bonuses, and other compensation, if any,
received by Andres M. Soriano, Jr. and/or its successor-in-
interest.

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

During the pendency of the motion for production,
respondents San Miguel Corporation, Enrique Conde, Miguel
Ortigas and Antonio Prieto filed their answer to the petition
denying the substantial allegations therein and stating, by
way of affirmative defenses that the action taken by the
Board of Directors on September 18, 1976 resulting in the * *
* amendments is valid and legal because the power to
amend, modify, repeal or adopt new By-laws delegated to
said Board on March 13, 1961 and long prior thereto has
never been revoked, withdrawn or otherwise nullified by the
stockholders of SMC; that contrary to petitioners claim,
the vote requirement for a valid delegation of the power to
amend, repeal or adopt new by-laws is determined in relation
to the total subscribed capital stock at the time the delegtion
of said power is made, not when the Board opts to exercise
said delegated power; that petitioner has not availed of his
intracorporate remedy for the nullification of the
amendment,

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which is to secure its repeal by vote of the stockholders
representing a majority of the subscribed capital stock at any
regular or special meeting, as provided in Article VIII, section
1 of the by-laws and section 22 of the Corporation Law, hence
the petition is premature; that petitioner is estopped from
questioning the amendments on the ground of lack of
authority of the Board, since he failed to object to other
amendments made on the bais of the same 1961
authorization; that the power of the corporation to amend its
by-laws is broad, subject only to the condition that the by-
laws adopted should not be inconsistent with any existing
law; that respondent corporation should not be precluded
from adopting protective measures to minimize or eliminate
situations where its directors might be tempted to put their
personal interests over that of the corporation; that the
questioned amended by-laws is a matter of internal policy
and the judgment of the board should not be interfered with;
that the by-laws, as amended, are valid and binding and are
intended to prevent the possibility of violation of criminal and
civil laws prohibiting combinations in restraint of trade; and
that the petition states no cause of action. It was, therefore,
prayed that the petition be dismissed and that petitioner be
ordered to pay damages and attorneys fees to respondents.
The application for writ of preliminary injunction was likewise
on various grounds.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed
their opposition to the petition, denying the material
averments thereof and stating, as part of their affirmative
defenses, that in August 1972, the Universal Robina
Corporation (Robina), a corporation engaged in business
competitive to that of respondent corporation, began
acquiring shares therein, until September 1976 when its total
holding amounted to 622,987 shares; that in October 1972,
the Consolidated Foods Corporation (CFC) likewise began
acquiring shares in respondent corporation, until its total
holdings amounted to P543,959.00 in September 1976; that
on January 12, 1976, petitioner, who is president and
controlling shareholder of Robina and CFC (both closed
corporations) purchased 5,000 shares of stock of respondent
corporation, and thereafter, in

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

As counterclaims, actual damages, moral damages,
exemplary damages, expenses of litigation and attorneys
fees were presented against petitioner.

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

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

Considering the evidence submitted before the Commission
by the petitioner and respondents in the above-entitled case,
it is hereby ordered:

1. That respondents produce and permit the inspection,
copying and photographing, by or on behalf of the petitioner-
movant, John Gokongwei, Jr., of the minutes of the
stockholders meeting of the respondent San Miguel
Corporation held on March 13, 1961, which are in the
possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the issues
involved in the main case. Accordingly, the respondents
should allow petitionr-movant entry in the principal office of
the respondent Cor

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poration, San Miguel Corporation on January 14, 1977, at
9:30 oclock in the morning for purposes of enforcing the
rights herein granted; it being understood that the
inspection, copying and photographing of the said documents
shall be undertaken under the direct and strict supervision of
this Commission. Provided, however, that other documents
and/or papers not heretofore included are not covered by
this Order and any inspection thereof shall require the prior
permission of this Commission;

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

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

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

This Order is immediately executory upon its approval.2

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

Meanwhile, on December 10, 1976, while the petition was
yet to be heard, respondent corporation issued a notice of
special stockholders meeting for the purpose of ratification
and confirmation of the amendment to the By-laws, setting
such meeting for February 10, 1977. This prompted petitioner
to ask respondent Commission for a summary judgment in-

________________

2 Annex H, Petition, pp. 168-169, Rollo.

352

352



sofar as the first cause of action is concerned, for the alleged
reason that by calling a special stockholders meeting for the
aforesaid purpose, private respondents admitted the
invalidity of the amendments of September 18, 1976. The
motion for summary judgment was opposed by private
respondents. Pending action on the motion, petitioner filed
an Urgent Motion for the Issuance of a Temporary
Restraining Order, praying that pending the determination
of petitioners application for the issuance of a preliminary
injunction and/or petitioners motion for summary judgment,
a temporary restraining order be issued, restraining
respondents from holding the special stockholders meeting
as scheduled. This motion was duly opposed by respondents.

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

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

In view of the die fact that the annual stockholders meeting
of respondent corporation had been scheduled for May 10,
1977, petitioner filed with respondent Commission a
Manifestation stating that he intended to run for the position
of director of respondent corporation. Thereafter,
respondents filed a Manifestation with respondent
Commission, submitting a Resolution of the Board of
Directors of respondent corporation disqualifying and
precluding petitioner from being a candidate for director
unless he could submit evidence on May 3, 1977 that he does
not come within the disqualifications specified in

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the amendment to the by-laws, subject matter of SEC Case
No. 1375. By reason thereof, petitioner filed a manifestation
and motion to resolve pending incidents in the case and to
issue a writ of injunction, alleging that private respondents
were seeking to nullify and render ineffectual the exercise of
jurisdiction by the respondent Commission, to petitioners
irreparable damage and prejudice. Allegedly despite a
subsequent Manifestation to prod respondent Commission to
act, petitioner was not heard prior to the date of the
stockholders meeting.

Petitioner alleges that there appears a deliberate and
concerted inability on the part of the SEC to act, hence
petitioner came to this Court.
SEC CASE NO. 1423

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

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

Respondents issued notices of the annual stockholders
meeting, including in the Agenda thereof, the following:

354

354



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

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

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

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

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change Commission acts on the matters complained of in the
instant petition.

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

(1) Order No. 449, Series of 1977 (SEC Case No. 1375);
denying petitioners motion for reconsideration, with its
supplement, of the order of the Commission denying in part
petitioners motion for production of documents, petitioners
motion for reconsideration of the order denying the issuance
of a temporary restraining order denying the issuance of a
temporary restraining order, and petitioners consolidated
motion to declare respondents in contempt and to nullify the
stockholders meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375),
allowing petitioner to run as a director of respondent
corporation but stating that he should not sit as such if
elected, until such time that the Commission has decided the
validity of the by-laws in dispute, and denying deferment of
Item 6 of the Agenda for the annual stockholders meeting;
and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375),
denying petitioners motion for reconsideration of the order
of respondent Commission denying petitioners motion for
summary judgment;

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

356

356



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

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

(1) that the petitioner and the interests he represents are
engaged in businesses competitive and antagonistic to that of
respondent San Miguel Corporation, it appearing that he
owns and controls a greater portion of his SMC stock thru the
Universal Robina Corporation and the Consolidated Foods
Corporation, which corporations are engaged in businesses
directly and substantially competing with the allied
businesses of respondent SMC and of corporations in which
SMC has substantial investments. Further, when CFC and
Robina had accumulated shares in SMC, the Board of
Directors of SMC realized the clear and present danger that
competitors or antagonistic parties may be elected directors
and thereby have easy and direct access to SMCs business
and trade secrets and plans;
(2) that the amended by-laws were adopted to preserve
and protect respondent SMC from the clear and present
danger that business competitors, if allowed to become
directors, will illegally and unfairly utilize their direct access to
its business secrets and plans for their own private gain to the
irreparable prejudice of respondent SMC, and, ultimately, its
stockholders. Further, it is asserted that membership of a
competitor in the Board of Directors is a blatant disregard of
no less than the Constitution and pertinent laws against
combinations in restraint of trade;
(3) that by-laws are valid and binding since a corporation
has the inherent right and duty to preserve and protect itself
by excluding competitors and antagonistic parties, under the
law of self-preservation, and it should be allowed a wide
latitude in the selection of means to preserve itself;

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(4) that the delay in the resolution and disposition of SEC
Cases Nos. 1375 and 1423 was due to petitioners own acts or
omissions, since he failed to have the petition to suspend,
pendente lite, the amended by-laws calendared for hearing.
It was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension
(preliminary injunction) for hearing on May 3, 1977. The
instant petition being dated May 4, 1977, it is apparent that
respondent Commission was not given a chance to act with
deliberate dispatch, and
(5) that even assuming that the petition was meritorious, it
has become moot and academic because respondent
Commission has acted on the pending incidents complained
of. It was, therefore, prayed that the petition be dismissed.

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

Petitioner filed a reply to the aforesaid comments, stating
that the petition presents justiciable questions for the
determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and
oppresively against petitioner, warranting the intervention of
this Court; (2) a derivative suit, such as the instant case, is not
rendered academic by the act of a majority of stockholders,
such that the discussion, ratification and confirmation of Item
6 of the Agenda of the annual stockholders meeting of May
10, 1977

358

358



did not render the case moot; that the amendment to the
bylaws which specifically bars petitioner from being a director
is void since it deprives him of his vested rights.

Respondent Commission, thru the Solicitor General, filed a
separate comment, alleging that after receiving a copy of the
restraining order issued by this Court and noting that the
restraining order did not foreclose action by it, the
Commission en banc issued Orders Nos. 449, 450 and 451 in
SEC Case No. 1375.

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

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

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

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

(2) whether or not respondent SEC gravely abused its
discretion in denying petitioners request for an examination

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of the records of San Miguel International, Inc., a fully owned
subsidiary of San Miguel Corporation; and

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

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

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

Respondents Andres M. Soriano, Jr. and Jose M. Soriano
similarly pray that this Court resolve the legal issues raised by
the parties in keeping with the cherished rules of procedure
that a court should always strive to settle the entire
controversy in a single proceeding leaving no root or branch
to bear the seeds of future ligiation, citing Gayos v. Gayos.3
To

________________

3 L-27812, September 26, 1975, 67 SCRA 146.

360

360



the same effect is the prayer of San Miguel Corporation that
this Court resolve on the merits the validity of its amended
bylaws and the rights and obligations of the parties
thereunder, otherwise the time spent and effort exerted by
the parties concerned and, more importantly, by this
Honorable Court, would have been for naught because the
main question will come back to this Honorable Court for
final resolution. Respondent Eduardo R. Visaya submits a
similar appeal.

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

It is an accepted rule of procedure that the Supreme Court
should always strive to settle the entire controversy in a
single proceeding, leaving no root or branch to bear the seeds
of future litigation.4 Thus, in Francisco v. City of Davao,5 this
Court resolved to decide the case on the merits instead of
remanding it to the trial court for further proceedings since
the ends of justice would not be subserved by the remand of
the case. In Republic v. Security Credit and Acceptance
Corporation, et al.,6 this Court, finding that the main issue is
one of law, resolved to decide the case on the merits
because public interest demands an early disposition of the
case, and in Republic v. Central Surety and Insurance
Company,7 this Court denied remand of the third-party
complaint to the trial court for further proceedings, citing
precedents where this Court, in similar situations, resolved to
decide the cases on the merits, instead of remanding them to
the trial court where (a) the ends of justice would not be
subserved by the remand of the case; or (b) where public
interest demands an early disposition of the case; or (c)
where the trial court had already received

________________

4 Gayos v. Gayos, ibid., citing Marquez v. Marquez, No.
47792, July 24, 1941, 73 Phil. 74, 78; Keramik Industries, Inc.
v. Guerrero, L-38866, November 29, 1974, 61 SCRA 265.

5 L-20654, December 24, 1964, 12 SCRA 628.

6 L-20583, January 23, 1967, 19 SCRA 58.

7 L-27802, October 26, 1968, 25 SCRA 641.

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all the evidence presented by both parties and the Supreme
Court is now in a position, based upon said evidence, to
decide the case on its merits.8 It is settled that the doctrine
of primary jurisdiction has no application where only a
question of law is involved.8a Because uniformity may be
secured through review by a single Supreme Court, questions
of law may appropriately be determined in the first instance
by courts.8b In the case at bar, there are facts which cannot
be denied, viz.: that the amended by-laws were adopted by
the Board of Directors of the San Miguel Corporation in the
exercise of the power delegated by the stockholders
ostensibly pursuant to section 22 of the Corporation Law;
that in a special meeting on February 10, 1977 held specially
for that purpose, the amended by-laws were ratified by more
tna 80% of the stockholders of record; that the foreign
investment in the Hongkong Brewery and Distillery, a beer
manufacturing company in Hongkong, was made by the San
Miguel Corporation in 1948; and that in the stockholders
annual meeting held in 1972 and 1977, all foreign
investments and operations of San Miguel Corporation were
ratified by the stockholders.
II

Whether or not the amended by-laws of SMC disqualifying a
competitor from nomination or election to the Board of
Directors of SMC are valid and reasonable

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

________________

8 Samal v. Court of Appeals, L-8579, May 25, 1956, 99 Phil.
230.

8a 2 Am. Jur. 2d 696, 697.

8b Pan American P. Corp. v. Supreme Court of Delaware, 330
US 656, 6 L. ed. 2d 584.

9 Fleischer v. Botica Nolasco Co., Inc., No. 23241, March 14,
1925, 47 Phil. 583, 590.

10 18 C.J.S. Corporations, Sec. 189, p. 603.

362

362



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

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

Upon the other hand, respondents Andres M. Soriano, Jr.,
Jose M. Soriano and San Miguel Corporation content that
exclusion of a competitor from the Board is legitimate
corporate purpose, considering that being a competitor,
petitioner cannot devote an unselfish and undivided loyalty
to the corporation; that it is essentially a preventive measure
to assure stockholders of San Miguel Corporation of
reasonable protection from the unrestrained self-interest of
those charged with the promotion of the corporate
enterprise; that access to confidential information by a
competitor may result either in the promotion of the interest
of the competitor at the expense of the San Miguel
Corporation, or the promotion of both the interests of
petitioner and respondent San Miguel Corporation, which
may, therefore, result in a combination or agreement in
violation of Article 186 of the Revised Penal Code by
destroying free competition to the detriment of the
consuming public. It is further argued that there is not vested
right of any stockholder under Philippine Law to be voted as
director of a corporation. It is alleged that petitioner, as of
May 6, 1978, has exercised, personally or thru two
corporations owned or controlled by him, control over the
following shareholdings in San Miguel Corporation, vis.: (a)
John Gokongwei, Jr.6,325 shares; (b) Universal Robina
Corporation788,647 shares; (c) CFC Corporation658,313
shares, or a total of 1,403,285

_________________

11 People ex rel. Wildi v. Ittner, 165 Ill. App. 360, 367 (1911),
cited in Fletcher, Cyclopedia Corporations, Sec. 4191.

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shares. Since the outstanding capital stock of San Miguel
Corporation, as of the present date, is represented by
33,139,749 shares with a par value of P10.00, the total shares
owned or controlled by petitioner represents 4.2344% of the
total outstanding capital stock of San Miguel Corporation. It is
also contended that petitioner is the president and
substantial stockholder of Universal Robina Corporation and
CFC Corporation, both of which are allegedly controlled by
petitioner and members of his family. It is also claimed that
both the Universal Robina Corporation and the CFC
Corporation are engaged in businesses directly and
substantially competing with the allied businesses of San
Miguel Corporation, and of corporations in which SMC has
substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONERS
CORPORATIONS AND SAN MIGUEL COR PORATION

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

Product Line

Estimated
1977 SMC

Market Share
Robina-CFC

Total

Table Eggs

0.6%

10.0%

10.6%

Layer Pullets

33.0%

24.0%

57.0%

Dressed Chicken

35.0%

14.0%

49.0%

Poultry & Hog Feeds

40.0%

12.0%

52.0%

Ice Cream

70.0%

13.0%

83.0%

Instant Coffee

45.0%

40.0%

85.0%

Woven Fabrics

17.5%

9.1%

26.6%

Thus, according to respondent SMC, in 1976, the areas of
competition affecting SMC involved product sales of over
P400 million or more than 20% of the P2 billion total product
sales of SMC. Significantly, the combined market shares of
SMC and CFC-Robina in layer pullets, dressed chicken, poultry
and hog

364

364



feeds, ice cream, instant coffee and woven fabrics would
result in a position of such dominance as to affect the
prevailing market factors.

It is further asserted that in 1977, the CFC-Robina group was
in direct competition on product lines which, for SMC,
represented sales amounting to more than P478 million. In
addition, CFC-Robina was directly competing in the sale of
coffee with Filipro, a subsidiary of SMC, which product line
represented sales for SMC amounting to more than P275
million. The CFC-Robina group (Robitex, excluding Litton Mills
recently acquired by petitioner) is purportedly also in direct
competition with Ramie Textile, Inc., subsidiary of SMC, in
product sales amounting to more than P95 million. The areas
of competition between SMC and CFC-Robina in 1977
represented, therefore, for SMC, product sales of more than
P849 million.

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

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AUTHORITY OF CORPORATION TO PRESCRIBE
QUALIFICATIONS OF DIRECTORS EXPRESSLY CON FERRED BY
LAW

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

It is recognized by all authorities that every corporation has
the inherent power to adopt by-laws for its internal
government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among
themselves in reference to the management of its affairs.
12 At common law, the rule was that the power to make
and adopt by-laws was inherent in every corporation as one
of its necessary and inseparable legal incidents. And it is
settled throughout the United States that in the absence of
positive legislative provisions limiting it, every private
corporation has this inherent power as one of its necessary
and inseparable legal incidents, independent of any specific
enabling provision in its charter or in general law, such power
of self-government being essential to enable the corporation
to accomplish the purposes of its creation.13

In this jurisdiction, under section 21 of the Corporation Law, a
corporation may prescribe in its by-laws the qualifications,
duties and compensation of directors, officers and

________________

12 McKee & Company v. First National Bank of San Diego, 265
F. Supp. 1 (1967), citing Olincy v. Merle Norman Cosmetics,
Inc., 200 Cal. App. 20, 260, 19 Cal. Reptr. 387 (1962).

13 Fletcher, Cyclopedia Corporations, Sec. 4171, cited in
McKee & Company, supra.

366

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

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED
DIRECTOR

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

Pursuant to section 18 of the Corporation Law, any
corporation may amend its articles of incorporation by a vote
or written assent of the stockholders representing at least
two-thirds of the subscribed capital stock of the corporation.
If the amend-

_________________

14 No. 26649, July 13, 1927, 50 Phil. 399, 441.

15 6 Thompson 369, Sec. 4490.

16 Ibid.

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ment changes, diminishes or restricts the rights of the
existing shareholders, then the dissenting minority has only
one right, viz.: to object thereto in writing and demand
payment for his share. Under section 22 of the same law,
the owners of the majority of the subscribed capital stock
may amend or repeal any by-law or adopt new by-laws. It
cannot be said, therefore, that petitioner has a vested right to
be elected director, in the face of the fact that the law at the
time such right as stockholder was acquired contained the
prescription that the corporate charter and the by-law shall
be subject to amendment, alteration and modification.17

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

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE
CORPORATION AND ITS SHAREHOLDERS

Although in the strict and technical sense, directors of a
private corporation are not regarded as trustees, there
cannot be any doubt that their character is that of a fiduciary
insofar as the corporation and the stockholders as a body are
concerned. As agents entrusted with the management of the
corporation for the collective benefit of the stockholders,
they occupy a fiduciary relation, and in this sense the
relation is one of trust.18 The ordinary trust relationship of
directors of a corporation and stockholders, according to
Ashaman v. Miller,19 is not a matter of statutory or technical
law. It springs from the fact that directors have the control
and guidance of corporate affairs and property and hence of
the property in-

_________________

17 Mobile Press Register, Inc. v. McGowin, 277 Ala. 414, 124
So. 2d 812; Brundage v. The New Jersey Zinc Co., 226 A 2d
585.

18 Fletcher, Cyclopedia Corporations, 1975 Ed., Vol. 3, p. 144,
Sec. 838.

19 101 Fed. 2d 85, cited in Aleck, Modern Corporation Law,
Vol. 2, Sec. 959.

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terests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests
and are ultimately the only beneficiaries thereof * * *.

Justice Douglas, in Pepper v. Litton,20 emphatically restated
the standard of fiduciary obligation of the directors of
corporations, thus:

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

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

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

________________

20 308 U.S. 309; 84 L. ed. 281, 289-291.

21 16 S.E. 587, 18 L.R.A. 582.

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

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

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

It is a settled state law in the United States, according to
Fletcher, that corporations have the power to make by-laws
declaring a person employed in the service of a rival company
to be ineligible for the corporations Board of Directors. * * *
(A)n amendment which renders ineligible, or if elected,
subjects to removal, a director if he be also a director in a
corporation whose business is in competition with or is
antagonistic to the other corporation is valid.24 This is based

_________________

22 265 F. Supp., pp. 8-9.

23 Barreto v. Tuason, No. 23923, Mar. 23, 1926, 50 Phil. 888;
Severino v. Severino, No. 18058, Jan. 16, 1923, 44 Phil. 343;
Thomas v. Pineda, L-2411, June 28, 1951, 89 Phil. 312, 326.

24 2 Fletcher Cyclopedia Corporations, Sec. 297 (1969), p. 87.

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upon the principle that where the director is so employed in
the service of a rival company, he cannot serve both, but
must betray one or the other. Such an amendment advances
the benefit of the corporation and is good. An exception
exists in New Jersey, where the Supreme Court held that the
Corporation Law in New Jersey prescribed the only
qualification, and therefore the corporation was not
empowered to add additional qualifications.25 This is the
exact opposite of the situation in the Philippines because as
stated heretofore, section 21 of the Corporation Law
expressly provides that a corporation may make by-laws for
the qualifications of directors. Thus, it has been held that an
officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a
director by utilizing information he has received as such
officer, under the established law that a director or officer of
a corporation may not enter into a competing enterprise
which cripples or injures the business of the corporation of
which he is an officer or director.26

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

________________

25 Costello v. Thomas Cusack Co., 125 A. 15, 94 N.J. Eq. 923,
(1923).

26 Hall v. Dekker, 115 P. 2d 15, July 9, 1941.

27 Thaver v. Gaebler, 232 NW 563.

28 Sialkot Importing Corporation v. Berlin, 68 NE 2d 501, 503.

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The doctrine of corporate opportunity29 is precisely a
recognition by the courts that the fiduciary standards could
not be upheld where the fiduciary was acting for two entities
with competing interests. This doctrine rests fundamentally
on the unfairness, in particular circumstances, of an officer or
director taking advantage of an opportunity for his own
personal profit when the interest of the corporation justly
calls for protection.30

It is not denied that a member of the Board of Directors of
the San Miguel Corporation has access to sensitive and highly
confidential information, such as: (a) marketing strategies
and pricing structure; (b) budget for expansion and
diversification; (c) research and development; and (d) sources
of funding,

________________

29 Schildberg Rock Products Co. v. Brooks, 140 NW 2d 132,
137. Chief Justice Garfield quotes the doctrine as follows:

(5) The doctrine corporate opportunity is not new to the
law and is but one phase of the cardinal rule of undivided
loyalty on the part of the fiduciaries. 3 Fletcher Cyc.
Corporations, Perm. Ed., 1965 Revised Volume, section 861.1,
page 227; 19 Am. Jur. 2d, Corporations, section 1311, page
717. Our own consideration of the quoted terms as such is
mainly in Ontjes v. MacNider, supra, 232 Iowa 562, 579, 5
N.W., 2d 860, 869, which quotes at length with approval from
Guth v. Loft, Inc., 23 Del. Ch. 255, 270, 5 A 2d 503, 511, a
leading case in this area of the law. The quotation cites
several precedents for this: * * * if there is presented to a
corporate officer or director a business opportunity which the
corporation is financially able to undertake, is from its nature,
in the line of the corporations business and is of practical
advantage to it, is one in which the corporation has an
interest or a reasonable expectancy, and by embracing the
opportunity, the self-interest of the officer or director will be
brought into conflict with that of his corporation, the law will
not permit him to seize the opportunity for himself. And, if, in
such circumstances, the interests of the corporation are
betrayed, the corporation may elect to claim all of the
benefits of the transaction for itself, and the law will impress
a trust in favor of the corporation upon the property,
interests and profits so acquired.

30 Paulman v. Kritzer, 74 III. App. 2d 284, 291 NE 2d 541;
Tower Recreation, Inc. v. Beard, 141 Ind. App. 649, 231 NE 2d
154.

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availability of personnel, proposals of mergers or tie-ups with
other firms.

It is obviously to prevent the creation of an opportunity for
an officer or director of San Miguel Corporation, who is also
the officer or owner of a competing corporation, from taking
advantage of the information which he acquires as director to
promote his individual or corporate interests to the prejudice
of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial
sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy
his loyalty to both corporations and place the performance of
his corporation duties above his personal concerns.

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

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

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

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(1) A director shall not be directly or indirectly interested
as a stockholder in any other firm, company, or association
which competes with the subject corporation.
(2) A director shall not be the immediate member of the
family of any stockholder in any other firm, company, or
association which competes with the subject corporation.
(3) A director shall not be an officer, agent, employee,
attorney, or trustee in any other firm, company, or
association which compete with the subject corporation.
(4) A director shall be of good moral character as an
essential qualification to holding office.
(5) No person who is an attorney against the corporation in
a law suit is eligible for service on the board. (At p. 7.)

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

The offer and assurance of petitioner that to avoid any
possibility of his taking unfair advantage of his position as
director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be
discussed, would not detract from the validity and
reasonableness of the by-laws here involved. Apart from the
impractical results that would ensue from such arrangement,
it would be inconsistent with petitioners primary motive in
running for board memberhsipwhich is to protect his
investments in San Miguel Corporation. More important, such
a proposed norm of conduct would be against all accepted
principles underlying a directors duty of fidelity to the
corporation, for the policy of the law is to encourage and
enforce responsible corporate management. As explained by
Oleck:31 The law will not tolerate the passive attitude of
directors * * * without active and conscientious participation
in the managerial functions of the company. As directors, it is
their duty to control and supervise the day to day business
activities of the company or to promulgate definite policies
and rules of guidance with a

________________

31 Oleck, Modern Corporation Law, Vol. 2, Section 960.

374

374



vigilant eye toward seeing to it that these policies are carried
out. It is only then that directors may be said to have fulfilled
their duty of fealty to the corporation.

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

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

There is another important consideration in determining
whether or not the amended by-laws are reasonable. The
Con-

________________

32 The CFC and Robina companies, which are reportedly
worth more than P500 Million, are principally owned and
controlled by Mr. Gokongwei and are in substantial
competition to San Miguel. As against his almost 100%
ownership in these basically family companies, Mr.
Gokongweis holding in San Miguel are approximately 4% of
the total shareholdings of your Company. As a consequence,
One Peso (P1.00) of profit resulting from a sale by CFC and
Robina in the lines competing with San Miguel, is earned
almost completely by Mr. Gokongwei, his immediate family
and close associates. On the other hand, the loss of that sale
to San Miguel, resulting in a One Peso (P1.00) loss of profit to
San Miguel, in the limes competing with CFC and Robina,
would result in a loss in profit of only Four Centavos (P0.04)
to Mr. Gokongwei. (Letter to stockholders of SMC, dated
April 3, 1978, Annex R, Memo for respondent San Miguel
Corporation, rollo, p. 1867).

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stitution and the law prohibit combinations in restraint of
trade or unfair competition. Thus, section 2 of Article XIV of
the Constitution provides: The State shall regulate or
prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair
competition shall be allowed.

Article 186 of the Revised Penal Code also provides:

Art. 186. Monopolies and combinations in restraint of
trade.The penalty of prision correccional in its minimum
period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:

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

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

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

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

________________

33 Article 28, Civil Code; Section 4, par. 5, of Rep. Act No.
5455; and Section 7 (g) of Rep. Act No. 6173. Cf. Section 17,
paragraph 2. of the Judiciary Act.

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

The terms monopoly, combination in restraint of trade
and unfair competition appear to have a well defined
meaning in other jurisdictions. A monopoly embraces any
combination the tendency of which is to prevent competition
in the broad and general sense, or to control prices to the
detriment of the public.37 In short, it is the concentration of
business in the hands of a few. The material consideration in
determining its existence is not that prices are raised and
competition actually excluded, but that power exists to raise
prices or exclude competition when desired.38 Further, it
must be considered that the idea of monopoly is now
understood to include a condition produced by the mere act
of individuals. Its dominant thought is the notion of
exclusiveness or unity, or the suppression of competition by
the unification of interest or

_________________

34 Standard Oil Co. v. United States, 55 L. Ed. 619.

35 Blake & Jones, Contracts in Antitrust Theory, 65 Columbia
L. Rev. 377, 383 (1965).

36 Filipinas Compania de Seguros v. Mandanas, L-19638, June
20, 1966, 17 SCRA 391.

37 Love v. Kozy Theater Co., 236 SW 243, 245, 26 ALR 364.

38 Aldea-Rochelle, Inc. v. American Society of Composers,
Authors and Publishers, D.D.N.Y., 80 F. Suppl. 888, 893:

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management, or it may be thru agreement and concert of
action. It is, in brief, unified tactics with regard to prices.39

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

The argument for prohibiting competing corporations from
sharing even one director is that the interlock permits the
coordination of policies between nominally independent
firms to an extent that competition between them may be
completely eliminated. Indeed, if a director, for example, is to
be faithful to both corporations, some accommodation must
result. Suppose X is a director of both

_________________

39 National Cotton Oil Co. v. State of Texas, 25 S.T. 379, 383,
49 L. Ed. 689.

40 Norfolk Monument Co. v. Woodlawn Memorial Gardens,
Inc., 394 U.S. 700; U.S. v. General Motors Corp., 384 U.S. 127.

41 U.S. v. Paramount Pictures, 334 U.S. 131.

42 Section 8, 15 U.S.C.A. 19.

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Corporation A and Corporation B. X could hardly vote for a
policy by A that would injure B without violating his duty of
loyalty to B; at the same time he could hardly abstain from
voting without depriving A of his best judgment. If the firms
really do competein the sense of vying for economic
advantage at the expense of the otherthere can hardly be
any reason for an interlock between competitors other than
the suppression of competition.43 (Italics supplied.)

According to the Report of the House Judiciary Committee of
the U. S. Congress on section 9 of the Clayton Act, it was
established that: By means of the interlocking directorates
one man or group of men have been able to dominate and
control a great number of corporations * * * to the detriment
of the small ones dependent upon them and to the injury of
the public.44

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

Obviously, if a competitor has access to the pricing policy and
cost conditions of the products of San Miguel Corporation,
the essence of competition in a free market for the purpose
of serving the lowest priced goods to the consuming public
would be frustrated. The competitor could so manipulate the
prices of his products or vary its marketing strategies by
region or by brand in order to get the most out of the
consumers. Where the two competing firms control a
substantial segment of the market this could lead to collusion
and combination in restraint of trade. Reason and experience
point to the inevitable conclusion that the inherent tendency
of interlocking directorates between companies that are
related to each other as competitors is to blunt the edge of
rivalry between the corporations, to seek out ways of
compromising opposing interests, and thus eliminate
competition. As respondent SMC aptly observes, knowledge
by CFC-Robina of SMCs costs in

_________________

43 Travers, Interlocks in Corporate Management and the Anti
Trust Laws, 46 Texas L. Rev. 819, 840 (1968).

44 51 Cong. Rec. 9091.

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various industries and regions in the country will enable the
former to practice price discrimination. CF-Robina can
segment the entire consuming population by geographical
areas or income groups and change varying prices in order to
maximize profits from every market segment. CFC-Robina
could determine the most profitable volume at which it could
produce for every product line in which it competes with
SMC. Access to SMC pricing policy by CFC-Robina would in
effect destroy free competition and deprive the consuming
public of opportunity to buy goods of the highest possible
quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a
certain extent, engaged in agriculture, then the election of
petitioner to the Board of SMC may constitute a violation of
the prohibition contained in section 13(5) of the Corporation
Law. Said section provides in part that any stockholder of
more than one corporation organized for the purpose of
engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of
bringing about or attempting to bring about a combination to
exercise control of such corporations * *).

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

In the absence of any legal prohibition or overriding public
policy, wide latitude may be accorded to the corporation in

380

380



adopting measures to protect legitimate corporate interests.
Thus, where the reasonableness of a by-law is a mere matter
of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have expressed
their authority.45

Although it is asserted that the amended by-laws confer on
the present Board powers to perpetuate themselves in
power, such fears appear to be misplaced. This power, by its
very nature, is subject to certain well established limitations.
One of these is inherent in the very concept and definition of
the terms competition and competitor. Competition
implies a struggle for advantage between two or more forces,
each possessing, in substantially similar if not identical
degree, certain characteristics essential to the business
sought. It means an independent endeavor of two or more
persons to obtain the business patronage of a third by
offering more advantageous terms as an inducement to
secure trade.46 The test must be whether the business does
in fact compete, not whether it is capable of an indirect and
highly unsubstantial duplication of an isolated or non-
characteristic activity.47 It is, therefore, obvious that not
every person or entity engaged in business of the same kind
is a competitor. Such factors as quantum and place of
business, identity of products and area of competition should
be taken into consideration. It is, therefore, necessary to
show that petitioners business covers a substantial portion
of the same markets for similar products to the extent of not
less than 10% of respondent corporations market for
competing products. While We here sustain the validity of
the amended by-laws, it does not follow as a necessary
consequence that petitioner is ipso facto dis-

_________________

45 People ex rel. Wildi v. Ittner, supra, citing Thompson on
Corporation, Section 1002 (2nd Ed.).

46 Schill v. Remington Putnam Book Co., 17 A 2d 175, 180,
179 Md. 83.

47 People ex rel. Broderick v. Goldfogle, 205 NYS 870, 877,
123 Misc. 399.

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qualified. Consonant with the requirement of due process,
there must be due hearing at which the petitioner must be
given the fullest opportunity to show that he is not covered
by the disqualification. As trustees of the corporation and of
the stockholders, it is the responsibility of directors to act
with fairness to the stockholders.48 Pursuant to this
obligation and to remove any suspicion that this power may
be utilized by the incumbent members of the Board to
perpetuate themselves in power, any decision of the Board to
disqualify a candidate for the Board of Directors should be
reviewed by the Securities and Exchange Commission en banc
and its decision shall be final unless reversed by this Court on
certiorari.49 Indeed, it is a settled principle that where the
action of a Board of Directors

_________________

48 Swanson v. American Consumer Industries, Inc., 288 F.
Supp. 60.

49 Sections 3 and 5 of Presidential Decree No. 902-A
provides:

SEC. 3. The Commission shall have absolute jurisdiction,
supervision and control over all corporations * * * who are
grantees of * * * license or permit issued by the government
* * *.

SEC. 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations
registered with its as expressly granted under existing laws
and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:

a) Devices or schemes employed by or any acts, of the board
of directors, business associates, its officers or partners
amounting to fraud and misrepresentation which may be
detrimental to the interest of the public and/or of the
stockholders, partners, members of associations or
organizations registered with the Commission.

b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members or associates, respectively; and between such
corporation, partnership or association and the state insofar
as it concerns their individual franchise or right to exist as
such entity;

c) Controversies in the election or appointments of directors,
trustees, officers or managers of such corporations,
partnership or associations.

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is an abuse of discretion, or forbidden by statute, or is against
public policy, or is ultra vires, or is a fraud upon minority
stockholders or creditors, or will result in waste, dissipation
or misapplication of the corporation assets, a court of equity
has the power to grant appropriate relief.50
III

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

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

Further, it was averred that upon request, petitioner was
informed in writing on September 18, 1976; (1) that SMCs
foreign investments are handled by San Miguel International,
Inc., incorporated in Bermuda and wholly owned by SMC; this
was SMCs first venture abroad, having started in 1948 with

________________

50 Moore v. Keystone Macaroni Mfg. Co., 29 ALR 2d 1256.

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VOL. 89, APRIL 11, 1979

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an initial outlay of P500,000.00, augmented by a loan of
Hongkong $6 million from a foreign bank under the personal
guaranty of SMCs former President, the late Col. Andres
Soriano; (2) that as of December 31, 1975, the estimated
value of SMI would amount to almost P400 million; (3) that
the total cash dividends received by SMC from SMI since 1953
has amount to US$9.4 million; and (4) that from 1972-1975,
SMI did not declare cash or stock dividends, all earnings
having been used in line with a program for the setting up of
breweries by SMI.

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

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

The stockholders right of inspection of the corporations
books and records is based upon their ownership of the
assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this
ownership or interest be termed an equitable ownership, a
beneficial ownership, or a quasi-ownership.52 This right is
predicated upon the necessity of self-protection. It is
generally held by majority of the courts that where the right
is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his
interest as a stockholder and for some purpose germane
thereto or in the interest of the corporation.53 In other
words, the inspection has to be germane to the petitioners
interest as a stockholder, and

________________

51 Annex A of SMCs Comment on Supplemental Petition
pp. 680-688, Rollo.

52 Fletcher Cyc, Private Corporations, Vol. 5, 1976 Rev. Ed.
Section 2213, p. 693.

53 Fletcher, Ibid., Section 2218, p. 709.

384

384



has to be proper and lawful in character and not inimical to
the interest of the corporation.54 In Grey v. Insular
Lumber,55 this Court held that the right to examine the
books of the corporation must be exercised in good faith, for
specific and honest purpose, and not to gratify curiosity, or
for speculative or vexatious purposes. The weight of judicial
opinion appears to be, that on application for mandamus to
enforce the right, it is proper for the court to inquire into and
consider the stockholders good faith and his purpose and
motives in seeking inspection.56 Thus, it was held that the
right given by statute is not absolute and may be refused
when the information is not sought in good faith or is used to
the detriment of the corporation.57 But the impropriety of
purpose such as will defeat enforcement must be set up the
corporation defensively if the Court is to take cognizance of it
as a qualification. In other words, the specific provisions take
from the stockholder the burden of showing propriety of
purpose and place upon the corporation the burden of
showing impropriety of purpose or motive.58 It appears to
be the general rule that stockholders are entitled to full
information as to the management of the corporation and
the manner of expenditure of its funds, and to inspection to
obtain such information, especially where it appears that the
company is being mismanaged or that it is being managed for
the personal benefit of officers or directors or certain of the
stockholders to the exclusion of others.59

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

________________

54 Fletcher, Ibid., Section 2222, p. 725.

55 40 O.G., 1st Suppl. 1. April 3, 1939, citing 14 C.J.S. 854,
855.

56 Fletcher, supra, p. 716.

57 State v. Monida & Yellowstone Stage Co., 110 Minn. 193,
124 NW 791, 125 NW 676; State v. Cities Service Co., 114 A
463.

58 Fletcher, supra, Section 2220, p. 717.

59 Fletcher, supra, Section 2223, p. 728.

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

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

In the Nash case,65 The Supreme Court of New York held that
the contractual right of former stockholders to inspect books
and records of the corporation included the right to in-

_________________

60 Martin v. D. B. Martin Co., 10 Del. Ch. 211, 88 A. 612, 102
A. 373.

61 Woodward v. Old Second National Bank, 154 Mich. 459,
117 NW 893, 118 NW 581.

62 Martin v. D. B. Martin Co., supra.

63 State v. Sherman Oil Co., 1 W.W. Harr. (31 Del) 570, 117 A.
122.

64 Lisle v. Shipp, 96 Cal. App. 264, 273 P. 1103.

65 Nash v. Gay Apparel Corp., 193 NYS 2d 246.

386

386



spect corporations subsidiaries books and records which
were in corporations possession and control in its office in
New York.

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

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

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

Whether or not respondent SEC gravely abused its discretion
in allowing the stockholders of respondent corporation to

________________

66 Bailey v. Boxboard Products Co., 314 Pa. 45, 170 A. 127.

67 Rollo, pp. 50-51.

68 18 Am. Jur. 2d 718.

387

VOL. 89, APRIL 11, 1979

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ratify the investment of corporate funds in a foreign
corporation

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

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

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

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

________________

69 De la Rama v. Ma-ao Sugar Central Co., Inc., L-17504 and
L17506, February 28, 1969, 27 SCRA 247, 260.

388

388



the organization of SMI in Bermuda as a tax free
reorganization.

Under these circumstances, the ruling in De la Rama v. Maao
Sugar Central Co., Inc., supra, appears relevant. In said case,
one of the issues was the legality of an investment made by
Ma-ao Sugar Central Co., Inc., without prior resolution
approved by the affirmative vote of 2/3 of the stockholders
voting power, in the Philippine Fiber Processing Co., Inc., a
company engaged in the manufacture of sugar bags. The
lower court said that there is more logic in the stand that if
the investment is made in a corporation whose business is
important to the investing corporation and would aid it in its
purpose, to require authority of the stockholders would be to
unduly curtail the power of the Board of Directors. This
Court affirmed the ruling of the court a quo on the matter
and, quoting Prof. Sulpicio S. Guevara, said:

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

40. Power to invest corporate funds.A private
corporation has the power to invest its corporate funds in
any other corporation

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VOL. 89, APRIL 11, 1979

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

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

Besides, the investment was for the purchase of beer
manufacturing and marketing facilities which is apparently

_________________

70 Boyce v. Chemical Plastics, 175 F 2d 839, citing 13 Am. Jur.,
Section 972.

71 Pirovano v. De la Rama Steamship Co., L-53-7, 96 Phil. 335,
December 29, 1954.

390

390



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

WHEREFORE, judgment is hereby rendered as follows:

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

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

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

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

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

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

In resum, subject to the qualifications afore-stated,
judgment is hereby rendered GRANTING the petition by
allowing petitioner to examine the books and records of San
Miguel International, Inc. as specified in the petition. The
petition,* insofar as it assails the validity of the amended by-
laws and the ratification of the foreign investment of
respondent corporation, for lack of necessary votes, is hereby
DISMISSED. No costs.

Makasiar, Santos, Abad Santos and De Castro, JJ., concur.

Castro, C.J., reserves his right to file a separate opinion.

Fernando, J., concurs in the result and reserves his right to
file a separate opinion.

Teehankee, Concepcion Jr., Fernandez, and Guerrero, JJ.,
file a joint separate opinion.

Barredo, J., concurs and reserves the filing of a separate
opinion.

Aquino, and Melencio Herrera, JJ., did not take part.

Fernandez, J., concurs in the opinion of Justice Teehankee.

Guerrero, J., concurs and dissents in a separate opinion.

________________

* Includes the Supplemental petitions filed by petitioner.

392

392


CERTIFICATION

The undersigned hereby certifies that Justice VICENTE ABAD
SANTOS concurred in the opinion of Justice FELIX Q.
ANTONIO.
JOINT SEPARATE OPINION

TEEHANKEE, CONCEPCION JR.,

FERNANDEZ and GUERRERO, JJ.:
I

As correctly stated in the main opinion of Mr. Justice Antonio,
the Court is unanimous in its judgment granting the
petitioner as stockholder of respondent San Miguel
Corporation the right to inspect, examine and secure copies
of the records of San Miguel International, Inc. (SMI), a wholly
owned foreign subsidiary corporation of respondent San
Miguel Corporation. Respondent commissions en banc Order
No. 449, Series of 1977, denying petitioners right of
inspection for not being a stockholder of San Miguel
International, Inc. has been accordingly set aside. It need be
only pointed out that:

a) The commissions reasoning grossly disregards the fact that
the stockholders of San Miguel Corporation are likewise the
owners of San Miguel International, Inc. as the corporations
wholly owned foreign subsidiary and therefore have every
right to have access to its books and records, otherwise, the
directors and management of any Philippine corporation by
the simple device of organizing with the corporations funds
foreign subsidiaries would be granted complete immunity
from the stockholders scrutiny of its foreign operations and
would have a conduit for dissipating, if not misappropriating,
the corporate funds and assets by merely channeling them
into foreign subsidiaries operations; and

b) Petitioners right of examination herein recognized refers
to all books and records of the foreign subsidiary SMI

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VOL. 89, APRIL 11, 1979

393


which are in respondent corporations possession and
control1, meaning to say regardless of whether or not such
books and records are physically within the Philippines. All
such books and records of SMI are legally within respondent
corporations possession and control and if any books or
records are kept abroad, (e.g. in the foreign subsidiarys state
of domicile, as is to be expected), then the respondent
corporations board and management are obliged under the
Courts judgment to bring and make them (or true copies
thereof) available within the Philippines for petitioners
examination and inspection.
II

On the other main issue of the validity of respondent San
Miguel Corporations amendment of its by-laws2 whereby
respondent corporations board of directors under its
resolution dated April 29, 1977 declared petitioner ineligible
to be nominated or to be voted or to be elected as of the
board of directors, the Court, composed of 12 members
(since Mme. Justice Ameurfina Melencio Herrera inhibited
herself from taking part herein, while Mr. Justice Ramon C.
Aquino upon submittal of the main opinion of Mr. Justice
Antonio decided not to take part), failed to reach a conclusive
vote or the required majority of 8 votes to settle the issue
one way or the other.

Six members of the Court, namely, Justices Barredo,
Makasiar, Antonio, Santos, Abad Santos and De Castro,
considered the issue purely legal and voted to sustain the
validity per se of the questioned amended by-laws but
nevertheless voted that the prohibition and disqualification
therein provided shall not apply to petitioner Gokongwei until
and after he shall have been given a new and proper
hearing by the corporations board of directors and the
boards decision of disqualification shall have been sustained
on appeal by respon-

________________

1 Main opinion, p. 55.

2 Sec. 2, Art. III of respondent corporations By-Laws,
reproduced in footnote 1 of the main opinion, pages 3 and 4.

394

394



dent Securities and Exchange Commission and ultimately by
this Court.

The undersigned Justices do not consider the issue as purely
legal in the light of respondent commissions Order No. 451,
Series of 1977, denying petitioners Motion for Summary
Judgment on the ground that the Commission en banc finds
that there (are) unresolved and genuine issues of fact3 as
well as its position in this case thru the Solicitor General that
the case at bar is premature and that the administrative
remedies before the commission should first be availed of
and exhausted.4

We are of the opinion that the questioned amended by-laws,
as they are, (adopted after almost a century of respondent
corporations existence as a public corporation with its shares
freely purchased and traded in the open market without
restriction and disqualification) which would bar petitioner
from qualification, nomination and election as director and
worse, grant the board by 3/4 vote the arbitrary power to bar
any stockholder from his right to be elected as director by the
simple expedient of declaring him to be engaged in a
competitive or antagonistic business or declaring him as a
nominee of the competitive or antagonistic stockholder
are illegal, oppressive, arbitrary and unreasonable.

We consider the questioned amended by-laws as being
specifically tailored to discriminate against petitioner and
depriving him in violation of substantive due process of his
vested substantial rights as stockholder of respondent
corporation. We further consider said amended by-laws as
violating specific provisions of the Corporation Law which
grant and recognize the right of a minority stockholder like
petitioner to be elected director by the process of cumulative
voting ordained by the Law (secs. 21 and 30) and the right of
a minority director once elected not to be removed from
office of director except for cause by vote of the stockholders
holding 2/3 of the subscribed capital stock (sec. 31). If a
minority

_________________

3 Rollo, Vol. I, page 392-E.

4 SEC memo, pages 9 and 10.

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VOL. 89, APRIL 11, 1979

395


stockholder could be disqualified by such a by-laws
amendment under the guise of providing for qualifications,
these mandates of the Corporation Law would have no
meaning or purpose.

These vested and substantial rights granted stockholders
under the Corporation Law may not be diluted or defeated by
the general authority granted by the Corporation Law itself to
corporations to adopt their by-laws (in section 21) which deal
principally with the procedures governing their internal
business. The by-laws of any corporation must be always
within the charter limits. What the Corporation Law has
granted stockholders may not be taken away by the
corporations by-laws. The amendment is further an
instrument of oppressiveness and arbitrariness in that the
incumbent directors are thereby enabled to perpetuate
themselves in office by the simple expedient of disqualifying
any unwelcome candidate, no matter how many votes he
may have.

However, in view of the inconclusiveness of the vote, we
sustain respondent commissions stand as expressed in its
Orders Nos. 450 and 451, Series of 1977 that there are
unresolved and genuine issues of fact and that it has yet to
rule on and finally decide the validity of the disputed by-law
provision, subject to appeal by either party to this Court.

In view of prematurity of the proceedings here (as likewise
expressed by Mr. Justice Fernando), the case should as a
consequence be remanded to the Securities and Exchange
Commission as the agency of primary jurisdiction for a full
hearing and reception of evidence of all relevant facts (which
should property be submitted to the commission instead of
the piecemeal documents submitted as annexes to this Court
which is not a trier of facts) concerning not only the
petitioner but the members of the board of directors of
respondent corporation as well, so that it may determine on
the basis thereof the issue of the legality of the questioned
amended by-laws, and assuming that it holds the same to be
valid whether the same are arbitrarily and unreasonably
applied to petitioner vis a vis other directors, who, petitioner
claims, should in such event be likewise disqualified from
sitting in the board of directors by

396

396



virtue of conflict of interests or their being likewise engaged
in competitive or antagonistic business with the
corporation such as investment and finance, coconut oil mills,
cement, milk and hotels.5

It should be noted that while the petition may be dismissed in
view of the inconclusiveness of the vote and the Courts
failure to attain the required 8-vote majority to resolve the
issue, such as dismissal (for lack of necessary votes) is of no
doctrinal value and does not in any manner resolve the issue
of the validity of the questioned amended by-laws nor
foreclose the same. The same should properly be determined
in a proper case in the first instance by the Securities and
Exchange Commission as the agency of primary jurisdiction,
as above indicated.

The Court is unanimous, therefore, in its judgment that
petitioner Gokongwei may run for the office of, and if
elected, sit as, member of the board of directors of
respondent San Miguel Corporation as stated in the
dispositive portion of the main opinion of Mr. Justice
Antonio, to wit: Until and after petitioner has been given a
new and proper hearing by the board of directors of said
corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating
and acting en banc and ultimately to this Court and until
disqualified in the manner herein provided, the prohibition
in the aforementioned amended by-laws shall not apply to
petitioner. In other words, until and after petitioner shall
have been given due process and proper hearing by the
respondent board of directors as to the question of his
qualification or disqualification under the questioned
amended by-laws (assuming that the respondent Securities
and Exchange Commission ultimately upholds the validity of
said bylaws), and such disqualification shall have been
sustained by respondent Securities and Exchange Commission
and ultimately by final judgment of this Court, petitioner is
deemed eligible for all legal purposes and effects to be
nominated

________________

5 Petitioners memorandum in support of oral argument, pp.
1820.

397

VOL. 89, APRIL 11, 1979

397


and voted and if elected to sit as a member of the board of
directors of respondent San Miguel Corporation.

In view of the Courts unanimous judgment on this point, the
portion of respondent commissions Order No. 450, Series of
1977 which imposed the condition that he *petitioner+
cannot sit as board member if elected until after the
Commission shall have finally decided the validity of the
disputed by-law provision has been likewise accordingly set
aside.
III

By way of recapitulation, so that the Courts decision and
judgment may be clear and not subject to ambiguity, we state
the following:

1. With the votes of the six Justices concurring unqualifiedly
in the main opinion added to our four votes, plus the Chief
Justices vote and that of Mr. Justice Fernando, the Court has
by twelve (12) votes unanimously rendered judgment
granting petitioners right to examine and secure copies of
the books and records of San Miguel International, Inc. as a
foreign subsidiary of respondent corporation and respondent
commissions Order No. 449, Series of 1977, to the contrary is
set aside:

2. With the same twelve (12) votes, the Court has also
unanimously rendered judgment declaring that until and
after petitioner shall have been given due process and proper
hearing by the respondent board of directors as to the
question of his disqualification under the questioned
amended by-laws (assuming that the respondent Securities
and Exchange Commission ultimately upholds the validity of
said by-laws), and such disqualification shall have been
sustained by respondent Securities and Exchange Commission
and ultimately by final judgment of this Court petitioner is
deemed eligible for all legal purposes and effect to be
nominated and voted and if elected to sit as a member of the
board of directors of respondent San Miguel Corporation.
Accordingly, respondent commissions Order No. 450, Series
of 1977 to the contrary has likewise been set aside; and

398

398



3. The Courts voting on the validity of respondent
corporations amendment of the by-laws (sec. 2, Art. III) is
inconclusive without the required majority of eight votes to
settle the issue one way or the other having been reached.
No judgment is rendered by the Court thereon and the
statements of the six Justices who have signed the main
opinion on the legality thereof have no binding effect, much
less doctrinal value.

The dismissal of the petition insofar as the question of the
validity of the disputed by-laws amendment is concerned is
not by any judgment with the required eight votes but simply
by force of Rule 56, section 11 of the Rules of Court, the
pertinent portion of which provides that where the court en
banc is equally divided in opinion, or the necessary majority
cannot be had, the case shall be reheard, and if on re-hearing
no decision is reached, the action shall be dismissed if
originally commenced in the court x x x. The end result is
that the Court has thereby dismissed the petition which
prayed that the Court bypass the commission and directly
resolved the issue and therefore the respondent commission
may now proceed, as announced in its Order No. 450, Series
of 1977, to hear the case before it and receive all relevant
evidence bearing on the issue as hereinabove indicated, and
resolve the unresolved and genuine issues of fact (as per
Order No. 451, Series of 1977) and the issues of legality of the
disputed by-laws amendment.

Teehankee, Concepcion Jr., and Fernandez, JJ., concur.

Guerrero, J., concurred.
SUPPLEMENT TO JOINT SEPARATE OPINION

TEEHANKEE, CONCEPCION JR.,

FERNANDEZ and GUERRERO, JJ.:

This supplemental opinion is issued with reference to the
advance separate opinion of Mr. Justice Barredo issued by
him as to certain misimpressions as to the import of the
decision

399

VOL. 89, APRIL 11, 1979

399


in this case which might be produced by our joint separate
opinion of April 11, 1979 and urgent(ly) to clarify (his)
position in respect to the rights of the parties resulting from
the dismissal of the petition herein and the outline of the
procedure by which the disqualification of petitioner
Gokongwei can be made effective.

1. Mr. Justice Barredos advances separate opinion that as
between the parties herein, the issue of the validity of the
challenged by-laws is already settled had, of course, no
binding effect. The judgment of the Court is found on pages
59-61 of the decision of April 11, 1979, penned by Mr. Justice
Antonio, wherein on the question of the validity of the
amended by-laws the Courts inconclusive voting is set forth
as follows:

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

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

Four (4) Justices, namely, Justices Teehankee, Concepcion
Jr., Fernandez and Guerrero filed a separate opinion, wherein
they voted against the validity of the questioned amended
by-laws and that this question should properly be resolved
first by the SEC as the agency of primary jurisdiction x x x.1

As stated in said judgment itself, for lack of the necessary
votes, the petition, insofar as it assails the validity of the
questioned by-laws, was dismissed.

2. Mr. Justice Barredo now contends contrary to the
undersigneds understanding, as stated on pages 8 and 9 of
our joint separate opinion of April 11, 1979 that the legal
effect of the dismissal of the petition on the question of
validity of the amended by-laws for lack of the necessary
votes simply means that the Court has thereby dismissed the
petition which prayed that the Court by-pass the commission
and directly resolve the issue and therefore the respondent
commission may now proceed, as announced in its Order No.
450, Series of

_________________

1 At p. 60; emphasis supplied.

400

400



1977, to hear the case before it and receive all relevant
evidence bearing on the issue as hereinabove indicated, and
resolve the unresolved and genuine issues of fact (as per
Order No. 451, Series of 1977) and the issue of legality of the
disputed by-laws amendment, that such dismissal has no
other legal consequence than that it is the law of the case as
far as the parties are concerned, albeit the majority of the
opinion of six against four Justices is not doctrinal in the
sense that it cannot be cited as necessarily a precedent for
subsequent cases.

We hold on our part that the doctrine of the law of the case
invoked by Mr. Justice Barredo has no applicability for the
following reasons:

a) Our jurisprudence is quite clear that this doctrine may be
invoked only where there has been a final and conclusive
determination of an issue in the first case later invoked as the
law of the case.

Thus, in People vs. Olarte2, we held that

Law of the case has been defined as the opinion delivered
on a former appeal. More specifically, it means that whatever
is once irrevocably established as the controlling legal rule of
decision between the same parties in the same case
continues to be the law of the case, whether correct on
general principles or not, so long as the facts on which such
decision was predicated continue to be the facts of the case
before the court. x x x

- - - - -

It need not be stated that the Supreme Court, being the
court of last resort, is the final arbiter of all legal questions
properly brought before it and that its decision in any given
case constitutes the law of that particular case. Once its
judgment becomes final it is binding on all inferior courts, and
hence beyond their power and authority to alter or modify
(Kabigting vs. Acting Director of Prisons, G. R. No. L-15548,
October 30, 1962).

The decision of this Court on that appeal by the
government from the order of dismissal, holding that said
appeal did not place the

________________

2 19 SCRA 494; citing People vs. Pinnila, L-11374, May 30,
1958, cited in Lee vs. Aligaen, 76 SCRA 416 (1977) per
Antonio, J.

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VOL. 89, APRIL 11, 1979

401


appellants, including Absalon Bignay, in double jeopardy,
signed and concurred in by six Justices as against three
dissenters headed by the Chief Justice, promulgated way back
in the year 1952, has long become the law of the case. It may
be erroneous, judged by the law on double jeopardy as
recently interpreted by this same Tribunal Even so, it may not
be disturbed and modified. Our recent interpretation of the
law may be applied to new cases, but certainly not to an old
one finally and conclusively determined. As already stated,
the majority opinion in that appeal is now the law of the
case. (People vs. Pinuila)

The doctrine of the law of the case, therefore, has no
applicability whatsoever herein insofar as the question of the
validity or invalidity of the amended by-laws is concerned.
The Courts judgment of April 11, 1979 clearly shows that the
voting on this question was inconclusive with six against four
Justices and two other Justices (the Chief Justice and Mr.
Justice Fernando) expressly reserving their votes thereon, and
Mr. Justice Aquino while taking no part in effect likewise
expressly reserved his vote thereon. No final and conclusive
determination could be reached on the issue and pursuant to
the provisions of Rule 56, section 11, since this special civil
action originally commenced in this Court, the action was
simply dismissed with the result that no law of the case was
laid down insofar as the issue of the validity or invalidity of
the questioned by-laws is concerned, and the relief sought
herein by petitioner that this Court by-pass the SEC which has
yet to hear and determine the same issue pending before it
below and that this Court itself directly resolve the said issue
stands denied.

b) The contention of Mr. Justice Barredo that the result of the
dismissal of the case was that petitioner Gokongwei may not
hereafter act on the assumption that he can revive the issue
of the validity whether in the Securities and Exchange
Commission, in this Court or in any other forum, unless he
proceeds on the basis of a factual milieu different from the
setting of this case. Not even the Securities and Exchange
Commission may pass on such question anymore at the
instance of herein petitioner or anyone acting in his stead or
on his behalf, appears to us to be untenable.

402

402



The Court through the decision of April 11, 1979, by the
unanimous votes of the twelve participating Justices headed
by the Chief Justice, ruled that petitioner Gokongwei was
entitled to a new and proper hearing by the SMC board of
directors on the matter of his disqualification under the
questioned by-laws and that the boards decision shall be
appealable to the respondent Securities and Exchange
Commission deliberating and acting en banc and ultimately to
this Court (and) unless disqualified in the manner herein
provided, the prohibition in the aforementioned amended
by-laws shall not apply to petitioner.

The entire Court, therefore, recognized that petitioner had
not been given procedural due process by the SMC board on
the matter of his disqualification and that he was entitled to a
new and proper hearing. It stands to reason that in such
hearing, petitioner could raise not only questions of fact but
questions of law, particularly questions of law affecting the
investing public and their right to representation on the
board as provided by lawnot to mention that as borne out
by the fact that no restriction whatsoever appears in the
Courts decision, it was never contemplated that petitioner
was to be limited to questions of fact and could not raise the
fundamental questions of law bearing on the invalidity of the
questioned amended by-laws at such hearing before the SMC
board. Farthermore, it was expressly provided unanimously in
the Courts decision that the SMC boards decision on the
disqualification of petitioner (assuming the board of
directors of San Miguel Corporation should, after the proper
hearing, disqualify him as qualified in Mr. Justice Barredos
own separate opinion, at page 2) shall be appealable to
respondent Securities and Exchange Commission
deliberating and acting en banc and ultimately to this
Court. Again, the Courts judgment as set forth in its decision
of April 11, 1979 contains nothing that would warrant the
opinion now expressed that respondent Securities and
Exchange Commission may not pass anymore on the question
of the invalidity of the amended by-laws. Certainly, it cannot
be contended that the Court in dismissing the petition for
lack of necessary votes actually by-passed the

403

VOL. 89, APRIL 11, 1979

403


Securities and Exchange Commission and directly ruled itself
on the invalidity of the questioned by-laws when it itself
could not reach a final and conclusive vote (a minimum of
eight votes) on the issue and three other Justices (the Chief
Justice and Messrs. Justices Fernando and Aquino) had
expressly reserved their vote until after further hearings (first
before the Securities and Exchange Commission and
ultimately in this Court).

Such a view espoused by Mr. Justice Barredo could
conceivably result in an incongruous situation where
supposedly under the law of this case the questioned by-laws
would be held valid as against petitioner Gokongwei and yet
the same may be stricken off as invalid as to all other SMC
shareholders in a proper case.

3. It need only be pointed out that Mr. Justice Barredos
advance separate opinion can in no way affect or modify the
judgment of this Court as set forth in the decision of April 11,
1979 and discussed hereinabove. The same bears the
unqualified concurrence of only three Justices out of the six
Justices who originally voted for the validity per se of the
questioned by-laws, namely, Messrs. Justices Antonio, Santos
and De Castro. Messrs. Justices Fernando and Makasiar did
not concur therein but they instead concurred with the
limited concurrence of the Chief Justice touching on the law
of the case which guardedly held that the Court has not
question are invalid but without in any manner foreclosing
the issue and as a matter of fact and law, without in any
manner changing or modifying the above-quoted vote of the
Chief Justice as officially rendered in the decision of April 11,
1979, wherein he precisely reserved (his) vote on the validity
of the amended by-laws.

4. A word on the separate opinion of Mr. Justice Pacifico de
Castro attached to the advance separate opinion of Mr.
Justice Barredo, Mr. Justice De Castro advances his
interpretation as to a restrictive construction of section 13(5)
of the Philippine Corporation Law, ignoring or disregarding
the fact that during the Courts deliberations it was brought
out that this prohibitory provision was and is not raised in
issue in this

404

404



case whether here or in the Securities and Exchange
Commission below (outside of a passing argument by Messrs.
Angara, Abello, Concepcion, Regala & Cruz, as counsels for
respondent Sorianos in their Memorandum of June 26, 1978
that (T)he disputed By-Laws does not prohibit petitioner
from holding onto, or even increasing his SMC investment; it
only restricts any shifting on the part of petitioner from
passive investor to a director of the company.3

As a consequence, the Court abandoned the idea of calling
for another hearing wherein the parties could properly raise
and discuss this question as a new issue and instead rendered
the decision in question, under which the question of section
13(5) could be raised at a new and proper hearing before the
SMC board and in the Securities and Exchange Commission
and in due course before this Court (but with the clear
understanding that since both corporations, the Robina and
SMC are engaged in agriculture as submitted by the Sorianos
counsel in their said memorandum, the issue could be raised
likewise against SMC and its other shareholders, directors, if
not against SMC itself. As expressly stated in the Chief
Justices reservation of his vote, the matter of the question of
the applicability of the said section 13(5) to petitioner would
be heard by this Court at the appropriate time after the
proceedings below (and necessarily the question of the
validity of the amended by-laws would be taken up anew and
the Court would at that time be able to reach a final and
conclusive vote).

Mr. Justice De Castros personal interpretation of the decision
of April 11, 1979 that petitioner may be allowed to ran for
election despite adverse decision of both the SMC board and
the Securities and Exchange Commission only if he comes to
this Court and obtains an injunction against the enforcement
of the decision disqualifying him is patently contradictory of
his vote on the matter as expressly given in the judgment in
the Courts decision of April 11, 1979 (at page 59) that
petitioner could run and if elected, sit as director of the
respondent SMC and could be disqualified only after a new
and proper hearing by the board of directors of said
corporation, whose

________________

3 Sorianos Memorandum at page 94.

405

VOL. 89, APRIL 11, 1979

405


decision shall be appealable to the respondent Securities and
Exchange Commission deliberating and acting en banc and
ultimately to this Court. Unless disqualified in the manner
herein provided, the prohibition in the aforementioned
amended by-laws shall not apply to petitioner.

Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ.,
concur.
A D V A N C E S E P A R A T E O P I N I O N

BARREDO, J.:

I reserved the filing of a separate opinion in order to state my
own reasons for voting in favor of the validity of the amended
by-laws in question. Regrettably, I have not yet finished
preparing the same. In view, however, of the joint separate
opinion of Justices Teehankee, Concepcion Jr., Fernandez and
Guerrero, the full text of which has just come to my
attention, and which I am afraid might produce certain
misimpressions as to the import of the decision in this case, I
consider it urgent to clarify my position in respect to the
rights of the parties resulting from the dismissal of the
petition herein and the outlining of the procedure by which
the disqualification of petitioner Gokongwei can be made
effective, hence this advance separate opinion.

To start with, inasmuch as petitioner Gokongwei himself
placed the issue of the validity of said amended by-laws
squarely before the Court for resolution, because he feels,
rightly or wrongly, he can no longer have due process or
justice from the Securities and Exchange Commission, and the
private respondents have joined with him in that respect, the
six votes cast by Justices Makasiar, Antonio, Santos, Abad
Santos, de Castro and this writer in favor of validity of the
amended by-laws in question, with only four members of this
Court, namely, Justices Teehankee, Concepcion Jr., Fernandez
and Guerrero opining otherwise, and with Chief Justice Castro
and Justice Fernando reserving their votes thereon, and

406

406



Justices Aquino and Melencio Herrera not voting, thereby
resulting in the dismissal of the petition insofar as it assails
the validity of the amended by-laws . . . for lack of necessary
votes, has no other legal consequence than that it is the law
of the case as far as the parties herein are concerned, albeit
the majority opinion of six against four Justices is not
doctrinal in the sense that it cannot be cited as necessarily a
precedent for subsequent cases. This means that petitioner
Gokongwei and the respondents, including the Securities and
Exchange Commission, are bound by the foregoing result,
namely, that the Court en banc has not found merit in the
claim that the amended by-laws in question are invalid,
Indeed, it is one thing to say that dismissal of the case is not
doctrinal and entirely another thing to maintain that such
dismissal leaves the issue unsettled. It is somewhat of a
misreading and misconstruction of Section 11 of Rule 56,
contrary to the well-known established norm observed by
this Court, to state that the dismissal of a petition for lack of
the necessary votes does not amount to a decision on the
merits. Unquestionably, the Court is deemed to find no merit
in a petition in two ways, namely, (1) when eight or more
members vote expressly in that sense and (2) when the
required number of justices needed to sustain the same
cannot be had.

I reiterate, therefore, that as between the parties herein, the
issue of validity of the challenged by-laws is already settled.
From which it follows that the same are already enforceable
insofar as they are concerned. Petitioner Gokongwei may not
hereafter act on the assumption that he can revive the issue
of validity whether in the Securities and Exchange
Commission, in this Court or in any other forum, unless he
proceeds on the basis of a factual milieu different from the
setting of this case. Not even the Securities and Exchange
Commission may pass on such question anymore at the
instance of herein petitioner or anyone acting in his stead or
on his behalf. The vote of four justices to remand the case
thereto cannot alter the situation.

It is very clear that under the decision herein, the issue of
validity is a settled matter for the parties herein as the law of
the case, and it is only the actual implementation of the im-

407

VOL. 89, APRIL 11, 1979

407


pugned amended by-laws in the particular case of petitioner
that remains to be passed upon by the Securities and
Exchange Commission, and on appeal therefrom to Us,
assuming the board of directors of San Miguel Corporation
should, after the proper hearing, disqualify him.

To be sure, the record is replete with substantial indications,
nay admissions of petitioner himself, that he is a controlling
stockholder of corporations which are competitors of San
Miguel Corporation. The very substantial areas of such
competition involving hundreds of millions of pesos worth of
businesses stand uncontroverted in the records hereof. In
fact, petitioner has even offered, if he should be elected, as
director, not to take part when the board takes up matters
affecting the corresponding areas of competition between his
corporation and San Miguel Nonetheless, perhaps, it is best
that such evidence be formally offered at the hearing
contemplated in Our decision.

As to whether or not petitioner may sit in the board, if he
wins, definitely, under the decision in this case, even if
petitioner should win, he will have to immediately leave his
position or should be ousted, the moment this Court settles
the issue of his actual disqualification, either in a full blown
decision or by denying the petition for review of
corresponding decision of the Securities and Exchange
Commission unfavorable to him. And, of course, as a matter
of principle, it is to be expected that the matter of his
disqualification should be resolved expeditiously and within
the shortest possible time, so as to avoid as much juridical
injury as possible, considering that the matter of the validity
of the prohibition against competitors embodied in the
amended by-laws is already unquestionable among the
parties herein and to allow him to be in the board for
sometime would create an obviously anomalous and legally
incongruous situation that should not be tolerated. Thus, all
the parties concerned must act promptly and expeditiously.

Additionally, my reservation to explain my vote on the
validity of the amended by-laws still stands.

408

408



Castro, C.J., concurs in Justice Barredos statement that the
dismissal (for lack of necessary votes) of the petition to the
extent that it assails the validity of the amended by-laws, is
the law of the case at bar, which means in effect that as far
and only in so far as the parties and the Securities and
Exchange Commission are concerned, the Court has not
question are invalid.

Fernando, J., concurs withe the opinion of Chief Justice
Castro.

Makasiar, J., concurs with the above opinion of the Chief
Justice.

Antonio and Santos, JJ., concur.

De Castro, J., with separate opinion.
S E P A R A T E O P I N I O N

DE CASTRO, J.:

As stated in the decision penned by Justice Antonio, I voted
to uphold the validity of the amendment to the by-laws in
question. What induced me to this view is the practical
consideration easily perceived in the following illustration: If
a person becomes a stockholder of a corporation and gets
himself elected as a director, and while he is such a director,
he forms his own corporation competitive or antagonistic to
the corporation of which he is a director, and becomes
Chairman of the Board and President of his own corporation,
he may be removed from his position as director, admittedly
one of trust and confidence. If this is so, as seems
undisputably to be the case, a person already controlling, and
also the Chairman of the Board and President of, a
corporation, may be barred from becoming a member of the
board of directors of a competitive corporation. This is my
view, even as I am for a restrictive interpretation of Section
13(5) of the Philippine Corporation Law, under which I would
limit the scope of the provision to corporations engaged In
agriculture, but only as the word agriculture refers to its
more limited meaning as distinguished from its general and
broad connotation The

409

VOL. 89, APRIL 11, 1979

409


term would then mean farming or raising the natural
products of the soil, such as by cultivation, in the manner as is
required by the Public Land Act in the acquisition of
agricultural land, such as by homestead, before the patent
may be issued. It is my opinion that under the public land
statute, the development of a certain portion of the land
applied for as specified in the law as a condition precedent
before the applicant may obtain a patent, is cultivation, not
let us say, poultry raising or piggery, which may be included
In the term agriculture in its broad sense. For under Section
13(5) of the Philippine Corporation Law, construed not in the
strict way as I believe it should, because the provision is in
derogation of property rights, the petitioner in this case
would be disqualified from becoming an officer of either the
San Miguel Corporation or his own supposedly agricultural
corporations. It is thus beyond my comprehension why,
feeling as though I am the only member of the Court for a
restricted interpretation of Section 13(5) of Act 1459, doubt
still seems to be in the minds of other members giving the
cited provision an unrestricted interpretation, as to the
validity of the amended by-laws in question, or even holding
them null and void.

I concur with the observation of Justice Barredo that despite
that less than six votes are for upholding the validity of the
by-laws, their validity is deemed upheld, as constituting the
law of the case. It could not be otherwise, after the present
petition is dismissed with the relief sought to declare null and
void the said by-laws being denied in effect. A vicious circle
would be created if, should petitioner Gokongwei be barred
or disqualified from running by the Board of Directors of San
Miguel Corporation and the Securities and Exchange
Commission sustain the Board, petitioner could come again
to Us, raising the same question he has raised in the present
petition, unless the principle of the law of the case is
applied.

Clarifying therefore, my position, I am of the opinion thai with
the validity of the by-laws in question standing unimpaired, it
is now for petitioner to show that he does not come within
the disqualification as therein provided, both to the Board
and later to the Securities and Exchange Commission, it

410

410



being a foregone conclusion that, unless petitioner disposes
of his stockholdings in the so-called competitive corporations,
San Miguel Corporation would apply the by-laws against him.
His right, therefore, to run depends on what, on election day,
May 8, 1979, the ruling of the Board and/or the Securities
and Exchange Commission on his qualification to run would
be, certainly, not the final ruling of this Court in the event
recourse thereto is made by the party feeling aggrieved, as
intimated in the Joint Separate Opinion of Justices
Teehankee, Concepcion, Jr., Fernandez and Guerrero, that
only after petitioners disqualification has ultimately been
passed upon by this Court should petitioner not be allowed to
run. Petitioner may be allowed to run, despite an adverse
decision of both the Board and the Securities and Exchange
Commission, only if he comes to this Court and obtain an
injunction against the enforcement of the decision
disqualifying him. Without such injunction being required, all
that petitioner has to do is to take his time in coming to this
Court, and in so doing, he would in the meantime, be allowed
to run, and if he wins, to sit. This would, however, be contrary
to the doctrine that gives binding, if not conclusive, effect of
findings of facts of administrative bodies exercising quasi-
judicial functions upon appellate courts, which should,
accordingly, be enforced until reversed by this Tribunal.

Notes.Where the government enters into commercial
business it abandon its sovereign capacity and is to be treated
like any other corporation. (PNR vs. Union de Maquinistas,
Fugoneros y Motormen, 84 SCRA 223).

A corporation authorize under its articles of incorporation to
operate and otherwise deal in automobiles and accessories
and to engage in the transportation of persons by water may
not engage in the business of land transportation because
such would have no necessary connection with the
corporations legitimate business. (Luneta Motor Co. vs. A.D.
Santos, Inc., 5 SCRA 809).

A derivative suit by a stockholder for the purpose of annulling
the appointment of a defendant as Chairman of the Board

411

VOL. 89, APRIL 11, 1979

411


of Directors is not a quo warranto proceeding. A stockholder
has a cause of action to annul certain actions of the Board of
Directors of a bank, which actions were considered
anomalous and a breach of trust prejudicial to the bank.
(Republic Bank vs. Cuaderno, 19 SCRA 671).

The test to be applied is whether the act of the corporation is
in direct and immediate furtherance of its business, fairly
incident to the express powers and reasonably necessary to
their exercise. If so, the corporation has the power to do it;
otherwise, not. (Montelibano vs. Bacolod-Murcia Milling Co.,
Inc., 5 SCRA 36.)

A stockholder has a cause of action to annul certain action of
the Board of Directors of a bank, which actions were
considered anomalous and a breach of trust prejudicial to the
bank. (Republic Bank vs. Cuaderno, 19 SCRA 671.)

When a corporation was formed to evade subsidiary civil
liability, fiction of corporate entity will be disregarded.
(Palacio vs. Fely Transportation Company, 5 SCRA 1011 . )

[Gokongwei, Jr. vs. Securities and Exchange Commission, 89
SCRA 336(1979)]

G.R. No. 85318. June 3, 1991.*
COMMART (PHILS.), INC., JESUS, CORAZON, ALBERTO, AND
BERNARD all surnamed MAGLUTAC, petitioners, vs.
SECURITIES & EXCHANGE COMMISSION and ALICE
MAGLUTAC, respondents.

Corporation Law; Securities and Exchange Commission; SEC
correctly hold that the case was a minority stockholdings
derivative suit and correctly sustained the hearing panels
denial of the motions to dismiss.The complaint in SEC Case
No. 2673, particularly paragraphs 2 to 9 under First Cause of
Action, readily shows that it avers the diversion of corporate
income into the private bank accounts of petitioner Jesus T.
Maglutac and his wife. Likewise, the principal relief prayed for
in the complaint is the recovery of a sum of money in favor of
the corporation. This being the case, the complaint is
definitely a derivative suit. Consequently, the SEC correctly
held that the case was a minority stockholders derivative suit
and correctly sustained the hearing panels deniainsofar as
Alice Maglutac was concernedof the motions to dismiss it.

Same; Same; Same; Nature of stockholders derivative suit.
A derivative suit has been the principal defense of the
minority shareholder against abuses by the majority. It is a
remedy designed by equity for those situations where the
management, through fraud, neglect of duty, or other cause,
declines to take the proper and necessary steps to assert the
corporations rights.

Same; Same; Jurisdiction; Jurisdiction cannot be made to
depend upon the pleas and defenses set up by a defendant in
a motion to dismiss or answer otherwise jurisdiction should
become dependent almost entirely upon the defendant.In
disposing of this contention

_______________

* SECOND DIVISION.

74

74


Commart (Phils.), Inc. vs. Securities & Exchange Commission

respondent SEC ruled that jurisdiction cannot be made to
depend upon the pleas and defenses set up by a defendant in
a motion to dismiss or answer, otherwise jurisdiction should
become dependent almost entirely upon the defendant
(citing Cardenas v. Camus, infra.) But it left the door open to a
further consideration of the issue by stating that
complainants ownership of majority stocks of a rival
corporation could not at this stage of the proceedings, defeat
complainants claims:

PETITION for certiorari to review the order of the Securities
and Exchange Commission.


Monsod, Tamargo & Associates for petitioners.

Panganiban, Benitez, Barinaga & Bautista Law Offices for
private respondent.

PARAS, J.:

Petitioners, in the instant petition for review on certiorari,
seek the reversal of the en banc Order of the respondent
Securities & Exchange Commission dated September 12, 1988
denying the petition for certiorari (SEC-EB No. 115-117) filed
by the petitioners herein and ordering that the original
complaint (SEC Case No. 2673) be remanded to the Securities
Investigation and Clearing Department for further
proceeding, for having been rendered in grave abuse of
discretion amounting to lack of or in excess of jurisdiction and
in contravention of existing laws and jurisprudence.

Commart (Phils.), Inc., (Commart for short) is a corporation
organized by two brothers, Jesus and Mariano Maglutac, to
engage in the brokerage business for the importation of
fertilizers and other products/commodities.

Jesus T. Maglutac (Jesus for short) ran the company as
president, chairman of the board, and chairman of the
executive committee, while Mariano T. Maglutac (Mariano
for short) served as executive vice-president and vice-
chairman of the executive committee until April 1984.

Sometime in June 1984, the two brothers agreed to go their
separate ways, with Mariano being persuaded to sell to Jesus
his shareholdings in Commart amounting to 25% of the
outstanding capital stock. As part of the deal, a Cooperative

75

VOL. 198, JUNE 3, 1991

75


Agreement was signed, between Commart (represented by
Jesus) and Mariano, in which, among others, Commart ceded
to Mariano or to an acceptable entity he may create, a
portion of its business, with a pledge of mutual cooperation
for a certain period so as to enable Mariano to get his own
corporation off the ground, so to speak.

Marianos wife, Alice M. Maglutac (private respondent
herein) who has been for years a stockholder and director of
Commart, did not dispose of her shareholdings, and thus
continued as such even after the sale of Marianos equity.

As broker and indentor, Commarts principal income came
from commissions paid to it in U.S. dollars by foreign
suppliers of fertilizers and other commodities imported by
Planters Products, Inc. and other local importers.

Shortly after the sale of his equity in Commart to Jesus,
Mariano allegedly discovered that for several years, Jesus and
his wife Corazon (who was herself a director) had been
siphoning and diverting to their private bank accounts in the
United States and in Hongkong gargantuan amounts sliced off
from commissions due Commart from some foreign suppliers.
Consequently, on August 22, 1989, spouses Mariano and
Alice Maglutac filed a complaint (SEC Case No. 2673) with the
Securities & Exchange Commission (SEC for short) against
Jesus T. Maglu-tac, Victor Cipriano, Clemente Ramos, Carolina
de los Reyes, Corazon Maglutac, Alberto Maglutac and
Bernardo Maglutac (Jesus as Chairman) and the rest as
members of the Board of Directors of Commart).

In their Complaint, Mariano and Alice Maglutac alleged,
among others, that Jesus T. Maglutac, by means of secret
arrangements with foreign suppliers, embodied in and
evidenced by, correspondences and other documents
discovered just recently, has been diverting into his private
bank accounts and converting to his own personal benefit
and advantage substantial portions of the commission
income of the corporation, to the prejudice of the
corporation, its stockholders and its creditors. (Petition,
Annex B, p. 2; Rollo, p. 20) Thus, complainants prayed, among
others, that judgment be rendered as follows

(a) Ordering respondents Jesus T. Maglutac, Corazon
Maglutac, and Victor Cipriano to account for and to turn over
or deliver to

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76



the Corporation the sum of US$2,539,918.97, or its
equivalent in Philippine currency, with legal interest thereon
from the respective dates of misappropriation or, at the very
least, from date of filing of this suit, together with such other
and further sums as may be proved to have likewise been
misappropriated by them;
(b) Ordering all the respondents, as members of the Board
of Directors, to take such remedial steps as would protect the
corporation from further depredation of its funds and
property;
(c) Declaring rescinded or annulled the disposition of
complainant Mariano T. Maglutacs shares of stock to
respondent Jesus T. Maglutac and ordering the restoration to
the former of all his executive positions with all the rights and
privileges thereunto appertaining; or, in the alternative,
ordering that said complainant be paid the equivalent of one-
fourth of the actual market value of COMMARTs present
assets including goodwill, taking into consideration also the
total sums misappropriated by respondents Jesus T.
Maglutac, Corazon Maglutac, and Victor Cipriano which
rightfully belonged to COM-MART; and
(d) Ordering respondents to pay complainants attorneys
fees equivalent to twenty (20%) per cent of the total amounts
awarded and recovered, plus such further sums as may be
proved to have been incurred as and by way of litigation
expenses. (pp. 24-25, Rollo)

In response to the aforementioned Complaint, two Motions
to Dismiss were filed. The records reveal that:

(a) On October 17, 1984, Albert and Bernard Maglutac
moved to dismiss on the ground that Mariano Maglutac has
no capacity to sue and the complaint states no cause of
action against them.
(b) On October 20, 1984, Jesus & Corazon Maglutac
likewise moved to dismiss on the ground that respondent
Commission does not have jurisdiction over the nature of the
suit.

These motions were opposed by complainants Alice and
Mariano Maglutac. While said incidents were pending,
complainants filed an Amended Complaint whereby Commart
was impleaded as party complainant and praying that
Commart be placed under receivership and the properties of
Jesus & Corazon Maglutac and Victor Cipriano be attached. It
is alleged in the Amended Complaint that complainant
Commart is the corporation in whose behalf and for whose
benefit this derivative suit is brought; that complainant Alice
M. Maglutac is a minor-

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77


ity stockholder in good standing of Commart while her
husband complainant Mariano T. Maglutac was, likewise,
until June 25, 1984 or thereabouts, a stockholder of
Commart.

Motions to dismiss said Amended Complaint were also filed
by present petitioners and were also duly opposed by
complainants Mariano and his wife.

On May 10, 1985 Commart filed a Manifestation/Notice of
Dismissal, manifesting that it withdraws and dismisses the
action taken in its behalf by complainants Mariano T.
Maglutac and Alice M. Maglutac against all respondents.
(Petition, Annex E, p. 3; Rollo, pp. 42-44)

This was opposed by complainants on the ground, among
other doctrines, that in a derivative suit the corporation is not
allowed to be an active participant and has no control over
the suit against the real defendants; that the suing
shareholder has the right of control.

On May 27, 1985, the Hearing Panel issued an Order denying
all the motions to dismiss as well as the so called
manifestation/ notice of dismissal on the finding inter alia
that

Respondents maintain that the present action is basically
one for annulment/rescission of sale with alternative prayer
for reinstatement of employment status; that the action is
not a derivative suit considering that the nature of the action
is one for annulment and the fact that complainant Mariano
T. Maglutac being a non-stockholder is not qualified to
institute a derivative suit; that the action does not in any way
make mention of an actionable wrong against respondents
Albert and Bernard Maglutac, Clemente Ramos and Carolina
de los Reyes.

By way of opposition, complainants alleged that the instant
action should be characterized as a minority stockholders
derivative suit; that complainant Alice Maglutac is not merely
a nominal party but a real party in interest; that Mariano T.
Maglutacs rights as a stockholder have been injured through
the machinations and maneuvering of respondent Jesus
Maglutac; that the prayer for rescission or annulment of
contract is merely the logical consequence of the exercise of
jurisdiction by this Commission.

Respondents contention that the Commission has no
jurisdiction over the subject matter or the nature of the
action is devoid of merit. It is a cardinal principle in legal
procedure that what determines the subject matter or the
nature of the action are the facts alleged in the complaint as
constituting the cause of action. A perusal

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78



of the complaint, as well as, the amended complaint would
show that the action is one for mismanagement, for the
complainants alleged, inter alia, that x x x respondent Jesus
T. Maglutac, by means of secret arrangements with foreign
suppliers embodied in, and evidenced by, correspondences
and other documents discovered just recently, has been
diverting into his private bank accounts and coverting to his
own personal benefit and advantage substantial portions of
the commission income of the corporation, to the prejudice
of the corporation, its stockholders and its creditors and
enumerated immediately thereafter the alleged specific acts
of mismanagement. Viewed therefrom, the Commission has
jurisdiction. (pp. 127-128, Rollo)

On June 18, 1985 Commart filed a motion for reconsideration
and on August 29, 1985, Jesus and Corazon Maglutac also
filed a similar motion to have the Order of May 27, 1985
reconsidered and set aside. These motions were duly
opposed by Mariano and Alice Maglutac.

Acting on the Motion for Reconsideration, the Hearing Panel
issued on November 12, 1985, an Order modifying its
previous order by dismissing this case insofar as Mariano T.
Maglutac is concerned but affirming the said order in all
other respects. (Annex F to Petition, pp. 46, 49, Rollo)

Not satisfied with such modification present petitioners as
respondents in SEC Case No. 2673 went to the SEC en banc on
a petition for certiorari, prohibition and mandamus with
prayer for preliminary injunction. They contend(a) that the
Hearing Panel acted with grave abuse of discretion in not
dismissing the case for failure of Alice Maglutac to exhaust
intra-corporate remedies, and (b) that grave abuse was
likewise committed in not dismissing the case on the ground
that the complaint did not show clearly that Alice Maglutac
was a stockholder at the time the questioned transaction
occurred.

On September 12, 1988, the Commission en banc issued an
Order denying the aforesaid petition and remanding the case
to the Securities Investigation and Clearing Department for
further proceedings. It ruled (a) that exhaustion of intra-
corporate remedy before filing suit may be dispensed with
where it is clear that it is unavailable or futile as was the
case here. (p. 2, Order of Sept. 12, 1988, Annex A to Petition)
citing Everett v. Asia Banking Corp., 49 Phil. 512, and Republic
Bank v. Cuaderno, 19 SCRA 671, and (b) that the mere
allegation in the

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79


complaint that complainant is still a stockholder of Commart
is sufficient to vest jurisdiction to this Commission but
complainant must prove at the time of reception of evidence
that she was also a stockholder at the time the acts
complained of occurred. (Id., p. 3)

Although complainant Alice Maglutac failed to exhaust an
intracorporate remedy before filing this case, the said
condition precedent may be dispensed with where it is clear
that it is unavailable or futile. Thus it was held that:

Where the board of directors in a corporation is under the
complete control of the principal defendants in the case and
it is obvious that a demand upon the board of directors to
institute an action and prosecute the same effectively would
be useless, the action may be brought by one or more of the
stockholders without such demand (Everett v. Asia Banking
Corp., 49 Phil. 512; Republic Bank v. Cuaderno, et al., No. L-
22399, March 30, 1967).

A stockholder can file a derivative suit provided there is an
allegation in the complaint that she is such at the time the
acts complained of occurred, and at the time the suit is
brought (Hawes v. Oakland, 14 Otto [104 U.S.], 450, 456; S.C.
5972, 13 Fletcher 345, cited in Alvendia, The Law of Private
Corporations in the Philippines, First Ed., p. 361). The
requirement that said facts be pleaded is merely procedural
although the necessity of the existence of these facts in order
to give rise to the right of action is substantive (Pascual v. Del
Saz Orozco, 19 Phil. 97). And equity considerations warrant
the liberal interpretation of the rules of procedure to the end
that technicalities should not stand in the way of equitable
relief (Vol. I, Francisco, Civil Procedure, 2nd ed., p. 157, 1973
ed.) Mere allegation therefore that complainant is still a
stockholder of Commart is sufficient to vest jurisdiction to
this Commission. Complainant must however prove at the
time of reception of evidence that she was also a stockholder
at the time the acts complained of occurred. (pp. 10-11,
Memorandum by public respondent)

Hence, this petition.

The petitioners invoke two grounds for reversal of the Order
under review thereby raising these two issues, to wit:

1. Did the Securities and Exchange Commission err and/or
commit grave abuse of discretion in denying the petition
for certiorari and remanding the case for further proceedings
de-

80

80



spite the so-called notice of dismissal filed by Commart?

2. Did the Securities and Exchange Commission err and/or
commit grave abuse of discretion in its handling of the
conflict of interest issue? (Petition, p. 6; Rollo, p. 81)

We find the petition devoid of merit.

The complaint in SEC Case No. 2673, particularly paragraphs 2
to 9 under First Cause of Action, readily shows that it avers
the diversion of corporate income into the private bank
accounts of petitioner Jesus T. Maglutac and his wife.
Likewise, the principal relief prayed for in the complaint is the
recovery of a sum of money in favor of the corporation. This
being the case, the complaint is definitely a derivative suit.
Consequently, the SEC correctly held that the case was a
minority stockholders derivative suit and correctly sustained
the hearing panels denialinsofar as Alice Maglutac was
concernedof the motions to dismiss it.

A derivative suit has been the principal defense of the
minority shareholder against abuses by the majority. It is a
remedy designed by equity for those situations where the
management, through fraud, neglect of duty, or other cause,
declines to take the proper and necessary steps to assert the
corporations rights. Indeed, to grant to Commart the right of
withdrawing or dismissing the suit, at the instance of majority
stockholders and directors who themselves are the persons
alleged to have committed breaches of trust against the
interest of the corporation, would be to emasculate the right
of minority stockholders to seek redress for the corporation.
To consider the Notice of Dismissal filed by Commart as
quashing the complaint filed by Alice Maglutac in favor of the
corporation would be to defeat the very nature and function
of a derivative suit and render the right to institute the action
illusory.

In any case, the suit is for the benefit of Commart itself, for a
judgment in favor of the complainants will necessarily mean
recovery by the corporation of the US$2.5 million alleged to
have been diverted from its coffers to the private bank
accounts of its top managers and directors. Thus, the prayer
in the Amended Complaint is for judgment ordering
respondents Jesus and Corazon Maglutac, as well as Victor
Cipriano, to account for and to turn over or deliver to the
Corporation the aforesaid sum, with legal interest, and
ordering all the respon-

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81


dents, as members of the Board of Directors to take such
remedial steps as would protect the corporation from further
depredation of the funds and property. (pars. *a+ & *b+,
Annex 2, Comment)

On the conflict of interest issue, petitioners allege that
private respondent Alice Maglutac is a majority stockholder
of M.M. International Sales, a business rival/competitor of
Commart and holds only less than one percent (1%) of the
entire shareholdings of Commart. According to petitioners,
this being the case it is easier to believe that this so called
derivative suit was filed because it is to the best interest of
the company where she has a bigger and substantial interest,
which in this case is M.M. International Sales, Inc.

In disposing of this contention respondent SEC ruled that
jurisdiction cannot be made to depend upon the pleas and
defenses set up by a defendant in a motion to dismiss or
answer, otherwise jurisdiction should become dependent
almost entirely upon the defendant (citing Cardenas v.
Camus, infra.) But it left the door open to a further
consideration of the issue by stating that complainants
ownership of majority stocks of a rival corporation could not
at this stage of the proceedings, defeat complainants claims:

Jurisdiction of the court cannot be made to depend upon the
pleas or defenses pleaded by the defendant in his motion to
dismiss or answer, for were we to be governed by such rule,
the question of jurisdiction would depend almost entirely
upon the defendant (Cardenas v. Camus, 5 SCRA 639).
Respondents assertion in their motion to dismiss of
complainants ownership of the majority stocks of a rival
corporation, could not at this stage of the proceedings,
defeat complainants claim. (pp. 83-84, Rollo)

In other words, no real prejudice has been inflicted upon
petitioners right to be heard on this matter raised by them,
since the same can still be looked into during the hearing of a
derivative suit on the merits. There was, therefore, neither
error nor grave abuse of discretion in the decision of the
Securities & Exchange Commission not to dismiss the case but
to remand it instead to the Hearing Panel for further
proceedings.

WHEREFORE, for lack of merit, this Petition is DISMISSED.
Costs against petitioners. [Commart (Phils.), Inc. vs. Securities
& Exchange Commission, 198 SCRA 73(1991)]

No. L-22399. March 30, 1967.
REPUBLIC BANK, represented in this action by DAMASO P.
PEREZ, etc., plaintiff-appellant, vs. MIGUEL CUADERNO,
BlENVENIDO DlZON, PABLO ROMAN, THE BOARD OF
DlRECTORS OF THE REPUBLIC BANK AND THE MONETARY
BOARD OF THE CENTRAL BANK OF THE PHILIPPINES,
defendants-appellees.

Corporation; Banks; Derivative suit by stockholder.An
individual stockholder may institute a derivative or
representative suit on behalf of the corporation, wherein he
holds stock, in order to protect or vindicate corporate rights,
whenever the of f icials of the corporation refuse to sue, or
are the ones to be sued or hold 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.

Same; When authority of corporation to bring suit is not
required.Such a suit need not be authorized by the
corporation where its objective is to nullify the action taken
by its manager and the board of directors, in which case any
demand for intra-corporate remedy would be futile.

Same; Nonjoinder of other stockholders.The fact that no
other stockholder has made common cause with the plaintiff
is irrelevant since the smallness of plaintiffs holding is no
ground for denying him relief.

Same; Joinder of corporation.Whether in a derivative suit
filed by a stockholder, the corporation should be joined as a
plaintiff or a defendant is not important. What is important is
that the corporation should be made a party in order to make
the courts judgment binding upon it and thus bar future
relitigations of the issues. Misjoinder of parties is not a
ground for dismissing an action.

Same; Derivative suit is not a quo warranto proceeding.A
derivative suit by a stockholder for the purpose of annulling
the appointment of a defendant as Chairman of the Board of
Directors is not a quo warranto proceeding. The plaintiff is
not claiming title to the position of Chairman of the Board of
Directors. His action is designed to prevent diversion of the
corporate funds for the payment of the salary of said
Chairman.

Same; Stockholders suit to annul actions of banks Board of
Directors.A stockholder has a cause of action to annul
certain actions of the Board of Directors of a bank, which
actions were considered anomalous and a breach of trust
prejudicial to the bank.

Pleadings; Motion to dismiss; Hypothetical admission of facts
alleged in the complaint.The facts pleaded in the com-

672

672


Republic Bank vs, Cuaderno

plaint are deemed hypothetically admitted by the defendants
who file a motion to dismiss the complaint for failure to state
a cause of action.

Same; Actions; Sufficiency of cause of action.The test of
sufficiency of the facts alleged in the complaint is whether or
not the court could render a valid judgment as prayed for,
accepting as true the exclusive facts set forth in the
complaint. If the court should doubt the truth of the facts
averred, it must not dismiss the complaint but should require
an answer and proceed to trial on the merits.

Same; Pendency of other cases.A case should not be
dismissed due to the pendency of other litigations between
the same parties if said ground was not invoked in the motion
to dismiss, The .fact that said case may be incorporated, by
amendment, in any one of the other pending actions does
not justify its dismissal since the amendment of the complaint
in the other cases rests on the discretion of the court. It is
possible that the amendment would not be allowed.

APPEAL from an order of dismissal rendered by the Court of
First Instance of Manila. Lantin, 7.


Crispin D. Baizas and Associates and Halili, Bolinao and
Associates for plaintiff-appellant

N.M. Balboa, F.E. Evangelista and S. Malvar for defendant-
appellee Monetary Board.

Norberto J. Quisumbing and H.V. Quisumbing for other
defendants-appellees.

REYES, J.B.L,, J.:

Direct appeal from an order of the Court of First Instance of
Manila, in its civil case No. 53936, dismissing the petitioners
complaint on the ground of failure to state cause of action.

In the Court below, Damaso Perez, a stockholder of the
Republic Bank, a Philippine banking corporation domiciled in
Manila, instituted a derivative suit for and in behalf of said
Bank, against Miguel Cuaderno, Bienvenido Dizon, the Board
of Directors of the Republic Bank, and the Monetary Board of
the Central Bank of the Philippines. Paragraph 6 of the
Complaint (Rec. on Appeal, p. 7) expressly pleaded the
following:

6. That the relator herein filed the present derivative suit
without any further demand on the Board of Directors of

673

VOL. 19, MARCH 30, 1967

673

Republic Bank vs. Cuaderno

the Republic Bank for the reason that such formal demand to
institute the present complaint would be a futile formality
since the members of the board are personally chosen by
defendant Pablo Roman himself.

For a cause of action plaintiff alleged, inter alia, that Damaso
Perez had complained to the Monetary Board of the Central
Bank against certain frauds allegedly committed by defendant
Pablo Roman, in that being chairman of the Board of
Directors of the Republic Bank, and of its Executive Loan
Committee, in 1957 to 1959, in grave abuse of his fiduciary
duty and taking advantage of his said positions and in
connivance with other officials of the Republic Bank, Roman
had fraudulently granted or caused to be granted loans to
fictitious and non-existing persons and to their close friends,
relatives and/or employees, who were in reality their
dummies, on the basis of fictitious and inflated appraised
values of real estate properties; that said loans amounted to
almost 4 million pesos; that acting upon the complaint,
Miguel Cuaderno (then Governor of the Central Bank) and the
Monetary Board ordered an investigation, which was carried
out by Bank Examiners; that they and the Superintendent of
Banks of the Central Bank reported that certain mortgage
loans -amounting to P2,303,400.00 were granted in violation
of sections 77, 78 and 88 of the General Banking Act; that
acting on said reports, the Monetary Board, of which
defendant Cuaderno was a member, ordered a new Board of
Directors of the Republic Bank to be elected, which was done,
and subsequently approved by the Monetary Board; that on
January 5; 1960? the latter accepted the offer of Pablo
Roman to put up adequate security for the questioned loans
made by the Republic Bank, and such security was made a
condition for the resumption of the Banks normal
operations; that subsequently, the Central Bank through its
Governor, Miguel Cuaderno, referred to special prosecutors
of the Department of Justice on July 22, 1960, the banking
frauds and violations of the Banking Act, reported by the
Superintendent of Banks, for investigation and prosecution,
but no information was filed up to the time of the retirement
of Cuaderno in 1961; that other similar frauds were
subsequently discovered; that to neutralize the impending
action against him, Pablo Roman

674

674



engaged Miguel Cuaderno as technical consultant at a
compensation of P12,500.00 per month, and selected
Bienvenido Dizon as chairman of the Board of Directors of the
Republic Bank; that the Board of Directors composed of
individuals personally selected and chosen by Roman,
connived and confederated in approving the appointment
and selection of Cuaderno and Dizon; that such action was
motivated by bad faith and without intention to protect the
interest of the Republic Bank but were prompted to protect
Pablo Roman from criminal prosecution; that the
appointment of Cuaderno and his acceptance of the position
of technical consultant are immoral, anomalous and illegal,
and his compensation highly unconscionable, because court
actions involving the actuations of Cuaderno as Governor and
Member or Chairman of the Monetary Board are still pending
in court; that as member of the Monetary Board from 1961 to
1962, Bienvenido Dizon exercised supervision over the
Republic Bank; that the selection of Dizon as chairman of the
Board of the Republic Bank after he was forced to resign from
the presidency of the Philippine National Bank and from
membership of the Monetary Board and within one year
thereafter is in violation of section 3, sub-paragraph (d) of the
AntiGraft and Corrupt Practices Act; that both Cuaderno and
Dizon were alter egos of Pablo Roman; that the Monetary
Board was about to approve the appointment of Cuaderno
and Dizon and would do so unless enjoined.

The complaint, therefore, prayed for a writ of preliminary
Injunction against the Monetary Board to prevent its
confirmation of the appointments of Dizon and Cuaderno;
against the Board of Directors of the Republic Bank from
recognizing Cuaderno as technical consultant and Dizon as
Chairman of the Board; and against Pablo Roman from
appointing or selecting officers or directors of the Republic
Bank, and against the recognition of any such appointees
until final determination of the action. And concluded by
praying that after due hearing, judgment be rendered,

a) making the writ of injunction permanent;
b) declaring the appointment of defendant Miguel
Cuaderno as technical consultant with monthly compensation
of

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VOL. 19, MARCH 30, 1967

675


P12,500.00 unconscionable, immoral, illegal and null and
void;
c) declaring the selection of defendant Bienvenido Dizon as
chairman of the Board of Directors of the Republic Bank
violative of Section 3, sub-paragraph (d) of Republic Act No.
5019, otherwise known as the Anti-Graft and Corrupt
Practices Act, and therefore, illegal and null and void;
d) declaring that defendant Pablo Roman, in view of his
criminal liability for the fraudulent real estate mortgage loans
in the Republic Bank amounting to P4 million, has no right to
select or to be allowed to select person or persons who are
his alter egos to manage the Republic Bank, and enjoining the
defendant Board of Directors of the Republic Bank from
recognizing any officers or directors appointed or selected by
defendant Pablo Roman;
e) ordering defendants Miguel Cuaderno and Bienvenido
Dizon to return to the Republic Bank all amounts they may
have received either in the form of compensation,
remuneration or emolument, with an interest thereon at the
rate of 6%; or to order defendant Pablo Roman to refund the
amounts paid to said defendant Miguel Cuaderno and
defendant Bienvenido Dizon, and to pay such reasonable
damages to the plaintiff Republic Bank;
f) ordering all the defendants to pay the sum of P25,000.00
as attorneys fees, including all expenses of litigation and
costs of this suit.

The Monetary Board filed an answer with denials, admissions
and affirmative defenses; but the other defendants filed
separate motions to dismiss on practically the same grounds:
no valid cause of action against the individual movants; lack
of legal capacity of plaintiff-relator to sue; and non-
exhaustion of intra-corporate remedies. These motions were
duly opposed by plaintiff Damaso Perez.

On October 24, 1963, the court, taking into consideration
the grounds alleged in the motions to dismiss and the
opposition for the issuance of a writ of preliminary injunction
and the affirmative defenses filed by the defendants and the
arguments in support thereof, and that there are already
eight cases pending in the different branches of this court
between practically the same parties, denied the petition for
a writ of preliminary injunction and dismissed the case. The
court in effect suggested

676

676



that the matter at issue in the case may be presented in any
of the pending eight cases by means of amended and
supplemental pleadings.

Plaintiff Damaso Perez thereupon appealed to this Court.

The issue in this appeal, then, is whether or not the Court
below erred in dismissing the complaint. In this connection, it
should be remembered that the defenses of the Monetary
Board of the Central Bank, being interposed in an answer and
not in a motion to dismiss, are not here at issue. Our sole
concern is with the motions to dismiss of the other
defendants, Roman, Cuaderno, Dizon, and the Board of
Directors of the Republic Bank.

They mainly controvert the right of plaintiff to question the
appointment and selection of defendants Cuaderno and
Dizon, which they contend to be the result of corporate acts
with which plaintiff, as stockholder, cannot interfere.
Normally, this is correct, but Philippine jurisprudence is
settled that an individual stockholder is permitted to institute
a derivative or representative suit on behalf of the
corporation wherein he holds stock in order to protect or
vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued or hold
the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the
corporation as the real party in interest (Pascual vs. Del Saz
Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking Corp., 45 Phil.
518: Angeles vs. Santos, 64 Phil 697; Evangelista vs. Santos,
86 Phil. 388). Plaintiff-appellants action here is precisely in
conformity with these principles. He is neither alleging nor
vindicating his own individual interest or prejudice, but the
interest of the Republic Bank and the damage caused to it.
The action he has brought is a derivative one, expressly
manifested to be for and in behalf of the Republic Bank,
because it was futile to demand action by the corporation,
since its Directors were nominees and creatures of defendant
Pablo Roman (Complaint, p. 6). The frauds charged by
plaintiff are frauds against the Bank that redounded to its
prejudice.

The complaint expressly pleads that the appointment of
Cuaderno as technical consultant, and of Bienvenido Dizon to
head the Board of Directors of the Republic Bank,

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VOL. 19, MARCH 30, 1967

677


were made only to shield Pablo Roman from criminal
prosecution and not to further the interests of the Bank, and
avers that both men are Romans alter egos. There is no
denying that the facts thus pleaded in the complaint
constitute a cause of action for the bank: if the questioned
appointments were made solely to protect Roman from
criminal prosecution, by a Board composed by Romans
creatures and nominees, then the moneys disbursed in favor
of Cuaderno and Dizon would be an unlawful wastage or
diversion of corporate funds, since the Republic Bank would
have no interest in shielding Roman, and the directors in
approving the appointments would be committing a breach
of trust; the Bank, therefore, could sue to nullify the
appointments, enjoin disbursement of its funds to pay them,
and recover those paid out for the purpose, as prayed for in
the complaint in this case (Angeles vs. Santos, supra.).

Facts pleaded in the complaint are to be deemed accepted by
the defendants who file a motion to dismiss the complaint
for failure to state a cause of action. This is the cardinal
principle in the matter. And, it has been ruled that the test of
sufficiency of the facts alleged is whether or not the Court
could render a valid judgment as prayed for, accepting as true
the exclusive facts set forth in the complaint.1 So rigid is the
norm prescribed that if the Court should doubt the truth of
the facts averred it must not dismiss the complaint but
require an answer and proceed to trial on the merits.2

Defendants urge that the action is improper because the
plaintiff was not authorized by the corporation to bring suit in
its behalf. Any such authority could not be expected as the
suit is aimed to nullify the action taken by the manager and
the board of directors of the Republic Bank; and any demand
for intra-corporate remedy would be futile, as expressly
pleaded in the complaint. These circumstances permit a
stockholder to bring a derivative

________________

1 Paminsan vs. Costales, 28 Phil. 487; Blay vs. Batangas:
Transportation Co., 80 Phil. 373; De Jesus vs. Belarmino, 95
Phil. 366; Valencia & Co. vs. Layug, CA-G.R. No. L-11060, May
23, 1958.

2 Piero vs. Enriquez, 84 Phil. 774; Dimayuga vs. Dimayuga,
96 Phil. 366.

678

678



suit (Evangelista vs. Santos, 86 Phil. 394). That no other
stockholder has chosen to make common cause with plaintiff
Perez is irrelevant, since the smallness of plaintiffs holdings is
no ground for denying him relief (Ashwander vs. TVA, 80 L.
Ed. 688). At any rate, it is yet too early in the proceedings for
the absence of other stockholders to be of any significance,
no issues having even been joined.

There remains the procedural question whether the
corporation itself must be made party defendant. The English
practice is to make the corporation a party plaintiff, while in
the United States, the usage leans in favor of its being joined
as party defendant (see Editorial Note, 51 LRA [NS] 123).
Objections can be raised against either method. Absence of
corporate authority would seem to militate against making
the corporation a party plaintiff, while joining it as defendant
places the entity in the awkward position of resisting an
action instituted for its benefit. What is important is that the
corporation should be made a party, in order to make the
Courts judgment binding upon it, and thus bar future
relitigation of the issues. On what side the corporation
appears loses importance when it is considered that it lay
within the power of the trial court to direct the making of
such amendments of the pleadings, by adding or dropping
parties, as may be required in the interest of justice (Revised
Rule 3, sec. 11). Misjoinder of parties is not a ground to
dismiss an action. (Ibid.)

We see no reason to support the contention of defendant
Bienvenido Dizon that the action of plaintiff amounts to a quo
warranto proceeding. Plaintiff Perez is not claiming title to
Dizons position as head of the Republic Banks board of
directors. The suit is aimed at preventing the waste or
diversion of corporate funds in paying officers appointed
solely to protect Pablo Roman from criminal prosecution, and
not to carry on the corporations banking business, Whether
the complaints allegations to such effect are true or not must
be determined after due hearing.

Independently of the grounds advanced by the defendants in
their motions to dismiss, the Court a quo gave as a further
pretext for the dismissal of the action the pen-

679

VOL. 19, MARCH 30, 1967

679

Bernabe vs. Court of Appeals, et al.

dency of eight other lawsuits between practically the same
parties; reasoning that the question at issue in the present
case could be incorporated in any one of the other actions by
amended or supplemental pleading. We fail to see that this
justifies the dismissal of the case under appeal. In the first
place, there is no pretense that the cause of action here was
already included in any of the other pending cases. As a
matter of fact, dismissal of the present action was not sought
on the ground of pendency of another action between the
same parties. Secondly, the amendment of a complaint after
a responsive pleading is filed, would rest upon the discretion
of the party and the Court. Hence, this case cannot be
dismissed simply because of the possibility that the cause of
action here can be incorporated or introduced in any of those
of the pending cases.

In view of the foregoing, the order dismissing the complaint is
reversed and set aside. The case is remanded to the court of
origin with instructions to overrule the motions to dismiss
and require the defendants to answer the complaint,
Thereafter, the case shall be tried and decided on its merits.
Costs against defendants-appellees. So ordered.

Concepcion, C.J., Dizon, Regala, Bengzon, J.P., Zaldivar,
Sanchez and Castro, JJ., concur.

Makalintal, J., did not take part.

Order of dismissal set aside. Case remanded to lower court
for further proceedings. [Republic Bank vs. Cuaderno, 19
SCRA 671(1967)]

No. L-23136. August 26, 1974.*
ISMAEL MATHAY, JOSEFINA MATHAY, DIOGRACIAS T. REYES
and S. ADOR DIONISIO, plaintiffs-appellants, vs. THE
CONSOLIDATED BANK AND TRUST COMPANY, JOSE MARINO
OLONDRIZ, WILFRIDO C. TECSON, SIMON R. PATERNO,
FERMIN Z. CARAM, JR., ANTONIO P. MADRIGAL, JOSE P.
MADRIGAL, CLAUDIO TEEHANKEE, and ALFONSO JUAN
OLONDRIZ, defendants-appellees. CIPRIANO AZADA, MARIA
CRISTINA OLONDRIZ PERTIERRA jointly with her husband
ARTURO PERTIERRA, and MARIA DEL PUY OLONDRIZ DE
STEVENS, movants-intervenors-appellants.

Civil procedure; Class suit; Requisites of a class suit.The
necessary elements for the maintenance of a class suit are
accordingly: (1) that the subject matter of the controversy be
one of common or general interest to many persons, and (2)
that such persons be so numerous as to make it impracticable
to bring them all to the court.

Same; Same; Existence of a class suit depends upon the
attending facts, 11 ot upon the designation in the
complaint.An action does not become a class suit merely
because it is designated as such in the pleadings. Whether
the suit is or is not a class suit depends upon the attending
facts, and the complaint, or other pleading initiating the class
action should allege the existence of the necessary facts, to
wit, the existence of a subject matter of common interest,
and the existence of a class and the number of persons in the
alleged class, in order that the court might be enabled to
determine whether the members of the class are so
numerous as to make it impracticable to bring them all
before the court, to contrast the number appearing on the
record with the number in the class and to determine
whether claimants on record adequately represent the class
and the subject matter of general or common interest.

Same; Same; Meaning of phrase subject matter of the
action".By the phrase subject matter of the action is
meant the physical facts, the things real or personal, the
money, lands, chattels, and the like, in relation to which the
suit is prosecuted, and not the delict or wrong committed by
the defendant.

________________

* SECOND DIVISION.

560

560


Mathay vs. Consolidated Bank and Trust Company

Same; Same; Class suit will not prosper where brought by
stockholders who have determinable, though undivided
interest, in the property in question.This Court has ruled
that a class suit did not lie in an action for recovery of real
property where separate portions of the same parcel were
occupied and claimed individually by different parties to the
exclusion of each other, such that the different parties had
determinable, though undivided interests, in the property in
question. x x x The interest, subject matter of the class suits
in the above-cited cases, is analogous to the interest claimed
by appellants in the instant case. The interest that appellants,
plaintiffs and intervenors, and the CMI stockholders had in
the subject matter of this suitthe portion of stocks offering
of the Bank left unsubscribed by CMI stockholders who failed
to exercise their right to subscribe on or before January 17,
1963was several, not common or general in the sense
required by the statute. Each one of the appellants and the
CMI stockholders had determinable interest; each one had a
right, if any, only to his respective portion of the stocks. No
one had any right to, or any interest in, the stock to which
another was entitled.

Same; Same; Wrongs committed to each individual
stockholder would not create community of interest in
subject matter of controversy.Even if it be assumed, for the
sake of argument, that the appellants and the CMI
stockholders suffered wrongs that had been committed by
similar means and even pursuant to a single plan of the
Interim Board of Organizers of the Bank, the wrong suffered
by each of them would constitute a wrong separate from
those suffered by the other stockholders, and those wrongs
alone would not create that common or general interest in
the subject matter of the controversy as would entitle any
one of them to bring a class suit on behalf of the others.

Same; Same; So-called spurious class action is merely a
permissive joinder device and cannot be regarded as a class
suit.The .spurious class action is merely a permissive
joinder device; between the members of the class there is not
jural relationship, and the right or liability of each is distinct,
the class being formed solely by the presence of a common
question of law or fact. This permissive joinder is provided in
Section 6 of Rule 3, of our Rules of Court. Such joinder is not
and cannot be regarded as a class suit, which this action
purported and was intended to be as per averment of the
complaint.

Same; Same; Existence of common question of law would not
suffice to maintain a class action.It may be granted that the
claims of all the appellants involved the same question of law.
But this alone,

561

VOL. 58, AUGUST 26, 1974

561


as said above, did not constitute the common interest over
the subject matter indispensable in a class suit. The right to
purchase or subscribe to the shares of the proposed Bank,
claimed by appellants herein, is analogous to the right of
preemption that stockholders have when their corporation
increases its capital. The right of preemption, it has been said,
is personal to each stockholder, and while a stockholder may
maintain a suit to compel the issuance of his proportionate
share of stock, it has been ruled, nevertheless, that he may
not maintain a representative action on behalf of other
stockholders who are similarly situated.

Same; Same; In a class suit there must be a showing that
sufficient representative parties had been joined.Where it
appeared that no sufficient representative parties had been
joined, the dismissal by the trial court of the action, despite
the contention by plaintiffs that it was a class suit, was
correct.

Same; Motion to Dismiss; When ground of motion to dismiss
is lack of cause of action only allegations of the complaint
must be considered.As a rule the sufficiency of the
complaint, when challenged in a motion to dismiss, must be
determined exclusively on the basis of the facts alleged
therein.

Same; Same; A motion to dismiss based on lack of cause of
action hypothetically admits the truth of factual allegations in
the complaint.It is to be noted that only the facts well
pleaded in the complaint, and likewise, any inferences fairly
deducible therefrom, are deemed admitted by a motion to
dismiss. Neither allegations of conclusions nor allegations of
facts the falsity of which the court may take judicial notice
are deemed admitted.

Same; Same; Test for determining sufficiency of cause of
action in motion to dismiss.The question, therefore,
submitted to the Court in a motion to dismiss based on lack
of cause of action is not whether the facts alleged in the
complaint are true, for they are hypothetically admitted, but
whether the facts alleged are sufficient to constitute a cause
of action such that the court may render a valid judgment
upon the facts alleged therein.

Same; Essential elements of a cause of action.A cause of
action is an act or omission of one party in violation of the
legal right of the other. Its essential elements are, namely: (1)
the existence of a legal right in the plaintiff, (2) a correlative
legal duty in the defendant, and (3) an act or omission of the
defendant in violation of plaintiff s right with consequential
injury or damage to the plaintiff for which he may

562

562



maintain an action for the recovery of damages or other
appropriate relief.

Same; Allegation that one is entitled to something is a
conclusion of law.A bare allegation that one is entitled to
something is an allegation of a conclusion. Such allegation
adds nothing to the pleading, it being necessary to plead
specifically the facts upon which conclusion is founded. The
complaint alleged that appellants were stockholders of the
CMI; that as such stockholders, they were entitled, by virtue
of the resolution of March 28, 1962, to subscribed to the
capital stock of the proposed Consolidated Bank & Trust Co.,
at par value to the same extent and in the same amount as
said stockholders respective shareholdings in the CMI as
shown in the latters stock book as of January 15, 1963, the
right to subscribe to be exercised until January 15, 1963,
provided said stockholders of the CMI were qualified under
the law to become stockholders of the proposed Bank; that
appellants accomplished and filed their respective Pre-
Incorporation Agreements to Subscribe and fully paid the
subscription. These alleged specific facts did not even show
that appellants were entitled to subscribe to the capital stock
of the proposed Bank, for said right depended on a condition
precedent, which was, that they were qualified under the law
to become stockholders of the Bank, and there was no direct
averment in the complaint of the facts that qualified them to
become stockholders of the Bank. The allegation of the fact
that they subscribed to the stock did not, by necessary
implication, show that they were possessed of the necessary
qualifications to become stockholders of the proposed Bank.

Same; Trusts; Question of law and facts; Allegation that
defendants held shares as trustees for plaintiffs is a
condusion of law.The allegation in the complaint that the
defendants-appellees held their shares in trust for
plaintiffs-appellants without averment of the facts from
which the court could conclude the existence of the alleged
trust, was not deemed admitted by the motion to dismiss for
that was a conclusion of law.

Same; Question of law and facts; Allegation that one acquired
stocks in breach of law, trust or agreement is one of law.
The allegation that the defendants-appellees acquired
stockholdings far in excess of what they were lawfully
entitled, in violation of law and in breach of trust and of
contractual agreement, is also mere conclusion of law.

Same; Same; Allegation that an act was unlawful or wrongful
is a

563

VOL. 58, AUGUST 26, 1974

563


mere conclusion of law.The further allegations that the
calling of a special meeting was falsely certified, that the
seventh position of Director was illegally created and that
defendant Alfonso Juan Olondriz was not competent or
qualified to be a director are mere conclusions of law, the
same not being necessarily inferable from the ultimate facts
stated in the first and second causes of action.

APPEAL from an order of the Court of First Instance of Manila.
Arca, J.


Deogracias T. Reyes & Associates for appellants.

Taada, Teehankee & Carreon for appellees.

Paterno Pedrea for appellee Fermin Z. Caram, Jr.

ZALDIVAR, J.:

In this appeal, appellants-plaintiffs and movants-intervenors;
seek the reversal of the order dated March 21,1964 of the
Court of First Instance of Manila dismissing the complaint
together with all other pending incidents in Civil Case No.
55810.

The complaint in this case, filed on December 24, 1963 as a
class suit, under Section 12, Rule 3, of the Rules of Court,
contained six causes of action. Under the first cause of action,
plaintiffs-appellants alleged that they were, on or before
March 28, 1962, stockholders in the Consolidated Mines, Inc.
(hereinafter referred to as CMI), a corporation duly organized
and existing under Philippine laws; that the stockholders of
the CMI, including the plaintiffs-appellants, passed, at a
regular stockholders meeting, a Resolution providing: (a) that
the Consolidated Bank & Trust Co. (hereinafter referred to as
Bank) be organized with an authorized capital of
P20,000,000.00; (b) that the organization be undertaken by a
Board of Organizers composed of the President and Members
of the Board of Directors of the CMI; (c) that all stockholders
of the CMI, who were legally qualified to become
stockholders, would be entitled to subscribe to the capital
stock of the proposed Bank at par value to the same extent
and in the same amount as said stockholders respective
shareholdings in the CMI," as shown in its stock books on a
date to be fixed by the Board of Directors [which date was
subsequently fixed as January 15, 1963], provided that the
right to subscribe should

564

564



be exercised within thirty days from the date so fixed, and
that if such right to subscription be not so exercised then the
stockholders concerned shall be deemed to have thereby
waived and released ipso-facto their right to such
subscription in favor of the Interim Board of Organizers of the
Defendant Bank or their assignees; and (d) that the Board of
Directors of the CMI be authorized to declare a special
dividend in an amount it would fix, which the subscribing
stockholders might authorize to be paid directly to the
treasurer of the proposed Bank in payment of the
subscriptions; that the President and members of the Board
of Directors of the CMI, who are the individuals-defendants-
appellees in the instant case, constituted themselves as the
Interim Board of Organizers; that said Board sent out, on or
about November 20, 1962, to the CMI stockholders, including
the plaintiffs-appellants, circular letters with Pre-
Incorporation Agreement to Subscribe forms that provided
that the payment of the subscription should be made in cash
from time to time or by the application of the special
dividend declared by the CMI, and that the subscription must
be made within the period from December 4, 1962 to January
15, 1963, otherwise such subscription right shall be deemed
to have been thereby ipso facto waived and released in favor
of the Board of Organizers of the Defendant Bank and their
assignees; that the plaintiffs-appellants accomplished and
filed their respective Pre-Incorporation Agreement to
Subscribe and paid in full their subscriptions; that plaintiffs-
appellants and the other CMI subscribing stockholders in
whose behalf the action was brought also subscribed to a
very substantial amount of shares; that on June 25, 1963, the
Board of Organizers caused the execution of the Articles or
Incorporation of the proposed Bank indicating an original
subscription of 50,000 shares worth P5,000,000 subscribed
and paid only by six of the individuals-defendants-appellees,
namely, Antonio P. Madrigal, Jose P. Madrigal Simon R.
Paterno, Fermin Z. Caram, Jr., Claudio Teehankee, and
Wilfredo C. Tecson, thereby excluding the plaintiffs-
appellants and the other CMI subscribing stockholders who
had already subscribed; that the execution of said Articles of
Incorporation was in violation of law and in breach of trust
and contractual agreement as a means to gain control of
Defendant Bank by Defendant Individuals and persons or
entities chosen by them and for their personal profit or gain
in

565

VOL. 58, AUGUST 26, 1974

565


disregard of the rights of Plaintiffs and other CMI Subscribing
Stockholders; that the paid-in capital stock was raised, as
required by the Monetary Board, to P8,000,000.00, and
individuals-defendants-appellees caused to be issued from
the unissued shares 30,000 shares amounting to
P3,000,000.00, all of which were again subscribed and paid
for entirely by individuals-defendants-appellees or entities
chosen by them to the exclusion of Plaintiffs and other CMI
subscribing stockholders in violation of law and breach of
trust and of the contractual agreement embodied in the
contractual agreement of March 28, 1962"; that the Articles
were filed with the Securities and Exchange Commission
which issued the Certificate of Incorporation on June 25,
1963; that as of the date of the Complaint, the plaintiffs-
appellants and other CMI subscribing stockholders had been
denied, through the unlawful acts and manipulation of the
defendant Bank and Individuals-defendants-appellees, the
right to subscribe at par value, in proportion to their equities
established under their respective Pre-Incorporation
Agreements to Subscribe to the capital stock, i.e., (a) to the
original issue of 50,000 shares and/or (b) to the additional
issue of 30,000 shares, and/or (c) in that portion of said
original or additional issue which was unsubscribed; that the
individuals-defendants-appellees and the persons chosen by
them had unlawfully acquired stockholdings in the
defendant-appellee Bank in excess of what they were lawfully
entitled and held such shares in trust for the plaintiffs-
appellants and the other CMI stockholders; that it would have
been vain and futile to resort to intracorporate remedies
under the facts and circumstances alleged above. As relief on
the first cause of action, plaintiffs-appellants prayed that the
subscriptions and shareholdings acquired by the individuals-
defendants-appellees and the persons chosen by them, to the
extent that plaintiffs-appellants and the other CMI
stockholders had been deprived of their right to subscribe, be
annulled and transferred to plaintiffs-appellants and other
CMI subscribing stockholders.

Besides reproducing all the above allegations in the other
causes of action, plaintiffs-appellants further alleged under
the second cause of action that on or about August 28, 1963,
defendants-appellees Antonio P. Madrigal, Jose P. Madrigal;
Fermin Z. Caram, Jr., and Wilfredo C. Tecson falsely certified
to the calling of a special stockholders meeting allegedly

566

566



pursuant to due notice and call of Defendant Bank although
plaintiffs-appellants and other CMI stockholders were not
notified thereof, and amended the Articles of Incorporation
increasing the number of Directors from 6 to 7, and had the
illegally created position of Director filled up by defendant-
appellee Alfonso Juan Olondriz, who was not competent or
qualified to hold such position. In the third cause of action,
plaintiffs-appellants claimed actual damages in an amount
equivalent to the difference between the par value of the
shares they were entitled, but failed, to acquire and the
higher market value of the same shares. In the fourth cause
of action, plaintiffs-appellants claimed moral damages; in the
fifth, exemplary damages; and in the sixth, attorneys fees.

In his manifestation to the court on January 4, 1964,
Francisco Sevilla, who was one of the original plaintiffs,
withdrew. On January 15, 1964 Cipriano Azada, Maria Cristina
Olondriz Pertierra, Maria del Puy Olondriz de Stevens (who
later withdrew as intervenors-appellants) and Carmen Sievert
de Amoyo, filed a motion to intervene, and to join the
plaintiffs-appellants on record, to which motion defendants-
appellees, except Fermin Z. Caram, Jr., filed, on January 17,
1964 their opposition.

On February 7, 1964 defendants-appellees, except Fermin Z.
Caram, Jr., filed a motion to dismiss on the grounds that (a)
plaintiffs-appellants had no legal standing or capacity to
institute the alleged class suit; (b) that the complaint did not
state a sufficient and valid cause of action; and (c) that
plaintiffs-appellants complaint against the increase of the
number of directors did not likewise state a cause of action.
Plaintiffs-appellants filed their opposition thereto on
February 21,1964.

On March 4,1964 appellants, plaintiffs and intervenors, filed a
verified petition for a writ of preliminary injunction to enjoin
defendants-appellees from considering or ratifying by
resolution, at the meeting of the stockholders of defendant-
appellee Bank to be held the following day, the unlawful
apportionment of the shares of the defendant-appellee Bank
and the illegal amendment to its Articles of Incorporation
increasing the number of Directors, The Court, after hearing,
granted the writ, but subsequently set it aside upon the
appellees filing a counterbond.

Some subscribers to the capital stock of the Bank like

567

VOL. 58, AUGUST 26, 1974

567


Concepcion Zuluaga, et al., and Carlos Moran Sison, et al.,
filed separate manifestations that they were opposing and
disauthorizing the suit of plaintiffs-appellants.

On March 7, 1964 defendants-appellees, except Fermin Z.
Caram, Jr., filed a supplemental ground for their motion to
dismiss, to wit, that the stockholders, except Fermin Z.
Caram, Jr., who abstained, had unanimously, at their regular
annual meeting held on March 5, 1964, ratified and
confirmed all the actuations of the organizers-directors in the
incorporation, organization and establishment of the Bank.

In its order, dated March 21,1964, the trial court granted the
motion to dismiss, holding, among other things, that the class
suit could not be maintained because of the absence of a
showing in the complaint that the plaintiffs-appellants were
sufficiently numerous and representative, and that the
complaint failed to state a cause of action. From said order,
appellants, plaintiffs and intervenors, interposed this appeal
to this Court on questions of law and fact, contending that
the lower court erred as follows:

I. In holding that plaintiffs-appellants could not maintain
the present class suit because of the absence of a showing in
the complaint that they were sufficiently numerous and
representative;
II. In holding that the instant action could not be
maintained as a class suit because plaintiffs-appellants did
not have a common legal interest in the subject matter of the
suit;
III. In dismissing the present class suit on the ground that it
did not meet the requirements of Rule 3, section 12 of the
Rules of Court;
IV. In holding that the complaint was fatally defective in
that it failed to state with particularity that plaintiffs-
appellants had resorted to, and exhausted, intra-corporate
remedies;
V. In resolving defendants-appellees motion on the basis
of f acts not alleged in the complaint;
VI. In holding that plaintiffs-appellants complaint stated no
valid cause of action against defendants-appellees;
VII. In not holding that a trust relationship existed between
the Interim Board of Organizers of defendant-appellee Bank
and the CMI subscribing stockholders and in not holding that
the waiver was in favor of the Board of Trustees for the CMI
subscribing stockholders;

568

568



VIII. In holding that the failure of plaintiffs-appellants to
allege that they had paid or had offered to pay for the shares
allegedly pertaining to them constituted another ground for
dismissal;
IX. In holding that the allegations under the second cause
of action stated no valid cause of action due to a fatal
omission to allege that plaintiffs-appellants were
stockholders of record at the time of the holding of the
special stockholders meeting;
X. In holding that plaintiffs-appellants complaint stated no
cause of action against defendant-appellee Bank; and
XI. In considering the resolution of ratification and
confirmation and in holding that the resolution rendered the
issues in this case moot.

The assigned error revolve around two questions, namely: (1)
whether the instant action could be maintained as a class
suit, and (2) whether the complaint stated a cause of action.
These issues alone will be discussed.

1. Appellants contended in the first three assigned errors
that the trial court erred in holding that the present suit could
not be maintained as a class suit, and in support thereof
argued that the propriety of a class suit should be determined
by the common interest in the subject matter of the
controversy; that in the instant case there existed such
common interest which consisted not only in the recovery of
the shares of which the appellants were unlawfully deprived,
but also in divesting the individuals-defendants-appellees and
the persons or entities chosen by them of control of the
appellee Bank.1; that the complaint showed that besides the
four plaintiffs-appellants of record, and the four movant-
intervenors-appellants there were in the appellee Bank many
other stockholders who, though similarly situated as the
appellants, did not formally include themselves as parties on
record in view of the representative character of the suit;
that the test, in order to determine the legal standing of a
party to institute a class suit, was not one of number, but
whether or not the interest of said party was representative
of the persons in whose behalf the class suit was instituted;
that granting arguendo, that the plaintiffs-appellants were
not sufficiently numerous and representative,

________________

1 Brief for Plaintiffs-Appellants and Movants-Intervenors-
Appellants, page 25.

569

VOL. 58, AUGUST 26, 1974

569


the court should not have dismissed the action, for
insufficiency of number in a class suit was not a ground for a
motion to dismiss, and the court should have treated the suit
as an action under Rule 3, section 6, of the Rules of Court
which permits a joinder of parties.

Defendants-appellees, on the contrary, stressed that the
instant suit was instituted as a class suit and the plaintiffs-
appellants did not sue in their individual capacities for the
protection of their individual interests; that the plaintiffs-
appellants of record could not be considered numerous and
representative, as said plaintiffs-appellants were only four
out of 1,500 stockholders, and owned only 8 shares out of the
80,000 shares of stock of the appellee Bank; that even if to
the four plaintiffs-appellants were added the four movants-
intervenors-appellants the situation would be the same as
two of the intervenors, to wit, Ma. Cristina Olondriz Pertierra
and Ma. del Puy Olondriz de Stevens, could not sue as they
did not have their husbands consent; that it was necessary
that in a class suit the complaint itself should allege facts
showing that the plaintiffs were sufficiently numerous and
representative, and this did not obtain in the instant case, as
the complaint did not even allege how many other CMI
stockholders were similarly situated; that the withdrawal of
one plaintiff, Francisco Sevilla, the subsequent disclaimers of
any interest in the suit made in two separate pleadings by
other CMI stockholders and the disauthorization of their
being represented by plaintiffs-appellants by the 986 (out of
1,663) stockholders who attended the annual meeting of
bank stockholders on March 5, 1964, completely negated
plaintiffs-appellants pretension that they were sufficiently
numerous and representative or that there were many other
stockholders similarly situated whom the plaintiffs-appellants
allegedly represented; that plaintiffs-appellants did not have
that common or general interest required by the Rules of
Court in the subject matter of the suit.2

In their Reply Brief, appellants insisted that non-compliance
with Section 12, Rule 3, not being one enumerated in Rules
16 and 17, was not a ground for dismissal; that the
requirements for a class had been complied with; that the
required common interest existed even if the interests were
several for there was a common question of law or fact and a
common relief was

_________________

2 Brief for Defendants-Appellees, pages 5470.

570

570



sought; that the common or general interest could be in the
object of the action, in the result of the proceedings, or in the
question involved in the action, as long as there was a
common right based on the same essential facts; that
plaintiffs-appellants adequately represented the aggrieved
group of bank stockholders, inasmuch as appellants interests
were not antagonistic to those of the latter, and appellants
were in the same position as the group in whose behalf the
complaint was filed.

The governing statutory provision for the maintenance of a
class suit is Section 12 of Rule 3 of the Rules of Court, which
reads as follows:

Sec. 12. Class suit.When the subject matter of the
controversy is one of common or general interest to many
persons, and the parties are so numerous that it is
impracticable to bring them all before the court. one or more
may sue or defend for the benefit of all. But in such case the
court shall make sure that the parties actually before it are
sufficiently numerous and representative so that all interests
concerned are fully protected. Any party in interest shall have
a right to intervene in protection of his individual interest.

The necessary elements for the maintenance of a class suit
are accordingly: (1) that the subject matter of the controversy
be one of common or general interest to many persons, and
(2) that such persons be so numerous as to make it
impracticable to bring them all to the court. An action does
not become a class suit merely because it is designated as
such in the pleadings. Whether the suit is or is not a class suit
depends upon the attending facts, and the complaint, or
other pleading initiating the class action should allege the
existence of the necessary facts, to wit, the existence of a
subject matter of common interest, and the existence of a
class and the number of persons in the alleged class,3 in
order that the court might be enabled to determine whether
the members of the class are so numerous as to make it
impracticable to bring them all before the court, to contrast
the number appearing on the record with the number in the
class and to determine whether claimants on

________________

3 The existence of persons similarly situated must be a
reality, not a possibility. A likelihood that there are other
persons similarly situated is not enough, Barron and Holtsoff,
Federal Practice and Procedure, Vol. 2, page 156.

571

VOL. 58, AUGUST 26, 1974

571


record adequately represent the class and the subject matter
of general or common interest.4

The complaint in the instant case explicitly declared that the
plaintiffs-appellants instituted the present class suit under
Section 12, Rule 3, of the Rules of Court in behalf of CMI
subscribing stockholders"5 but did not state the number of
said CMI subscribing stockholders so that the trial court could
not infer, much less make sure as explicitly required by the
statutory provision, that the parties actually before it were
sufficiently numerous and representative in order that all
interests concerned might be fully protected, and that it was
impracticable to bring such a large number of parties before
the court.

The statute also requires, as a prerequisite to a class suit, that
the subject-matter of the controversy be of common or
general interest to numerous persons. Although it has been
remarked that the innocent common or general interest
requirement is not very helpful in determining whether or
not the suit is proper",6 the decided cases in our jurisdiction
have more incisively certified the matter when there is such
common or general interest in the subject matter of the
controversy. By the phrase subject matter of the action is
the def endant."7

This Court has ruled that a class suit did not lie in an action
for recovery of real property where separate portions of the
same parcel were occupied and claimed individually by
different parties to the exclusion of each other, such that the
different parties had determinable, though undivided
interests, in the property in question.8 It has likewise held
that a class

________________

4 Cf. Moores Federal Practice 2d ed., Vol. III, pages 3423
3424; 4 Federal Rules Service, pages 454455; Johnson, et al.,
vs. Riverland Levee Dist., et al., 117 F 2d 711, 715.

5 Record on Appeal, pages 2, 89.

6 Moores Federal Practice, 2 ed., Vol. III, page 3417.

7 Moran, Comments on the Rules of Court, 1963 ed., Vol. 1,
page 92, citing Pomeroys Code Remedies, 492.

8 Rallonza vs. Evangelista, 15 Phil. 531; Valencia vs. City of
Dumaguete, L-17799, August 31, 1962, 5 SCRA 1096, 1101;
Borlasa vs. Polistico, 47 Phil. 345, 349.

572

572



occupying different portions of a big parcel of land, where
each defendant had an interest only in the particular portion
he was occupying, which portion was completely different
from the other portions individually occupied by other
defendants, for the applicable section 118 of the Code of Civil
Procedure relates to a common and general interest in single
specific things and not to distinct ones.9 In an action for the
recovery of amounts that represented surcharges allegedly
collected by the city from some 30,000 customers of four
movie houses, it was held that a class suit did not lie, as no
one plaintiff had any right to, or any share in the amounts
individually claimed by the others, as each of them was
entitled, if at all, only to the return of what he had personally
paid.10

The interest, subject matter of the class suits in the
abovecited cases, is analogous to the interest claimed by
appellants in the instant case. The interest that appellants,
one of them had any right to, or any interest in, the stock to
which another was entitled. Anent this point, the trial court
correctly remarked:

It appears to be the theory of the plaintiffs borne out by the
prayer, that each subscribing CMI stockholder is entitled to
further subscribe to a certain proportion, depending upon his
stockholding in the CMI, of the P8 million capital stock of the
defendant bank open to subscription (out of the P20 million
authorized capital stock) as well as the unsubscribed portion
of the P8 million stock offering which were left unsubscribed
by those CMI stockholders who for one reason or another
had failed to exercise their subscription rights on or before

_________________

9 Berses vs. Villanueva, 25 Phil. 473. It is to be noted that
Section 12 of Rule 3 is the same as section 12 of former Rule
3, which was taken from section 118 of Act. 190. Moran,
Comments on the Rules of Court, 1963 ed., Vol. 1, page 167.

10 Valencia vs. City of Dumaguete, L-17799, August 31, 1962,
5 SCRA 1096,1101.

573

VOL. 58, AUGUST 26, 1974

573


January 15, 1963. Under the plaintiffs theory therefore, each
subscribing CMI stockholder was entitled to subscribe to a
definite number of shares both in the original offering of P8
million and in that part thereof not subscribed on or before
the deadline mentioned, so that one subscribing CMI
stockholder may be entitled to subscribe to one share,
another to 3 shares and a third to 11 shares, and so on,
depending upon the amount and extent of CMI stockholding.
But except for the fact that a question of lawthe proper
interpretation of the waiver provisions of the CMI
stockholders resolution of March 28, 1962is common to
all, each CMI subscribing stock holder has a legal interest in,
and a claim to, only his respective proportion of shares in the
defendant bank, and none with regard to any of the shares to
which another stockholder is entitled. Thus, plaintiff Ismael
Mathay has no legal interest in, or claim to, any share claimed
by any or all of his co-plaintiffs from the defendant
individuals. Hence, no CMI subscribing stockholder or, for
that matter, not any number of CMI stockholders can
maintain a class suit in behalf of others, x x x x x".11

Even if it be assumed, for the sake of argument, that the
appellants and the CMI stockholders suffered wrongs that
had been committed by similar means and even pursuant to a
single plan of the Interim Board of Organizers of the Bank, the
wrong suffered by each of them would constitute a wrong
separate from those suffered by the other stockholders, and
those wrongs alone would not create that common or
general interest in the subject matter of the controversy as
would entitle any one of them to bring a class suit on behalf
of the others. Anent this point it has been said that:

Separate wrongs to separate persons, although committed
by similar means and even pursuant to a single plan, do not
alone create acommon or general interest in those who are
wronged so as to entitle them to maintain a representative
action."12

Appellants, however, insisted, citing American authorities,13

________________

11 Record on Appeal, pages 284285.

12 Society Milion Athena, Inc., et al. vs. National Bank of
Greece, et al., 22 N.E. 2d 374.

13 Prof. Sutherlands address before the Cincinati Bar
Association regarding the new Federal Rules, December 10,
1938; 1 Cincinnati Law Review, page 1; Clark vs. Chase
National Bank, 6 Fed. Rule Service 256, cited in Francisco, The
Revised Rules of Court, 1973, Vol. I. pages 294, 295.

574

574



that a class suit might be brought even if the interests of
plaintiffs-appellants might be several as long as there was a
common question of law or fact affecting them and a
common relief was sought. We have no conflict with the
authorities cited; those were rulings under the Federal Rules
of Civil Procedure, pursuant to Rule 23 of which, there were
three types of class suits, namely: the true, the hybrid, and
the spurious, and these three had only one feature in
common, that is, in each the persons constituting the class
must be so numerous as to make it impracticable to bring
them all before the court. The authorities cited by plaintiffs-
appellants refer to the spurious class action (Rule 23 (a) (3)
which involves a right sought to be enforced, which is several,
and there is a common question of law or fact affecting the
several rights and a common relief is sought.14 The spurious
class action is merely a permissive joinder device; between
the members of the class there is no jural relationship, and
the right or liability of each is distinct, the class being formed
solely by the presence of a common question of law or
fact.15 This permissive joinder is provided in Section 6 of Rule
3, of our Rules of Court. Such joinder is not and cannot be
regarded as a class suit, which this action purported and was
intended to be as per averment of the complaint.

It may be granted that the claims of all the appellants
involved the same question of law. But this alone, as said
above, did not constitute the common interest over the
subject matter indispensable in a class suit. The right to
is personal to each stockholder,16 and while a stockholder
may maintain a suit to compel the issuance of his
proportionate share of stock, it has been ruled, nevertheless,
that he may not maintain a representative action on behalf of
other stockholders who are

_________________

14 See Barron and Holtsoff, Federal Practice and Procedure
Vol 2, page 139.

15 Moores Federal Practice, Vol. 3, pages 34423443.

16 11 Fletchers Cyclopedia of the Law of Private Corporation
1932, page 231.

575

VOL. 58, AUGUST 26, 1974

575


similarly situated.17 By analogy, the right of each of the
appellants to subscribe to the waived stocks was personal,
and no one of them could maintain on behalf of others
similarly situated a representative suit.

Straining to make it appear that appellants and the CMI
subscribing stockholders had a common or general interest in
the subject matter of the suit, appellants stressed in their
brief that one of the reliefs sought in the instant action was
to divest defendant individuals and the persons or entities
chosen by them of control of the defendant bank."18 This
relief allegedly sought by appellants did not, however, appear
either in the text or in the prayer of the complaint.

Appellants, furthermore, insisted that insufficiency of number
in a class suit was not a ground for dismissal of one action.
This Court has, however, said that where it appeared that no
sufficient representative parties had been joined, the
dismissal by the trial court of the action, despite the
contention by plaintiffs that it was a class suit, was correct.19
Moreover. insofar as the instant case is concerned, even if it
be granted for the sake of argument, that the suit could not
be dismissed on that ground, it could have been dismissed,
nevertheless, on the ground of lack of cause of action which
will be presently discussed.

2. Appellants supported their assigned error that the court
erred in holding that the complaint stated no valid cause of
action, by claiming that paragraph 15 together with the other
allegations of the complaint to the effect that defendants-
appellees had unlawfully acquired stockholdings in the capital
stock of defendant-appellee Bank in excess of what they were
lawfully entitled to, in violation of law and in breach of trust
and the contractual agreement, constituted a valid and
sufficient cause of action;20 and that only the allegations in
the complaint should have been considered by the trial court
in

_________________

17 Dousman v. Wisconsin & L.S. Min. & Smelting Co., 40 Wis.
418 in 12 L.R.A., New Series, 1908, page 972.

18 Brief for the Plaintiffs-Appellants and Movants-
Intervenors-Appellants, page 25.

19 Niembra, et al., vs. Director of Lands, L-20084, July 17,
1964, 11 SCRA 525, 528.

Appellants, pages 3234.

576

576



determining whether the complaint stated a cause of
action or not.

Defendants-appellees, on the contrary, maintained that the
allegations of the complaint should not be the only ones to be
considered in determining whether there is a cause of action;
that even if the ultimate facts alleged in the first cause of
action of the complaint be the only ones considered, the
complaint would still f ail to state a valid cause of action on
the following grounds: first, there was no allegation regarding
appellants qualification to subscribe to the capital stock of
the appellee Bank, for under the CMI stockholders resolution
of March 28, 1962, only those qualified under the law were
entitled to subscribe, and under the regulations of the
Monetary Board, only natural-born Filipino citizens could be
stockholders of a banking corporation organized under the
laws of the Philippines, and nowhere did the complaint allege
that plaintiffs-appellants were natural born Filipino
citizens.21 Second, appellants averment in paragraph 8 that
they subscribed, and their averment in paragraph 15 that
they were denied the right to subscribe x x x to the capital
stock of the defendant Bank, were inconsistent, and hence
neutralized each other, thereby leaving in shambles the first
cause of action. Third, there was no allegation that appellants
had not yet received or had not been issued the
corresponding certificates of stock covering the shares they
had subscribed and paid for. Fourth, the allegations failed to
show the existence of the supposed trust; and fifth, the
complaint failed to allege that plaintiffs-appellants had paid
or offered to pay for the shares allegedly pertaining to
them.22

Let us premise the legal principles governing the motion to
dismiss on the ground of lack of cause of action.

Section 1, Rule 16 of the Rules of Court, providing in part
that:

Within the time for pleading a motion to dismiss may be
made on any of the following grounds: x x x

"(g) That the complaint states no cause of action. x x x

explicitly requires that the sufficiency of the complaint must
be tested exclusively on the basis of the complaint itself and
no

________________



577

VOL. 58, AUGUST 26, 1974

577


other should be considered when the ground for motion to
dismiss is that the complaint states no cause of action.
Pursuant thereto this Court has ruled that:

As a rule the sufficiency of the complaint, when challenged
in a motion to dismiss, must be determined exclusively on the
basis of the facts alleged therein."23

It has been likewise held that a motion to dismiss based on
lack of cause of action hypothetically admits the truth of the
allegations of fact made in the complaint.24 It is to be noted
that only the facts well pleaded in the complaint, and
likewise, any inferences fairly deducible therefrom, are
deemed admitted by a motion to dismiss. Neither allegations
of conclusions25 nor allegations of facts the falsity of which
the court may take judicial notice are deemed admitted.26
The question, therefore, submitted to the Court in a motion
to dismiss based on lack of cause of action is not whether the
facts alleged in the complaint are true, for these are
hypothetically admitted, but whether the facts alleged are
sufficient to constitute a cause of action such that the court
may render a valid judgment upon the facts alleged therein.

A cause of action is an act or omission of one party in
violation of the legal right of the other. Its essential elements
are, namely: (1) the existence of a legal right in the plaintiff,
(2) a correlative legal duty in the defendant, and (3) an act or
omission of the defendant in violation of plaintiff s right with
consequential injury or damage to the plaintiff for which he
may maintain an action for the recovery of damages or other

_______________

23 Uy Chao vs. De la Rama Steamship Co., Inc. L-14495,
September 29, 1962, 6 SCRA 69, 72. See also De Jesus, et al.
vs. Belarmino, et al., 95 Phil. 365, 371; Dalandan, et al. vs.
Julio, et al., L-19101, February 29, 1964, 10 SCRA 400;
Remitere, et al. vs. Montinola Vda. de Yulo, et al., L-19751,
February 28, 1966, 16 SCRA 250, 254; Acua vs. Batac
Producers Cooperative Marketing Association, Inc., et al., L-
20338, June 30, 1967, 20 SCRA 526, 531.

24 Alquigue vs. De Leon, L-15059, March 30, 1963, 7 SCRA
513, 515; Salazar, et al. vs. Ortizano, L-20480, 16 SCRA 662,
665; Acua vs. Batac Producers Cooperative Marketing
Association, Inc., et al., L-20338, June 30, 1967, 20 SCRA 526,
531.

25 Dalandan vs. Julio, L-19101, February 29, 1964, 10 SCRA
400, 410.

26 71 CJS pages 906912.

578

578



appropriate relief .27 On the other hand, Section 3 of Rule 6
of the Rules of Court provides that the complaint must state
the ultimate facts constituting the plaintiffs cause of action.
Hence, where the complaint states ultimate facts that
constitute the three essential elements of a cause of action,
the complaint states a cause of action;28 otherwise, the
complaint must succumb to a motion to dismiss on that
ground.

The legal principles having been premised, let us now analyze
and discuss appellants various causes of action.

Appellants first cause of action, pursuant to what has been
premised above, should.have consisted of: (1) the right of
appellants as well as of the other CMI stockholders to
subscribe, in proportion to their equities established under
their respective Pre-Incorporation Agreements to
Subscribe, to that portion of the capital stock which was
unsubscribed because of failure of the CMI stockholders to
exercise their right to subscribe thereto; (2) the legal duty of
the appellees to have said portion of the capital stock to be
subscribed by appellants and other CMI stockholders; and (3)
the violation or breach of said right of appellants and other
CMI stockholders by the appellees.

Did the complaint state the important and substantial facts
directly forming the basis of the primary right claimed by
plaintiffs? Before proceeding to elucidate this question, it
should be noted that a bare allegation that one is entitled to
specifically the facts upon which such conclusion is
founded.29 The complaint alleged that appellants were
stockholders of the CMI; that as such stockholders, they were
entitled, by virtue of the resolution of March 28, 1962, to
subscribe to the capital stock of the proposed Consolidated
Bank and Turst Co., at par value to the same extent and in the
same amount as said stockholders respective shareholdings
in the CMI as shown in the latters stock book as of January
15, 1963, the right to

________________

27 Ma-ao Sugar Central Co., Inc. vs. Barrios, et al., 79 Phil.
666, 667; Ramitere, et al. vs. Montinola Vda. de Yulo, et al. L-
1975l, February 28, 1966, 16 SCRA 251, 255.

28 Community Investment and Finance Corp. vs. Garcia, 88
Phil. 215, 218.


subscribe to be exercised until January 15, 1963, provided
said stockholders of the CMI were qualif ied under the law to
become stockholders of the proposed Bank;30 that
subscription.31

These alleged specific facts did not even show that appellants
were entitled to subscribe to the capital stock of the
proposed Bank, for said right depended on a condition

Assuming arguendo that appellants were qualified to become
stockholders of the Bank, they could subscribe, pursuant to
the explicit terms of the resolution of March 28, 1962, to the
same extent and in the same amount as said stockholders
respective shareholdings in the CMI' as of January 15,
1963.32 This was the measure of the right they could claim to
subscribe to waived stocks. Appellants did not even aver that
the stocks waived to the subscription of which they claimed
the right to subscribe, were comprised in the extent and
amount of their respective shareholdings in the CMI. It is not
surprising that they did not make such an averment for they
did not even allege the amount of shares of stock to which
they claimed they were entitled to subscribe. The failure of
the complaint to plead specifically the above facts rendered it
impossible for the court to conclude by natural reasoning that
the appellants and other CMI stockholders had a right to
subscribe to the waived shares of stock, and made any
allegation to that effect a conclusion of the pleader, not an
ultimate fact, in accordance with the test suggested by the
California Supreme Court, to wit:

If from the facts in evidence, the result can be reached by
that process of natural reasoning adopted in the investigation
of truth, it becomes an ultimate fact, to be found as such. If,
on the other hand,

________________



resort must be had to the artifical processes of the law, in
order to reach a final determination, the result is a conclusion
of law."33

Let us now pass to the second and third elements that would
have constituted the first cause of action. Did the complaint
allege as ultimate facts the legal duty of defendants-appellees
to have a portion of the capital stock subscribed to by
appellants? Did the complaint allege as ultimate facts that
defendants-appellees had violated appellants right?

Even if it be assumed arguendo that defendants-appellees
had the duty to have the waived stocks subscribed to by the
CMI stockholders, this duty was not owed to all the CMI
stockholders, but only to such CMI stockholders as were
qualified to become stockholders of the proposed Bank.
Inasmuch as it has been shown that the complaint did not
contain ultimate facts to show that plaintiffs-appellants were
qualified to become stockholders of the Bank, it follows that
the complaint did not show that defendants-appellees were
under duty to have plaintiffs-appellants subscribe to the
stocks of the proposed Bank. It inevitably follows also that
the complaint did not contain ultimate facts to show that the
right of the plaintiffs-appellants to subscribe to the shares of
the proposed Bank had been violated by defendants-
appellees. How could a non-existent right be violated?

Let us continue the discussion further. The complaint alleged
that by virtue of the resolution of March 28,1962, the
President and Members of the Board of Directors of the CMI
would be constituted as a Board of Organizers to undertake
and carry out the organization of the Bank;34 that the Board
of Organizers was constituted and proceeded with the
establishment of the Bank;35 that the persons composing the
Board of Organizers were the individuals-defendants-
appellees;36 that the Board of Organizers sent our circular
letters with Pre-Incorporation Agreement to Subscribe
forms37 which specified, among others, such subscription
right shall be deemed ipso facto waived and released in favor
of the

________________

Board of Organizers of the defendant Bank and their
assignees";38 that in the Articles of Incorporation prepared
by the Board of Organizers, the individuals-defendants-
appellees alone appeared to have subscribed to the 50,000
shares;39 and that individuals-defendants-appellees again
subscribed to all the additional 30,000 shares.40 From these
facts, appellants concluded that they were denied their right
to subscribe in proportion to their equities;41 that the
individuals-defendants-appellees unlawfully acquired
entitled in violation of law and in breach of trust and of
contractual agreement;42 and that, because of matters
already alleged, the individuals-defendants-appellees hold
their shares in the defendant bank in trust for plaintiffs."43

The allegeation in the complaint that the individuals-
that was a conclusion of law. Express averments that a party
was the beneficial owner of certain property; x x x that
property or money was received or held in trust, or for the
use of another; that particular funds were trust funds; that a
particular transaction created an irrevocable trust; that a
person held property as constructive trustee; that on the
transfer of certain property a trust resulted have been
considered as mere conclusions of law.44 The facts alleged in
the complaint did not, by logical reasoning, necessarily lead
to the conclusion that defendants-appellees were trustees in
favor of appellants of the shares of stock waived by the CMI
stockholders who failed to exercise their right to subscribe. In
this connection, it has been likewise said that:

The general rule is that an allegation of duty in terms
unaccompanied by a statement of the facts showing the
existence of

________________

38 Paragraph 7(b) of Complaint; Record on Appeal; page 8.

39 Paragraph 9 of Complaint; Record on Appeal, page 9.

40 Paragraphs 11 and 12 of Complaint; Record on Appeal,
page 11.

41 Paragraph 15 of Complaint.



44 47 C.J.S., page 78.

582

582



the duty, is a mere conclusion of law, unless there is a
relation set forth from which the law raises the duty."45

In like manner, the allegation that individuals-defendants-
appellees held said shares in trust was no more than an
interpretation by appellants of the effect of the waiver clause
of the Resolution and as such it was again a mere conclusion
of law. It has been said that:

The following are also conclusions of law: x x x an allegation
characterizing an instrument or purporting to interpret it and
state its effects, x x x"46

Allegations in petition in the nature of conclusions about the
meaning of contract, inconsistent with stated terms of the
contract, cannot be considered."47


Of course, the allegation that there was a violation of trust
duty was plainly a conclusion of law, for a mere allegation
that it was the duty of a party to do this or that, or that he
was guilty of a breach of duty, is a statement of a conclusion,
not of fact."48

An averment x x x that an act was unlawful or wrongful is
a mere legal conclusion or opinion of the pleader."49

Moreover, plaintiffs-appellants did not state in the complaint
the amount of subscription the individual defendants-
appellees were entitled to; hence there was no basis for the
court to determine what amount subscribed to by them was
excessive.

From what has been said, it is clear that the ultimate facts
stated under the first cause of action are not sufficient to
constitute a cause of action.

The further allegations in the second cause of action that the

________________

45 71 C.J.S., pages 4950.

46 41 Am. Jur., page 304.

47 71 C.J.S., page 41, citing DOench v. Gillioz, 139 SW 2d 921,
346 Mo. 179.


stated in the first and second causes of action. It has been
held in this connection that:

An averment that x x x an act was unlawful or wrongful is
a mere legal conclusion or opinion of the pleader. The same is
true of allegations that an instrument was illegally certified
or x x x that an act was arbitrarily done x x x"50

A pleader states a mere conclusion when he makes any of
the following allegations: that a party was incapacitated to
enter into a contract or convey property x x x"51

The third, fourth, fifth and sixth causes of action depended on
the first cause of action, which, as has been shown, did not
state ultimate facts sufficient to constitute a cause of action.
It stands to reason, therefore, that said causes of action
would also be fatally defective.

It having been shown that the complaint failed to state
ultimate facts to constitute a cause of action, it becomes
unnecessary to discuss the other assignments of errors.

WHEREFORE, the instant appeal is dismissed, and the order
dated March 21, 1964 of the Court of First Instance of Manila
dismissing the complaint in Civil Case No. 55810 is affirmed,
with costs in this instance against appellants.

It is so ordered.

Fernando, Barredo, Fernandez and Aquino, JJ., concur.

Antonio, J., took no part.

Appeal dismissed, order affirmed.

Notes.The rules of pleading limit the statement of the
cause of action only to such operative facts as give rise to the
right of action of the plaintiff to obtain relief against the
wrongdoer. The details of probative matter or particulars of
evidence, statements of law, inferences and arguments need
not be stated (De los Santos vs. Sheriff of Rizal, 64 Phil. 197;
Ortiz vs. Garcia, 15 Phil. 192; La Insular vs. Jao Oge, 42 Phil.
366; Valmilero vs. Kong Chang Seng, 33 Phil. 84; Laguna
Coconut Oil vs. Bank of the Philippine Islands, 44 Phil. 618).

________________

50 41 Am. Jur., page 303.

51 41 Am. Jur., page 304.

584

584



Neither is it proper to allege in a pleading inferences of facts
from facts which are not stated in the complaint for these are
not the ultimate facts required by law to be pleaded. (Alzua
vs. Johnson, 21 Phil. 308; Tec Bi & Co. vs. Chartered Bank of
India, 41 Phil. 596).

General allegations that a contract is valid or lawful, or is just
or reasonable are mere conclusions of law. Likewise mere
conclusions of law are allegations that a contract is void,
voidable, invalid, illegal, ultra vires, or against public policy,
without stating facts showing its invalidity. (See Remitere vs.
Vda. de Yulo, 16 SCRA 251)

[Mathay vs. Consolidated Bank and Trust Company, 58 SCRA
559(1974)]

No. L-23136. August 26, 1974.*
ISMAEL MATHAY, JOSEFINA MATHAY, DIOGRACIAS T. REYES
and S. ADOR DIONISIO, plaintiffs-appellants, vs. THE
CONSOLIDATED BANK AND TRUST COMPANY, JOSE MARINO
OLONDRIZ, WILFRIDO C. TECSON, SIMON R. PATERNO,
FERMIN Z. CARAM, JR., ANTONIO P. MADRIGAL, JOSE P.
MADRIGAL, CLAUDIO TEEHANKEE, and ALFONSO JUAN
OLONDRIZ, defendants-appellees. CIPRIANO AZADA, MARIA
CRISTINA OLONDRIZ PERTIERRA jointly with her husband
ARTURO PERTIERRA, and MARIA DEL PUY OLONDRIZ DE
STEVENS, movants-intervenors-appellants.

Civil procedure; Class suit; Requisites of a class suit.The
necessary elements for the maintenance of a class suit are
accordingly: (1) that the subject matter of the controversy be
one of common or general interest to many persons, and (2)
that such persons be so numerous as to make it impracticable
to bring them all to the court.

Same; Same; Existence of a class suit depends upon the
attending facts, 11 ot upon the designation in the
complaint.An action does not become a class suit merely
because it is designated as such in the pleadings. Whether
the suit is or is not a class suit depends upon the attending
facts, and the complaint, or other pleading initiating the class
action should allege the existence of the necessary facts, to
wit, the existence of a subject matter of common interest,
and the existence of a class and the number of persons in the
alleged class, in order that the court might be enabled to
determine whether the members of the class are so
numerous as to make it impracticable to bring them all
before the court, to contrast the number appearing on the
record with the number in the class and to determine
whether claimants on record adequately represent the class
and the subject matter of general or common interest.

Same; Same; Meaning of phrase subject matter of the
action".By the phrase subject matter of the action is
the defendant.

________________

* SECOND DIVISION.

560

560



Same; Same; Class suit will not prosper where brought by
stockholders who have determinable, though undivided
interest, in the property in question.This Court has ruled
that a class suit did not lie in an action for recovery of real
property where separate portions of the same parcel were
occupied and claimed individually by different parties to the
exclusion of each other, such that the different parties had
determinable, though undivided interests, in the property in
question. x x x The interest, subject matter of the class suits
in the above-cited cases, is analogous to the interest claimed
by appellants in the instant case. The interest that appellants,
one had any right to, or any interest in, the stock to which
another was entitled.

Same; Same; Wrongs committed to each individual
stockholder would not create community of interest in
subject matter of controversy.Even if it be assumed, for the
sake of argument, that the appellants and the CMI
stockholders suffered wrongs that had been committed by
similar means and even pursuant to a single plan of the
Interim Board of Organizers of the Bank, the wrong suffered
by each of them would constitute a wrong separate from
those suffered by the other stockholders, and those wrongs
alone would not create that common or general interest in
the subject matter of the controversy as would entitle any
one of them to bring a class suit on behalf of the others.

Same; Same; So-called spurious class action is merely a
permissive joinder device and cannot be regarded as a class
suit.The .spurious class action is merely a permissive
joinder device; between the members of the class there is not
jural relationship, and the right or liability of each is distinct,
the class being formed solely by the presence of a common
question of law or fact. This permissive joinder is provided in
Section 6 of Rule 3, of our Rules of Court. Such joinder is not
and cannot be regarded as a class suit, which this action
purported and was intended to be as per averment of the
complaint.

Same; Same; Existence of common question of law would not
suffice to maintain a class action.It may be granted that the
claims of all the appellants involved the same question of law.
But this alone,

561

VOL. 58, AUGUST 26, 1974

561


as said above, did not constitute the common interest over
the subject matter indispensable in a class suit. The right to
is personal to each stockholder, and while a stockholder may
maintain a suit to compel the issuance of his proportionate
share of stock, it has been ruled, nevertheless, that he may
not maintain a representative action on behalf of other
stockholders who are similarly situated.

Same; Same; In a class suit there must be a showing that
sufficient representative parties had been joined.Where it
appeared that no sufficient representative parties had been
joined, the dismissal by the trial court of the action, despite
the contention by plaintiffs that it was a class suit, was
correct.

Same; Motion to Dismiss; When ground of motion to dismiss
is lack of cause of action only allegations of the complaint
must be considered.As a rule the sufficiency of the
complaint, when challenged in a motion to dismiss, must be
determined exclusively on the basis of the facts alleged
therein.

Same; Same; A motion to dismiss based on lack of cause of
action hypothetically admits the truth of factual allegations in
the complaint.It is to be noted that only the facts well
pleaded in the complaint, and likewise, any inferences fairly
deducible therefrom, are deemed admitted by a motion to
dismiss. Neither allegations of conclusions nor allegations of
facts the falsity of which the court may take judicial notice
are deemed admitted.

Same; Same; Test for determining sufficiency of cause of
action in motion to dismiss.The question, therefore,
submitted to the Court in a motion to dismiss based on lack
of cause of action is not whether the facts alleged in the
complaint are true, for they are hypothetically admitted, but
whether the facts alleged are sufficient to constitute a cause
of action such that the court may render a valid judgment
upon the facts alleged therein.

Same; Essential elements of a cause of action.A cause of
action is an act or omission of one party in violation of the
legal right of the other. Its essential elements are, namely: (1)
the existence of a legal right in the plaintiff, (2) a correlative
legal duty in the defendant, and (3) an act or omission of the
defendant in violation of plaintiff s right with consequential
injury or damage to the plaintiff for which he may

562

562



maintain an action for the recovery of damages or other
appropriate relief.

Same; Allegation that one is entitled to something is a
conclusion of law.A bare allegation that one is entitled to
specifically the facts upon which conclusion is founded. The
complaint alleged that appellants were stockholders of the
CMI; that as such stockholders, they were entitled, by virtue
of the resolution of March 28, 1962, to subscribed to the
capital stock of the proposed Consolidated Bank & Trust Co.,
at par value to the same extent and in the same amount as
said stockholders respective shareholdings in the CMI as
shown in the latters stock book as of January 15, 1963, the
right to subscribe to be exercised until January 15, 1963,
provided said stockholders of the CMI were qualified under
the law to become stockholders of the proposed Bank; that
subscription. These alleged specific facts did not even show
that appellants were entitled to subscribe to the capital stock
of the proposed Bank, for said right depended on a condition

Same; Trusts; Question of law and facts; Allegation that
defendants held shares as trustees for plaintiffs is a
condusion of law.The allegation in the complaint that the
that was a conclusion of law.

Same; Question of law and facts; Allegation that one acquired
stocks in breach of law, trust or agreement is one of law.

Same; Same; Allegation that an act was unlawful or wrongful
is a

563

VOL. 58, AUGUST 26, 1974

563


mere conclusion of law.The further allegations that the
stated in the first and second causes of action.

APPEAL from an order of the Court of First Instance of Manila.
Arca, J.


Deogracias T. Reyes & Associates for appellants.

Taada, Teehankee & Carreon for appellees.

Paterno Pedrea for appellee Fermin Z. Caram, Jr.

ZALDIVAR, J.:

In this appeal, appellants-plaintiffs and movants-intervenors;
seek the reversal of the order dated March 21,1964 of the
Court of First Instance of Manila dismissing the complaint
together with all other pending incidents in Civil Case No.
55810.

The complaint in this case, filed on December 24, 1963 as a
class suit, under Section 12, Rule 3, of the Rules of Court,
contained six causes of action. Under the first cause of action,
plaintiffs-appellants alleged that they were, on or before
March 28, 1962, stockholders in the Consolidated Mines, Inc.
(hereinafter referred to as CMI), a corporation duly organized
and existing under Philippine laws; that the stockholders of
the CMI, including the plaintiffs-appellants, passed, at a
regular stockholders meeting, a Resolution providing: (a) that
the Consolidated Bank & Trust Co. (hereinafter referred to as
Bank) be organized with an authorized capital of
P20,000,000.00; (b) that the organization be undertaken by a
Board of Organizers composed of the President and Members
of the Board of Directors of the CMI; (c) that all stockholders
of the CMI, who were legally qualified to become
stockholders, would be entitled to subscribe to the capital
stock of the proposed Bank at par value to the same extent
and in the same amount as said stockholders respective
shareholdings in the CMI," as shown in its stock books on a
date to be fixed by the Board of Directors [which date was
subsequently fixed as January 15, 1963], provided that the
right to subscribe should

564

564



be exercised within thirty days from the date so fixed, and
that if such right to subscription be not so exercised then the
stockholders concerned shall be deemed to have thereby
waived and released ipso-facto their right to such
subscription in favor of the Interim Board of Organizers of the
Defendant Bank or their assignees; and (d) that the Board of
Directors of the CMI be authorized to declare a special
dividend in an amount it would fix, which the subscribing
stockholders might authorize to be paid directly to the
treasurer of the proposed Bank in payment of the
subscriptions; that the President and members of the Board
of Directors of the CMI, who are the individuals-defendants-
appellees in the instant case, constituted themselves as the
Interim Board of Organizers; that said Board sent out, on or
about November 20, 1962, to the CMI stockholders, including
the plaintiffs-appellants, circular letters with Pre-
Incorporation Agreement to Subscribe forms that provided
that the payment of the subscription should be made in cash
from time to time or by the application of the special
dividend declared by the CMI, and that the subscription must
be made within the period from December 4, 1962 to January
15, 1963, otherwise such subscription right shall be deemed
to have been thereby ipso facto waived and released in favor
of the Board of Organizers of the Defendant Bank and their
assignees; that the plaintiffs-appellants accomplished and
filed their respective Pre-Incorporation Agreement to
Subscribe and paid in full their subscriptions; that plaintiffs-
appellants and the other CMI subscribing stockholders in
whose behalf the action was brought also subscribed to a
very substantial amount of shares; that on June 25, 1963, the
Board of Organizers caused the execution of the Articles or
Incorporation of the proposed Bank indicating an original
subscription of 50,000 shares worth P5,000,000 subscribed
and paid only by six of the individuals-defendants-appellees,
namely, Antonio P. Madrigal, Jose P. Madrigal Simon R.
Paterno, Fermin Z. Caram, Jr., Claudio Teehankee, and
Wilfredo C. Tecson, thereby excluding the plaintiffs-
appellants and the other CMI subscribing stockholders who
had already subscribed; that the execution of said Articles of
Incorporation was in violation of law and in breach of trust
and contractual agreement as a means to gain control of
Defendant Bank by Defendant Individuals and persons or
entities chosen by them and for their personal profit or gain
in

565

VOL. 58, AUGUST 26, 1974

565


disregard of the rights of Plaintiffs and other CMI Subscribing
Stockholders; that the paid-in capital stock was raised, as
required by the Monetary Board, to P8,000,000.00, and
individuals-defendants-appellees caused to be issued from
the unissued shares 30,000 shares amounting to
P3,000,000.00, all of which were again subscribed and paid
for entirely by individuals-defendants-appellees or entities
chosen by them to the exclusion of Plaintiffs and other CMI
subscribing stockholders in violation of law and breach of
trust and of the contractual agreement embodied in the
contractual agreement of March 28, 1962"; that the Articles
were filed with the Securities and Exchange Commission
which issued the Certificate of Incorporation on June 25,
1963; that as of the date of the Complaint, the plaintiffs-
appellants and other CMI subscribing stockholders had been
denied, through the unlawful acts and manipulation of the
defendant Bank and Individuals-defendants-appellees, the
right to subscribe at par value, in proportion to their equities
established under their respective Pre-Incorporation
Agreements to Subscribe to the capital stock, i.e., (a) to the
original issue of 50,000 shares and/or (b) to the additional
issue of 30,000 shares, and/or (c) in that portion of said
original or additional issue which was unsubscribed; that the
individuals-defendants-appellees and the persons chosen by
them had unlawfully acquired stockholdings in the
defendant-appellee Bank in excess of what they were lawfully
entitled and held such shares in trust for the plaintiffs-
appellants and the other CMI stockholders; that it would have
been vain and futile to resort to intracorporate remedies
under the facts and circumstances alleged above. As relief on
the first cause of action, plaintiffs-appellants prayed that the
subscriptions and shareholdings acquired by the individuals-
defendants-appellees and the persons chosen by them, to the
extent that plaintiffs-appellants and the other CMI
stockholders had been deprived of their right to subscribe, be
annulled and transferred to plaintiffs-appellants and other
CMI subscribing stockholders.

Besides reproducing all the above allegations in the other
causes of action, plaintiffs-appellants further alleged under
the second cause of action that on or about August 28, 1963,
defendants-appellees Antonio P. Madrigal, Jose P. Madrigal;
Fermin Z. Caram, Jr., and Wilfredo C. Tecson falsely certified
to the calling of a special stockholders meeting allegedly

566

566



pursuant to due notice and call of Defendant Bank although
plaintiffs-appellants and other CMI stockholders were not
notified thereof, and amended the Articles of Incorporation
increasing the number of Directors from 6 to 7, and had the
illegally created position of Director filled up by defendant-
appellee Alfonso Juan Olondriz, who was not competent or
qualified to hold such position. In the third cause of action,
plaintiffs-appellants claimed actual damages in an amount
equivalent to the difference between the par value of the
shares they were entitled, but failed, to acquire and the
higher market value of the same shares. In the fourth cause
of action, plaintiffs-appellants claimed moral damages; in the
fifth, exemplary damages; and in the sixth, attorneys fees.

In his manifestation to the court on January 4, 1964,
Francisco Sevilla, who was one of the original plaintiffs,
withdrew. On January 15, 1964 Cipriano Azada, Maria Cristina
Olondriz Pertierra, Maria del Puy Olondriz de Stevens (who
later withdrew as intervenors-appellants) and Carmen Sievert
de Amoyo, filed a motion to intervene, and to join the
plaintiffs-appellants on record, to which motion defendants-
appellees, except Fermin Z. Caram, Jr., filed, on January 17,
1964 their opposition.

On February 7, 1964 defendants-appellees, except Fermin Z.
Caram, Jr., filed a motion to dismiss on the grounds that (a)
plaintiffs-appellants had no legal standing or capacity to
institute the alleged class suit; (b) that the complaint did not
state a sufficient and valid cause of action; and (c) that
plaintiffs-appellants complaint against the increase of the
number of directors did not likewise state a cause of action.
Plaintiffs-appellants filed their opposition thereto on
February 21,1964.

On March 4,1964 appellants, plaintiffs and intervenors, filed a
verified petition for a writ of preliminary injunction to enjoin
defendants-appellees from considering or ratifying by
resolution, at the meeting of the stockholders of defendant-
appellee Bank to be held the following day, the unlawful
apportionment of the shares of the defendant-appellee Bank
and the illegal amendment to its Articles of Incorporation
increasing the number of Directors, The Court, after hearing,
granted the writ, but subsequently set it aside upon the
appellees filing a counterbond.

Some subscribers to the capital stock of the Bank like

567

VOL. 58, AUGUST 26, 1974

567


Concepcion Zuluaga, et al., and Carlos Moran Sison, et al.,
filed separate manifestations that they were opposing and
disauthorizing the suit of plaintiffs-appellants.

On March 7, 1964 defendants-appellees, except Fermin Z.
Caram, Jr., filed a supplemental ground for their motion to
dismiss, to wit, that the stockholders, except Fermin Z.
Caram, Jr., who abstained, had unanimously, at their regular
annual meeting held on March 5, 1964, ratified and
confirmed all the actuations of the organizers-directors in the
incorporation, organization and establishment of the Bank.

In its order, dated March 21,1964, the trial court granted the
motion to dismiss, holding, among other things, that the class
suit could not be maintained because of the absence of a
showing in the complaint that the plaintiffs-appellants were
sufficiently numerous and representative, and that the
complaint failed to state a cause of action. From said order,
appellants, plaintiffs and intervenors, interposed this appeal
to this Court on questions of law and fact, contending that
the lower court erred as follows:

I. In holding that plaintiffs-appellants could not maintain
the present class suit because of the absence of a showing in
the complaint that they were sufficiently numerous and
representative;
II. In holding that the instant action could not be
maintained as a class suit because plaintiffs-appellants did
not have a common legal interest in the subject matter of the
suit;
III. In dismissing the present class suit on the ground that it
did not meet the requirements of Rule 3, section 12 of the
Rules of Court;
IV. In holding that the complaint was fatally defective in
that it failed to state with particularity that plaintiffs-
appellants had resorted to, and exhausted, intra-corporate
remedies;
V. In resolving defendants-appellees motion on the basis
of f acts not alleged in the complaint;
VI. In holding that plaintiffs-appellants complaint stated no
valid cause of action against defendants-appellees;
VII. In not holding that a trust relationship existed between
the Interim Board of Organizers of defendant-appellee Bank
and the CMI subscribing stockholders and in not holding that
the waiver was in favor of the Board of Trustees for the CMI
subscribing stockholders;

568

568



VIII. In holding that the failure of plaintiffs-appellants to
allege that they had paid or had offered to pay for the shares
allegedly pertaining to them constituted another ground for
dismissal;
IX. In holding that the allegations under the second cause
of action stated no valid cause of action due to a fatal
omission to allege that plaintiffs-appellants were
stockholders of record at the time of the holding of the
special stockholders meeting;
X. In holding that plaintiffs-appellants complaint stated no
cause of action against defendant-appellee Bank; and
XI. In considering the resolution of ratification and
confirmation and in holding that the resolution rendered the
issues in this case moot.

The assigned error revolve around two questions, namely: (1)
whether the instant action could be maintained as a class
suit, and (2) whether the complaint stated a cause of action.
These issues alone will be discussed.

1. Appellants contended in the first three assigned errors
that the trial court erred in holding that the present suit could
not be maintained as a class suit, and in support thereof
argued that the propriety of a class suit should be determined
by the common interest in the subject matter of the
controversy; that in the instant case there existed such
common interest which consisted not only in the recovery of
the shares of which the appellants were unlawfully deprived,
but also in divesting the individuals-defendants-appellees and
the persons or entities chosen by them of control of the
appellee Bank.1; that the complaint showed that besides the
four plaintiffs-appellants of record, and the four movant-
intervenors-appellants there were in the appellee Bank many
other stockholders who, though similarly situated as the
appellants, did not formally include themselves as parties on
record in view of the representative character of the suit;
that the test, in order to determine the legal standing of a
party to institute a class suit, was not one of number, but
whether or not the interest of said party was representative
of the persons in whose behalf the class suit was instituted;
that granting arguendo, that the plaintiffs-appellants were
not sufficiently numerous and representative,

________________

Appellants, page 25.

569

VOL. 58, AUGUST 26, 1974

569


the court should not have dismissed the action, for
insufficiency of number in a class suit was not a ground for a
motion to dismiss, and the court should have treated the suit
as an action under Rule 3, section 6, of the Rules of Court
which permits a joinder of parties.

Defendants-appellees, on the contrary, stressed that the
instant suit was instituted as a class suit and the plaintiffs-
appellants did not sue in their individual capacities for the
protection of their individual interests; that the plaintiffs-
appellants of record could not be considered numerous and
representative, as said plaintiffs-appellants were only four
out of 1,500 stockholders, and owned only 8 shares out of the
80,000 shares of stock of the appellee Bank; that even if to
the four plaintiffs-appellants were added the four movants-
intervenors-appellants the situation would be the same as
two of the intervenors, to wit, Ma. Cristina Olondriz Pertierra
and Ma. del Puy Olondriz de Stevens, could not sue as they
did not have their husbands consent; that it was necessary
that in a class suit the complaint itself should allege facts
showing that the plaintiffs were sufficiently numerous and
representative, and this did not obtain in the instant case, as
the complaint did not even allege how many other CMI
stockholders were similarly situated; that the withdrawal of
one plaintiff, Francisco Sevilla, the subsequent disclaimers of
any interest in the suit made in two separate pleadings by
other CMI stockholders and the disauthorization of their
being represented by plaintiffs-appellants by the 986 (out of
1,663) stockholders who attended the annual meeting of
bank stockholders on March 5, 1964, completely negated
plaintiffs-appellants pretension that they were sufficiently
numerous and representative or that there were many other
stockholders similarly situated whom the plaintiffs-appellants
allegedly represented; that plaintiffs-appellants did not have
that common or general interest required by the Rules of
Court in the subject matter of the suit.2

In their Reply Brief, appellants insisted that non-compliance
with Section 12, Rule 3, not being one enumerated in Rules
16 and 17, was not a ground for dismissal; that the
requirements for a class had been complied with; that the
required common interest existed even if the interests were
several for there was a common question of law or fact and a
common relief was

_________________


570

570



sought; that the common or general interest could be in the
object of the action, in the result of the proceedings, or in the
question involved in the action, as long as there was a
common right based on the same essential facts; that
plaintiffs-appellants adequately represented the aggrieved
group of bank stockholders, inasmuch as appellants interests
were not antagonistic to those of the latter, and appellants
were in the same position as the group in whose behalf the
complaint was filed.

The governing statutory provision for the maintenance of a
class suit is Section 12 of Rule 3 of the Rules of Court, which
reads as follows:

Sec. 12. Class suit.When the subject matter of the
controversy is one of common or general interest to many
persons, and the parties are so numerous that it is
impracticable to bring them all before the court. one or more
may sue or defend for the benefit of all. But in such case the
court shall make sure that the parties actually before it are
sufficiently numerous and representative so that all interests
concerned are fully protected. Any party in interest shall have
a right to intervene in protection of his individual interest.

The necessary elements for the maintenance of a class suit
are accordingly: (1) that the subject matter of the controversy
be one of common or general interest to many persons, and
(2) that such persons be so numerous as to make it
impracticable to bring them all to the court. An action does
not become a class suit merely because it is designated as
such in the pleadings. Whether the suit is or is not a class suit
depends upon the attending facts, and the complaint, or
other pleading initiating the class action should allege the
existence of the necessary facts, to wit, the existence of a
subject matter of common interest, and the existence of a
class and the number of persons in the alleged class,3 in
order that the court might be enabled to determine whether
the members of the class are so numerous as to make it
impracticable to bring them all before the court, to contrast
the number appearing on the record with the number in the
class and to determine whether claimants on

________________

3 The existence of persons similarly situated must be a
reality, not a possibility. A likelihood that there are other
persons similarly situated is not enough, Barron and Holtsoff,
Federal Practice and Procedure, Vol. 2, page 156.

571

VOL. 58, AUGUST 26, 1974

571


record adequately represent the class and the subject matter
of general or common interest.4

The complaint in the instant case explicitly declared that the
plaintiffs-appellants instituted the present class suit under
Section 12, Rule 3, of the Rules of Court in behalf of CMI
subscribing stockholders"5 but did not state the number of
said CMI subscribing stockholders so that the trial court could
not infer, much less make sure as explicitly required by the
statutory provision, that the parties actually before it were
sufficiently numerous and representative in order that all
interests concerned might be fully protected, and that it was
impracticable to bring such a large number of parties before
the court.

The statute also requires, as a prerequisite to a class suit, that
the subject-matter of the controversy be of common or
general interest to numerous persons. Although it has been
remarked that the innocent common or general interest
requirement is not very helpful in determining whether or
not the suit is proper",6 the decided cases in our jurisdiction
have more incisively certified the matter when there is such
common or general interest in the subject matter of the
controversy. By the phrase subject matter of the action is
the def endant."7

This Court has ruled that a class suit did not lie in an action
for recovery of real property where separate portions of the
same parcel were occupied and claimed individually by
different parties to the exclusion of each other, such that the
different parties had determinable, though undivided
interests, in the property in question.8 It has likewise held
that a class

________________

4 Cf. Moores Federal Practice 2d ed., Vol. III, pages 3423
3424; 4 Federal Rules Service, pages 454455; Johnson, et al.,
vs. Riverland Levee Dist., et al., 117 F 2d 711, 715.

5 Record on Appeal, pages 2, 89.

6 Moores Federal Practice, 2 ed., Vol. III, page 3417.

7 Moran, Comments on the Rules of Court, 1963 ed., Vol. 1,
page 92, citing Pomeroys Code Remedies, 492.

8 Rallonza vs. Evangelista, 15 Phil. 531; Valencia vs. City of
Dumaguete, L-17799, August 31, 1962, 5 SCRA 1096, 1101;
Borlasa vs. Polistico, 47 Phil. 345, 349.

572

572



occupying different portions of a big parcel of land, where
each defendant had an interest only in the particular portion
he was occupying, which portion was completely different
from the other portions individually occupied by other
defendants, for the applicable section 118 of the Code of Civil
Procedure relates to a common and general interest in single
specific things and not to distinct ones.9 In an action for the
recovery of amounts that represented surcharges allegedly
collected by the city from some 30,000 customers of four
movie houses, it was held that a class suit did not lie, as no
one plaintiff had any right to, or any share in the amounts
individually claimed by the others, as each of them was
entitled, if at all, only to the return of what he had personally
paid.10

The interest, subject matter of the class suits in the
abovecited cases, is analogous to the interest claimed by
appellants in the instant case. The interest that appellants,
one of them had any right to, or any interest in, the stock to
which another was entitled. Anent this point, the trial court
correctly remarked:

It appears to be the theory of the plaintiffs borne out by the
prayer, that each subscribing CMI stockholder is entitled to
further subscribe to a certain proportion, depending upon his
stockholding in the CMI, of the P8 million capital stock of the
defendant bank open to subscription (out of the P20 million
authorized capital stock) as well as the unsubscribed portion
of the P8 million stock offering which were left unsubscribed
by those CMI stockholders who for one reason or another
had failed to exercise their subscription rights on or before

_________________

9 Berses vs. Villanueva, 25 Phil. 473. It is to be noted that
Section 12 of Rule 3 is the same as section 12 of former Rule
3, which was taken from section 118 of Act. 190. Moran,
Comments on the Rules of Court, 1963 ed., Vol. 1, page 167.

10 Valencia vs. City of Dumaguete, L-17799, August 31, 1962,
5 SCRA 1096,1101.

573

VOL. 58, AUGUST 26, 1974

573


January 15, 1963. Under the plaintiffs theory therefore, each
subscribing CMI stockholder was entitled to subscribe to a
definite number of shares both in the original offering of P8
million and in that part thereof not subscribed on or before
the deadline mentioned, so that one subscribing CMI
stockholder may be entitled to subscribe to one share,
another to 3 shares and a third to 11 shares, and so on,
depending upon the amount and extent of CMI stockholding.
But except for the fact that a question of lawthe proper
interpretation of the waiver provisions of the CMI
stockholders resolution of March 28, 1962is common to
all, each CMI subscribing stock holder has a legal interest in,
and a claim to, only his respective proportion of shares in the
defendant bank, and none with regard to any of the shares to
which another stockholder is entitled. Thus, plaintiff Ismael
Mathay has no legal interest in, or claim to, any share claimed
by any or all of his co-plaintiffs from the defendant
individuals. Hence, no CMI subscribing stockholder or, for
that matter, not any number of CMI stockholders can
maintain a class suit in behalf of others, x x x x x".11

Even if it be assumed, for the sake of argument, that the
appellants and the CMI stockholders suffered wrongs that
had been committed by similar means and even pursuant to a
single plan of the Interim Board of Organizers of the Bank, the
wrong suffered by each of them would constitute a wrong
separate from those suffered by the other stockholders, and
those wrongs alone would not create that common or
general interest in the subject matter of the controversy as
would entitle any one of them to bring a class suit on behalf
of the others. Anent this point it has been said that:

Separate wrongs to separate persons, although committed
by similar means and even pursuant to a single plan, do not
alone create acommon or general interest in those who are
wronged so as to entitle them to maintain a representative
action."12

Appellants, however, insisted, citing American authorities,13

________________

11 Record on Appeal, pages 284285.

12 Society Milion Athena, Inc., et al. vs. National Bank of
Greece, et al., 22 N.E. 2d 374.

13 Prof. Sutherlands address before the Cincinati Bar
Association regarding the new Federal Rules, December 10,
1938; 1 Cincinnati Law Review, page 1; Clark vs. Chase
National Bank, 6 Fed. Rule Service 256, cited in Francisco, The
Revised Rules of Court, 1973, Vol. I. pages 294, 295.

574

574



that a class suit might be brought even if the interests of
plaintiffs-appellants might be several as long as there was a
common question of law or fact affecting them and a
common relief was sought. We have no conflict with the
authorities cited; those were rulings under the Federal Rules
of Civil Procedure, pursuant to Rule 23 of which, there were
three types of class suits, namely: the true, the hybrid, and
the spurious, and these three had only one feature in
common, that is, in each the persons constituting the class
must be so numerous as to make it impracticable to bring
them all before the court. The authorities cited by plaintiffs-
appellants refer to the spurious class action (Rule 23 (a) (3)
which involves a right sought to be enforced, which is several,
and there is a common question of law or fact affecting the
several rights and a common relief is sought.14 The spurious
class action is merely a permissive joinder device; between
the members of the class there is no jural relationship, and
the right or liability of each is distinct, the class being formed
solely by the presence of a common question of law or
fact.15 This permissive joinder is provided in Section 6 of Rule
3, of our Rules of Court. Such joinder is not and cannot be
regarded as a class suit, which this action purported and was
intended to be as per averment of the complaint.

It may be granted that the claims of all the appellants
involved the same question of law. But this alone, as said
above, did not constitute the common interest over the
subject matter indispensable in a class suit. The right to
is personal to each stockholder,16 and while a stockholder
may maintain a suit to compel the issuance of his
proportionate share of stock, it has been ruled, nevertheless,
that he may not maintain a representative action on behalf of
other stockholders who are

_________________

14 See Barron and Holtsoff, Federal Practice and Procedure
Vol 2, page 139.

15 Moores Federal Practice, Vol. 3, pages 34423443.

16 11 Fletchers Cyclopedia of the Law of Private Corporation
1932, page 231.

575

VOL. 58, AUGUST 26, 1974

575


similarly situated.17 By analogy, the right of each of the
appellants to subscribe to the waived stocks was personal,
and no one of them could maintain on behalf of others
similarly situated a representative suit.

Straining to make it appear that appellants and the CMI
subscribing stockholders had a common or general interest in
the subject matter of the suit, appellants stressed in their
brief that one of the reliefs sought in the instant action was
to divest defendant individuals and the persons or entities
chosen by them of control of the defendant bank."18 This
relief allegedly sought by appellants did not, however, appear
either in the text or in the prayer of the complaint.

Appellants, furthermore, insisted that insufficiency of number
in a class suit was not a ground for dismissal of one action.
This Court has, however, said that where it appeared that no
sufficient representative parties had been joined, the
dismissal by the trial court of the action, despite the
contention by plaintiffs that it was a class suit, was correct.19
Moreover. insofar as the instant case is concerned, even if it
be granted for the sake of argument, that the suit could not
be dismissed on that ground, it could have been dismissed,
nevertheless, on the ground of lack of cause of action which
will be presently discussed.

2. Appellants supported their assigned error that the court
erred in holding that the complaint stated no valid cause of
action, by claiming that paragraph 15 together with the other
allegations of the complaint to the effect that defendants-
appellees had unlawfully acquired stockholdings in the capital
stock of defendant-appellee Bank in excess of what they were
lawfully entitled to, in violation of law and in breach of trust
and the contractual agreement, constituted a valid and
sufficient cause of action;20 and that only the allegations in
the complaint should have been considered by the trial court
in

_________________

17 Dousman v. Wisconsin & L.S. Min. & Smelting Co., 40 Wis.
418 in 12 L.R.A., New Series, 1908, page 972.

18 Brief for the Plaintiffs-Appellants and Movants-
Intervenors-Appellants, page 25.

19 Niembra, et al., vs. Director of Lands, L-20084, July 17,
1964, 11 SCRA 525, 528.

Appellants, pages 3234.

576

576



determining whether the complaint stated a cause of
action or not.

Defendants-appellees, on the contrary, maintained that the
allegations of the complaint should not be the only ones to be
considered in determining whether there is a cause of action;
that even if the ultimate facts alleged in the first cause of
action of the complaint be the only ones considered, the
complaint would still f ail to state a valid cause of action on
the following grounds: first, there was no allegation regarding
appellants qualification to subscribe to the capital stock of
the appellee Bank, for under the CMI stockholders resolution
of March 28, 1962, only those qualified under the law were
entitled to subscribe, and under the regulations of the
Monetary Board, only natural-born Filipino citizens could be
stockholders of a banking corporation organized under the
laws of the Philippines, and nowhere did the complaint allege
that plaintiffs-appellants were natural born Filipino
citizens.21 Second, appellants averment in paragraph 8 that
they subscribed, and their averment in paragraph 15 that
they were denied the right to subscribe x x x to the capital
stock of the defendant Bank, were inconsistent, and hence
neutralized each other, thereby leaving in shambles the first
cause of action. Third, there was no allegation that appellants
had not yet received or had not been issued the
corresponding certificates of stock covering the shares they
had subscribed and paid for. Fourth, the allegations failed to
show the existence of the supposed trust; and fifth, the
complaint failed to allege that plaintiffs-appellants had paid
or offered to pay for the shares allegedly pertaining to
them.22

Let us premise the legal principles governing the motion to
dismiss on the ground of lack of cause of action.

Section 1, Rule 16 of the Rules of Court, providing in part
that:

Within the time for pleading a motion to dismiss may be
made on any of the following grounds: x x x

"(g) That the complaint states no cause of action. x x x

explicitly requires that the sufficiency of the complaint must
be tested exclusively on the basis of the complaint itself and
no

________________



577

VOL. 58, AUGUST 26, 1974

577


other should be considered when the ground for motion to
dismiss is that the complaint states no cause of action.
Pursuant thereto this Court has ruled that:

As a rule the sufficiency of the complaint, when challenged
in a motion to dismiss, must be determined exclusively on the
basis of the facts alleged therein."23

It has been likewise held that a motion to dismiss based on
lack of cause of action hypothetically admits the truth of the
allegations of fact made in the complaint.24 It is to be noted
that only the facts well pleaded in the complaint, and
likewise, any inferences fairly deducible therefrom, are
deemed admitted by a motion to dismiss. Neither allegations
of conclusions25 nor allegations of facts the falsity of which
the court may take judicial notice are deemed admitted.26
The question, therefore, submitted to the Court in a motion
to dismiss based on lack of cause of action is not whether the
facts alleged in the complaint are true, for these are
hypothetically admitted, but whether the facts alleged are
sufficient to constitute a cause of action such that the court
may render a valid judgment upon the facts alleged therein.

A cause of action is an act or omission of one party in
violation of the legal right of the other. Its essential elements
are, namely: (1) the existence of a legal right in the plaintiff,
(2) a correlative legal duty in the defendant, and (3) an act or
omission of the defendant in violation of plaintiff s right with
consequential injury or damage to the plaintiff for which he
may maintain an action for the recovery of damages or other

_______________

23 Uy Chao vs. De la Rama Steamship Co., Inc. L-14495,
September 29, 1962, 6 SCRA 69, 72. See also De Jesus, et al.
vs. Belarmino, et al., 95 Phil. 365, 371; Dalandan, et al. vs.
Julio, et al., L-19101, February 29, 1964, 10 SCRA 400;
Remitere, et al. vs. Montinola Vda. de Yulo, et al., L-19751,
February 28, 1966, 16 SCRA 250, 254; Acua vs. Batac
Producers Cooperative Marketing Association, Inc., et al., L-
20338, June 30, 1967, 20 SCRA 526, 531.

24 Alquigue vs. De Leon, L-15059, March 30, 1963, 7 SCRA
513, 515; Salazar, et al. vs. Ortizano, L-20480, 16 SCRA 662,
665; Acua vs. Batac Producers Cooperative Marketing
Association, Inc., et al., L-20338, June 30, 1967, 20 SCRA 526,
531.

25 Dalandan vs. Julio, L-19101, February 29, 1964, 10 SCRA
400, 410.

26 71 CJS pages 906912.

578

578



appropriate relief .27 On the other hand, Section 3 of Rule 6
of the Rules of Court provides that the complaint must state
the ultimate facts constituting the plaintiffs cause of action.
Hence, where the complaint states ultimate facts that
constitute the three essential elements of a cause of action,
the complaint states a cause of action;28 otherwise, the
complaint must succumb to a motion to dismiss on that
ground.

The legal principles having been premised, let us now analyze
and discuss appellants various causes of action.

Appellants first cause of action, pursuant to what has been
premised above, should.have consisted of: (1) the right of
appellants as well as of the other CMI stockholders to
subscribe, in proportion to their equities established under
their respective Pre-Incorporation Agreements to
Subscribe, to that portion of the capital stock which was
unsubscribed because of failure of the CMI stockholders to
exercise their right to subscribe thereto; (2) the legal duty of
the appellees to have said portion of the capital stock to be
subscribed by appellants and other CMI stockholders; and (3)
the violation or breach of said right of appellants and other
CMI stockholders by the appellees.

Did the complaint state the important and substantial facts
directly forming the basis of the primary right claimed by
plaintiffs? Before proceeding to elucidate this question, it
should be noted that a bare allegation that one is entitled to
specifically the facts upon which such conclusion is
founded.29 The complaint alleged that appellants were
stockholders of the CMI; that as such stockholders, they were
entitled, by virtue of the resolution of March 28, 1962, to
subscribe to the capital stock of the proposed Consolidated
Bank and Turst Co., at par value to the same extent and in the
same amount as said stockholders respective shareholdings
in the CMI as shown in the latters stock book as of January
15, 1963, the right to

________________

27 Ma-ao Sugar Central Co., Inc. vs. Barrios, et al., 79 Phil.
666, 667; Ramitere, et al. vs. Montinola Vda. de Yulo, et al. L-
1975l, February 28, 1966, 16 SCRA 251, 255.

28 Community Investment and Finance Corp. vs. Garcia, 88
Phil. 215, 218.

29 41 Am. Jur., page 303.

579

VOL. 58, AUGUST 26, 1974

579


subscribe to be exercised until January 15, 1963, provided
said stockholders of the CMI were qualif ied under the law to
become stockholders of the proposed Bank;30 that
subscription.31

These alleged specific facts did not even show that appellants
were entitled to subscribe to the capital stock of the
proposed Bank, for said right depended on a condition

Assuming arguendo that appellants were qualified to become
stockholders of the Bank, they could subscribe, pursuant to
the explicit terms of the resolution of March 28, 1962, to the
same extent and in the same amount as said stockholders
respective shareholdings in the CMI' as of January 15,
1963.32 This was the measure of the right they could claim to
subscribe to waived stocks. Appellants did not even aver that
the stocks waived to the subscription of which they claimed
the right to subscribe, were comprised in the extent and
amount of their respective shareholdings in the CMI. It is not
surprising that they did not make such an averment for they
did not even allege the amount of shares of stock to which
they claimed they were entitled to subscribe. The failure of
the complaint to plead specifically the above facts rendered it
impossible for the court to conclude by natural reasoning that
the appellants and other CMI stockholders had a right to
subscribe to the waived shares of stock, and made any
allegation to that effect a conclusion of the pleader, not an
ultimate fact, in accordance with the test suggested by the
California Supreme Court, to wit:

If from the facts in evidence, the result can be reached by
that process of natural reasoning adopted in the investigation
of truth, it becomes an ultimate fact, to be found as such. If,
on the other hand,

________________

30 Paragraphs 7 and 7 of Complaint, Record on Appeal, pages
5, 7, 8.

31 Paragraph 8 of Complaint, Record on Appeal, page 8.

32 Paragraph 4 of Complaint, Record on Appeal, page 5.

580

580



resort must be had to the artifical processes of the law, in
order to reach a final determination, the result is a conclusion
of law."33

Let us now pass to the second and third elements that would
have constituted the first cause of action. Did the complaint
allege as ultimate facts the legal duty of defendants-appellees
to have a portion of the capital stock subscribed to by
appellants? Did the complaint allege as ultimate facts that
defendants-appellees had violated appellants right?

Even if it be assumed arguendo that defendants-appellees
had the duty to have the waived stocks subscribed to by the
CMI stockholders, this duty was not owed to all the CMI
stockholders, but only to such CMI stockholders as were
qualified to become stockholders of the proposed Bank.
Inasmuch as it has been shown that the complaint did not
contain ultimate facts to show that plaintiffs-appellants were
qualified to become stockholders of the Bank, it follows that
the complaint did not show that defendants-appellees were
under duty to have plaintiffs-appellants subscribe to the
stocks of the proposed Bank. It inevitably follows also that
the complaint did not contain ultimate facts to show that the
right of the plaintiffs-appellants to subscribe to the shares of
the proposed Bank had been violated by defendants-
appellees. How could a non-existent right be violated?

Let us continue the discussion further. The complaint alleged
that by virtue of the resolution of March 28,1962, the
President and Members of the Board of Directors of the CMI
would be constituted as a Board of Organizers to undertake
and carry out the organization of the Bank;34 that the Board
of Organizers was constituted and proceeded with the
establishment of the Bank;35 that the persons composing the
Board of Organizers were the individuals-defendants-
appellees;36 that the Board of Organizers sent our circular
letters with Pre-Incorporation Agreement to Subscribe
forms37 which specified, among others, such subscription
right shall be deemed ipso facto waived and released in favor
of the

________________

33 Levins vs. Rovegno, 71 Cal. 273, 12 Pa. 161,164.

34 Paragraph 4(a) of Complaint; Record on Appeal, pages 4
5.

35 Paragraph 5 of Complaint; Record on Appeal, pages 67.



581

VOL. 58, AUGUST 26, 1974

581


Board of Organizers of the defendant Bank and their
assignees";38 that in the Articles of Incorporation prepared
by the Board of Organizers, the individuals-defendants-
appellees alone appeared to have subscribed to the 50,000
shares;39 and that individuals-defendants-appellees again
subscribed to all the additional 30,000 shares.40 From these
facts, appellants concluded that they were denied their right
to subscribe in proportion to their equities;41 that the
individuals-defendants-appellees unlawfully acquired
entitled in violation of law and in breach of trust and of
contractual agreement;42 and that, because of matters
already alleged, the individuals-defendants-appellees hold
their shares in the defendant bank in trust for plaintiffs."43

The allegeation in the complaint that the individuals-
that was a conclusion of law. Express averments that a party
was the beneficial owner of certain property; x x x that
property or money was received or held in trust, or for the
use of another; that particular funds were trust funds; that a
particular transaction created an irrevocable trust; that a
person held property as constructive trustee; that on the
transfer of certain property a trust resulted have been
considered as mere conclusions of law.44 The facts alleged in
the complaint did not, by logical reasoning, necessarily lead
to the conclusion that defendants-appellees were trustees in
favor of appellants of the shares of stock waived by the CMI
stockholders who failed to exercise their right to subscribe. In
this connection, it has been likewise said that:

The general rule is that an allegation of duty in terms
unaccompanied by a statement of the facts showing the
existence of

________________

38 Paragraph 7(b) of Complaint; Record on Appeal; page 8.


40 Paragraphs 11 and 12 of Complaint; Record on Appeal,
page 11.




44 47 C.J.S., page 78.

582

582



the duty, is a mere conclusion of law, unless there is a
relation set forth from which the law raises the duty."45

In like manner, the allegation that individuals-defendants-
appellees held said shares in trust was no more than an
interpretation by appellants of the effect of the waiver clause
of the Resolution and as such it was again a mere conclusion
of law. It has been said that:

The following are also conclusions of law: x x x an allegation
characterizing an instrument or purporting to interpret it and
state its effects, x x x"46

Allegations in petition in the nature of conclusions about the
meaning of contract, inconsistent with stated terms of the
contract, cannot be considered."47


Of course, the allegation that there was a violation of trust
duty was plainly a conclusion of law, for a mere allegation
that it was the duty of a party to do this or that, or that he
was guilty of a breach of duty, is a statement of a conclusion,
not of fact."48

An averment x x x that an act was unlawful or wrongful is
a mere legal conclusion or opinion of the pleader."49

Moreover, plaintiffs-appellants did not state in the complaint
the amount of subscription the individual defendants-
appellees were entitled to; hence there was no basis for the
court to determine what amount subscribed to by them was
excessive.

From what has been said, it is clear that the ultimate facts
stated under the first cause of action are not sufficient to
constitute a cause of action.

The further allegations in the second cause of action that the

________________

45 71 C.J.S., pages 4950.

46 41 Am. Jur., page 304.

47 71 C.J.S., page 41, citing DOench v. Gillioz, 139 SW 2d 921,
346 Mo. 179.

48 41 Am Jur., page 303.

49 41 Am. Jur., page 303.

583

VOL. 58, AUGUST 26, 1974

583


stated in the first and second causes of action. It has been
held in this connection that:

An averment that x x x an act was unlawful or wrongful is
a mere legal conclusion or opinion of the pleader. The same is
true of allegations that an instrument was illegally certified
or x x x that an act was arbitrarily done x x x"50

A pleader states a mere conclusion when he makes any of
the following allegations: that a party was incapacitated to
enter into a contract or convey property x x x"51

The third, fourth, fifth and sixth causes of action depended on
the first cause of action, which, as has been shown, did not
state ultimate facts sufficient to constitute a cause of action.
It stands to reason, therefore, that said causes of action
would also be fatally defective.

It having been shown that the complaint failed to state
ultimate facts to constitute a cause of action, it becomes
unnecessary to discuss the other assignments of errors.

WHEREFORE, the instant appeal is dismissed, and the order
dated March 21, 1964 of the Court of First Instance of Manila
dismissing the complaint in Civil Case No. 55810 is affirmed,
with costs in this instance against appellants.

It is so ordered.

Fernando, Barredo, Fernandez and Aquino, JJ., concur.

Antonio, J., took no part.

Appeal dismissed, order affirmed.

Notes.The rules of pleading limit the statement of the
cause of action only to such operative facts as give rise to the
right of action of the plaintiff to obtain relief against the
wrongdoer. The details of probative matter or particulars of
evidence, statements of law, inferences and arguments need
not be stated (De los Santos vs. Sheriff of Rizal, 64 Phil. 197;
Ortiz vs. Garcia, 15 Phil. 192; La Insular vs. Jao Oge, 42 Phil.
366; Valmilero vs. Kong Chang Seng, 33 Phil. 84; Laguna
Coconut Oil vs. Bank of the Philippine Islands, 44 Phil. 618).

________________


Neither is it proper to allege in a pleading inferences of facts
from facts which are not stated in the complaint for these are
not the ultimate facts required by law to be pleaded. (Alzua
vs. Johnson, 21 Phil. 308; Tec Bi & Co. vs. Chartered Bank of
India, 41 Phil. 596).

General allegations that a contract is valid or lawful, or is just
or reasonable are mere conclusions of law. Likewise mere
conclusions of law are allegations that a contract is void,
voidable, invalid, illegal, ultra vires, or against public policy,
without stating facts showing its invalidity. (See Remitere vs.
Vda. de Yulo, 16 SCRA 251)

[Mathay vs. Consolidated Bank and Trust Company, 58 SCRA
559(1974)]

G.R. No. 164588. October 19, 2005.*
NAUTICA CANNING CORPORATION, FIRST DOMINION PRIME
HOLDINGS, INC. and FERNANDO R. ARGUELLES, JR.,
petitioners, vs. ROBERTO C. YUMUL, respondent.

Civil Procedure; Appeals; Certiorari; A petition for review
under Rule 45 is the proper remedy of a party aggrieved by a
decision of the Court of Appeals, which is not identical to a
petition for certiorari under Rule 65.A petition for review
petition for certiorari under Rule 65. Under Rule 45,
decisions, final orders or resolutions of the Court of Appeals
is appealed by filing a petition for review, which is a
continuation of the appellate process over the original case.
On the other hand, the writ of certiorari under Rule 65 is filed
when petitioner has no plain, speedy and adequate remedy in
the ordinary course of law against its perceived grievance. A
remedy is considered plain, speedy and adequate if it will
promptly relieve the petitioner from the injurious effects of
the judgment and the acts of the lower court or agency.

Corporation Law; Stockholders; As between the corporation
on the one hand, and its shareholders and third persons on
the other, the corporation looks only to its books for the
purpose of determining who its shareholders are.It is
possible for a business to be wholly owned by one individual.
The validity of its incorporation is not affected when such
individual gives nominal ownership of only one share of stock
to each of the other four incorporators. This is not necessarily
illegal. But, this is valid only between or among the
incorporators privy to the agreement. It does bind the
corporation which, at the time the agreement is made, was
non-existent. Thus, incorporators continue to be stockholders
of a corporation unless, subsequent to the incorporation,
they have validly transferred their subscriptions to the real
parties in interest. As between the corporation on the one
hand, and its shareholders and third persons on the other,
the corporation looks only to its books for the purpose of
determining who its shareholders are.

_______________

* FIRST DIVISION.

416

416


Nautica Canning Corporation vs. Yumul

Same; Same; A transfer of shares of stock not recorded in the
stock and transfer book of the corporation is non-existent as
far as the corporation is concerned.We held in Ponce v.
Alsons Cement Corp. that:... [A] transfer of shares of stock
not recorded in the stock and transfer book of the
corporation is non-existent as far as the corporation is
concerned. As between the corporation on one hand, and its
shareholders and third persons on the other, the corporation
looks only to its books for the purpose of determining who its
shareholders are. It is only when the transfer has been
recorded in the stock and transfer book that a corporation
may rightfully regard the transferee as one of its
stockholders. From this time, the consequent obligation on
the part of the corporation to recognize such rights as it is
mandated by law to recognize arises. Hence, without such
recording, the transferee may not be regarded by the
corporation as one among its stockholders and the
corporation may legally refuse the issuance of stock
certificates[.]

Civil Procedure; Appeals; Securities and Exchange
Commission; Findings of fact of quasi-judicial agencies, like
the SEC, are generally accorded respect and even finality by
the Supreme Court, if supported by substantial evidence, in
recognition of their expertise on the specific matters under
their consideration.We see no cogent reason to set aside
the factual findings of the SEC, as upheld by the Court of
Appeals. Findings of fact of quasi-judicial agencies, like the
SEC, are generally accorded respect and even finality by the
Supreme Court, if supported by substantial evidence, in
recognition of their expertise on the specific matters under
their consideration, moreso if the same has been upheld by
the appellate court, as in this case.

Corporation Law; Statutes; Section 23 of Batas Pambansa (BP)
Blg. 68 or the Corporation Code of the Philippines requires
that every director must own at least one share of the capital
stock of the corporation of which he is a director. Before one
may be elected president of the corporation, he must be a
director.Section 23 of Batas Pambansa (BP) Blg. 68 or The
Corporation Code of the Philippines requires that every
director must own at least one share of the capital stock of
the corporation of which he is a director. Before one may be
elected president of the corporation, he must be a director.
Since Yumul was elected as Nauticas Director and as
President thereof, it follows that he must have owned at least
one share of the corpora-

417

VOL. 473, OCTOBER 19, 2005

417


tions capital stock. Thus, from the point of view of the
corporation, Yumul was the owner of one share of stock. As
such, the SEC correctly ruled that he has the right to inspect
the books and records of Nautica, pursuant to Section 74 of
BP Blg. 68 which states that the records of all business
transactions of the corporation and the minutes of any
meetings shall 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.

Same; Same; Courts; Jurisdictions; Intra-Corporate Disputes;
The Securities Regulation Code (Republic Act No. 8799);
Republic Act No. 8799 transferred from the SEC to the
regional trial court jurisdiction over cases involving intra-
corporate disputes.When the controversy involves matters
purely civil in character, it is beyond the ambit of the limited
jurisdiction of the SEC. As held in Viray v. Court of Appeals,
the better policy in determining which body has jurisdiction
over a case would be to consider not only the status or
relationship of the parties, but also the nature of the question
that is the subject of their controversy. This, however, is now
moot and academic due to the passage of Republic Act No.
8799 or The Securities Regulation Code which took effect on
August 8, 2000. The Act transferred from the SEC to the
regional trial court jurisdiction over cases involving intra-
corporate disputes. Thus, whether or not the issue is intra-
corporate, it is now the regional trial court and no longer the
SEC that takes cognizance of the controversy.

PETITION for review on certiorari of the decision and
resolution of the Court of Appeals.


Ma. Erlinda R. Calagi for petitioners.

Law Firm of Zamora, Poblador, Vasquez & Bretana
collaborating counsel for petitioners.

Quasha, Ancheta, Pea & Nolasco for respondent.

418

418



YNARES-SANTIAGO, J.:

Petitioners assail the September 26, 2001 Decision1 of the
Court of Appeals in CA-G.R. SP No. 61919, affirming in toto
the Decision of the Securities and Exchange Commission (SEC)
En Banc in SEC Case No. 10-96-5455, as well as the July 16,
2004 Resolution2 denying the motion for reconsideration.

The facts of the case show that Nautica Canning Corporation
(Nautica) was organized and incorporated on May 11, 1994
with an authorized capital stock of P40,000,000 divided into
400,000 shares with a par value of P100.00 per share. It had a
subscribed capital stock of P10,000,000 with paid-in
subscriptions from its incorporators as follows:3

Name

No. of Shares

Amount Subscribed

Amount Paid

ALVIN Y. DEE

89,991

P8,999,100

P4,499,100

JONATHAN Y. DEE

2

200

200

JOANNA D. LAUREL

2

200

200

DARLENE EDSA MARIE GONZALES

2

200

200

JENNIFER Y. DEE

2

200

200

ROBERTO C. YUMUL

1

100

100

JERRY ANGPING

10,000

1,000,000

500,000

100,000

P10,000,000

P5,000,000

On December 19, 1994, respondent Roberto C. Yumul was
appointed Chief Operating Officer/General Manager of
Nautica with a monthly compensation of P85,000 and an
addi-

_______________

1 Rollo, pp. 9-29. Penned by Associate Justice Salvador J.
Valdez, Jr. and concurred in by Associate Justices Wenceslao
I. Agnir, Jr. and Mariano C. Del Castillo.

2 Id., at pp. 30-31.

3 CA Rollo, pp. 80-81.

419

VOL. 473, OCTOBER 19, 2005

419


tional compensation equal to 5% of the companys operating
profit for the calendar year.4 On the same date, First
Dominion Prime Holdings, Inc., Nauticas parent company,
through its Chairman Alvin Y. Dee, granted Yumul an Option
to Purchase5 up to 15% of the total stocks it subscribed from
Nautica.

On June 22, 1995, a Deed of Trust and Assignment6 was
executed between First Dominion Prime Holdings, Inc. and
Yumul whereby the former assigned 14,999 of its subscribed
shares in Nautica to the latter. The deed stated that the
14,999 shares were acquired and paid for in the name of the
ASSIGNOR only for convenience, but actually executed in
behalf of and in trust for the ASSIGNEE.

In March 1996, Nautica declared a P35,000,000 cash
dividend, P8,250,000 of which was paid to Yumul
representing his 15% share.

After Yumuls resignation from Nautica on August 5, 1996, he
wrote a letter7 to Dee requesting the latter to formalize his
offer to buy Yumuls 15% share in Nautica on or before
August 20, 1996; and demanding the issuance of the
corresponding certificate of shares in his name should Dee
refuse to buy the same. Dee, through Atty. Fernando R.
Arguelles, Jr., Nauticas corporate secretary, denied the
request claiming that Yumul was not a stockholder of
Nautica.

On September 6, 19968 and September 9, 1996,9 Yumul
requested that the Deed of Trust and Assignment be
recorded in the Stock and Transfer Book of Nautica, and that
he, as a stockholder, be allowed to inspect its books and
records.

_______________
420



Yumuls requests were denied allegedly because he neither
exercised the option to purchase the shares nor paid for the
acquisition price of the 14,999 shares. Atty. Arguelles
maintained that the cash dividend received by Yumul is held
by him only in trust for First Dominion Prime Holdings, Inc.

Thus, Yumul filed on October 3, 1996, before the SEC a
petition for mandamus with damages, with prayer that the
Deed of Trust and Assignment be recorded in the Stock and
Transfer Book of Nautica and that the certificate of stocks
corresponding thereto be issued in his name.10

On October 12, 2000, the SEC En Banc rendered the
Decision,11 the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the
petitioner and against the respondents, as follows:

1. Declaring petitioner as a stockholder of respondent
Nautica;
2. Declaring petitioner as beneficial owner of 14,999 shares
of Nautica under the Deed of Trust and Assignment dated
June 22, 1995
3. Declaring petitioner to be entitled to the right of
inspection of the books of the corporation pursuant to the
pertinent provisions of the Corporation Code; and
4. Directing the Corporate Secretary of Nautica to recognize
and register the Deed of Trust and Assignment dated June 22,
1995.

SO ORDERED.12

On appeal, the Court of Appeals affirmed the decision of the
SEC En Banc. Petitioners motion for reconsideration was
denied in a Resolution dated July 16, 2004.

Hence, this petition.

_______________

10 Id., at pp. 59-73.

11 Id., at pp. 53-58.

12 Id., at p. 57.

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VOL. 473, OCTOBER 19, 2005

421


At the outset, we note that petitioners recourse to this Court
via a combined petition under Rule 65 and an appeal under
Rule 45 of the Rules of Court is irregular. A petition for review
petition for certiorari under Rule 65. Under Rule 45,
decisions, final orders or resolutions of the Court of Appeals
is appealed by filing a petition for review, which is a
continuation of the appellate process over the original
case.13 On the other hand, the writ of certiorari under Rule
65 is filed when petitioner has no plain, speedy and adequate
remedy in the ordinary course of law against its perceived
grievance. A remedy is considered plain, speedy and
adequate if it will promptly relieve the petitioner from the
injurious effects of the judgment and the acts of the lower
court or agency.

In this case, petitioners speedy, available and adequate
remedy is appeal via Rule 45, and not certiorari under Rule
65. Notwithstanding petitioners procedural lapse, we shall
treat the petition as one filed under Rule 45.

The petition is partly meritorious.

Petitioners contend that Yumul was not a stockholder of
Nautica; that he was just a nominal owner of one share as the
beneficial ownership belonged to Dee who paid for said share
when Nautica was incorporated. They presented China
Banking Corporation Check No. A2620636 and Citibank Check
No. B82642 as proof of payment by Dee; a letter by Dee
dated July 15, 1994 requesting the corporate secretary of
Nautica to issue a certificate of stock in Yumuls name but in
trust for Dee; and Stock Certificate No. 6 with annotation ITF
Alvin Y. Dee which means that respondent held said stock
In Trust For Alvin Y. Dee.

We are not persuaded.

_______________

13 Mercado v. Court of Appeals, G.R. No. 150241, November
4, 2004, 441 SCRA 463, 469.

422

422



Indeed, it is possible for a business to be wholly owned by
one individual. The validity of its incorporation is not affected
when such individual gives nominal ownership of only one
share of stock to each of the other four incorporators. This is
not necessarily illegal.14 But, this is valid only between or
among the incorporators privy to the agreement. It does bind
the corporation which, at the time the agreement is made,
was non-existent. Thus, incorporators continue to be
stockholders of a corporation unless, subsequent to the
incorporation, they have validly transferred their
subscriptions to the real parties in interest. As between the
corporation on the one hand, and its shareholders and third
persons on the other, the corporation looks only to its books
for the purpose of determining who its shareholders are.15

In the case at bar, the SEC and the Court of Appeals correctly
found Yumul to be a stockholder of Nautica, of one share of
stock recorded in Yumuls name, although allegedly held in
trust for Dee. Nauticas Articles of Incorporation and By-laws,
as well as the General Information Sheet filed with the SEC
indicated that Yumul was an incorporator and subscriber of
one share.16 Even granting that there was an agreement
between Yumul and Dee whereby the former is holding the
share in trust for Dee, the same is binding only as between
them. From the corporations vantage point, Yumul is its
stockholder with one share, considering that there is no
showing that Yumul transferred his subscription to Dee, the
alleged real owner of the share, after Nauticas incorporation.

We held in Ponce v. Alsons Cement Corp.17 that:

. . . *A+ transfer of shares of stock not recorded in the stock
and transfer book of the corporation is non-existent as far as
the corpora-

_______________

14 Villanueva, Philippine Corporate Law, 1998, pp. 166-167.

15 Ponce v. Alsons Cement Corporation, 442 Phil. 98, 109-
110; 393 SCRA 602, 612 (2002).

16 CA Rollo, p. 56.

17 Supra.

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423


tion is concerned. As between the corporation on one hand,
and its shareholders and third persons on the other, the
corporation looks only to its books for the purpose of
determining who its shareholders are. It is only when the
transfer has been recorded in the stock and transfer book
that a corporation may rightfully regard the transferee as one
of its stockholders. From this time, the consequent obligation
on the part of the corporation to recognize such rights as it is
mandated by law to recognize arises.

Hence, without such recording, the transferee may not be
regarded by the corporation as one among its stockholders
and the corporation may legally refuse the issuance of stock
certificates*.+

Moreover, the contents of the articles of incorporation bind
the corporation and its stockholders. Its contents cannot be
disregarded considering that it was the basic document which
legally triggered the creation of the corporation.18

The Court of Appeals, in affirming the factual findings of SEC,
held that:

The evidence submitted by petitioners to establish trust is
palpably incompetent, consisting mainly of the self-serving
allegations by the petitioners and the China Banking
Corporation checks issued as payment for the shares of stock
of Nautica. Dee did not testify on the supposed trust
relationship between him and Yumul. While Atty. Arguelles
testified, his testimony is barren of probative value since he
had no first-hand knowledge of the relationship in question.
The isolated fact that Dee might have paid for the share in
the name of Yumul did not by itself make the latter a man of
straw. Such act of payment is so nebulous and equivocal that
it can not yield the meaning which the petitioners would
want to squeeze from it without the clarificatory testimony of
Dee.19

We see no cogent reason to set aside the factual findings of
the SEC, as upheld by the Court of Appeals. Findings of fact of
quasi-judicial agencies, like the SEC, are generally ac-

_______________

18 Lanuza v. Court of Appeals, G.R. No. 131394, March 28,
2005, 454 SCRA 54.

19 Rollo, p. 25.

424

424



corded respect and even finality by the Supreme Court, if
supported by substantial evidence, in recognition of their
expertise on the specific matters under their consideration,20
moreso if the same has been upheld by the appellate court,
as in this case.

Besides, other than petitioners self-serving assertion that the
beneficial ownership belongs to Dee, they failed to show that
the subscription was transferred to Dee after Nauticas
incorporation. The conduct of the parties also constitute
sufficient proof of Yumuls status as a stockholder. On April 4,
1995, Yumul was elected during the regular annual
stockholders meeting as a Director of Nauticas Board of
Directors.21 Thereafter, he was elected as president of
Nautica.22 Thus, Nautica and its stockholders knowingly held
respondent out to the public as an officer and a stockholder
of the corporation.

Section 23 of Batas Pambansa (BP) Blg. 68 or The Corporation
Code of the Philippines requires that every director must own
at least one share of the capital stock of the corporation of
which he is a director. Before one may be elected president
of the corporation, he must be a director.23 Since Yumul was
elected as Nauticas Director and as President thereof, it
follows that he must have owned at least one share of the
corporations capital stock.

Thus, from the point of view of the corporation, Yumul was
the owner of one share of stock. As such, the SEC correctly
ruled that he has the right to inspect the books and records of
Nautica,24 pursuant to Section 74 of BP Blg. 68 which states
that the records of all business transactions of the
corporation and the minutes of any meetings shall be open to
inspection

_______________

20 Quiambao v. Court of Appeals, G.R. No. 128305, March 28,
2005, 454 SCRA 17.

21 CA Rollo, p. 254.

22 Rollo, p. 15.

23 Section 25, BP Blg. 68.

24 CA Rollo, p. 56.

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425


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.

As to whether or not Yumul is the beneficial owner of the
14,999 shares of stocks of Nautica, petitioners allege that
Yumul was given the option to purchase shares of stocks in
Nautica under the Option to Purchase dated December 19,
1994. However, he failed to exercise the option, thus there
was no cause or consideration for the Deed of Trust and
Assignment, which makes it void for being simulated or
fictitious.25

Anent this issue, the SEC did not make a categorical finding
on whether Yumul exercised his option and also on the
validity of the Deed of Trust and Assignment. Instead, it held
that:

. . . Although unsubstantiated, the apparent objective of the
respondents allegation was to refute petitioners claim over
the shares covered by the Deed of Trust and Assignment. This
must therefore be deemed as nothing but a ploy to deprive
petitioner of his right over the shares in question, which to us
should not be countenanced.26

Neither did the Court of Appeals rule on the issue as it only
held that:

Petitioners also contend that the Deed is a simulated
contract.

Simulation is the declaration of a fictitious will, deliberately
made by agreement of the parties, in order to produce, for
the purposes of deception, the appearances of a judicial act
which does not exist or is different with that which was really
executed. The characteristic of simulation is that the
apparent contract is not really desired or intended to produce
legal effect or in any way alter the juridical situation of the
parties.

_______________

25 Id., at p. 138.

26 Id., at p. 57.

426

426



The requisites for simulation are: (a) an outward declaration
of will different from the will of the parties; (b) the false
appearance must have been intended by mutual agreement;
and (c) the purpose is to deceive third persons. These
requisites have not been proven in this case.27

Thus, other than defining and enumerating the requisites of a
simulated contract or deed, the Court of Appeals did not
make a determination whether the SEC has the jurisdiction to
resolve the issue and whether the questioned deed was
fictitious or simulated.

In Intestate Estate of Alexander T. Ty v. Court of Appeals,28
we held that:

. . . The question raised in the complaints is whether or not
there was indeed a sale in the absence of cause or
consideration. The proper forum for such a dispute is a
regular trial court. The Court agrees with the ruling of the
Court of Appeals that no special corporate skill is necessary in
resolving the issue of the validity of the transfer of shares
from one stockholder to another of the same corporation.
Both actions, although involving different property, sought to
declare the nullity of the transfers of said property to the
decedent on the ground that they were not supported by any
cause or consideration, and thus, are considered void ab
initio for being absolutely simulated or fictitious. The
determination whether a contract is simulated or not is an
issue that could be resolved by applying pertinent provisions
of the Civil Code, particularly those relative to obligations and
contracts. Disputes concerning the application of the Civil
Code are properly cognizable by courts of general jurisdiction.
No special skill is necessary that would require the technical
expertise of the SEC. (Emphasis supplied)

Thus, when the controversy involves matters purely civil in
character, it is beyond the ambit of the limited jurisdiction of

_______________

27 Rollo, p. 27.

28 G.R. Nos. 112872 & 114672, April 19, 2001, 356 SCRA 661,
667-668.

427

VOL. 473, OCTOBER 19, 2005

427


the SEC. As held in Viray v. Court of Appeals,29 the better
policy in determining which body has jurisdiction over a case
would be to consider not only the status or relationship of
the parties, but also the nature of the question that is the
subject of their controversy. This, however, is now moot and
academic due to the passage of Republic Act No. 8799 or The
Securities Regulation Code which took effect on August 8,
2000. The Act transferred from the SEC to the regional trial
court jurisdiction over cases involving intra-corporate
disputes. Thus, whether or not the issue is intra-corporate, it
is now the regional trial court and no longer the SEC that
takes cognizance of the controversy.

Considering that the issue of the validity of the Deed of Trust
and Assignment is civil in nature, thus, under the competence
of the regular courts, and the failure of the SEC and the Court
of Appeals to make a determinative finding as to its validity,
we are constrained to refrain from ruling on whether or not
Yumul can compel the corporate secretary to register said
deed. It is only after an appropriate case is filed and decision
rendered thereon by the proper forum can the issue be
resolved.

WHEREFORE, the petition is PARTIALLY GRANTED. The
September 26, 2001 Decision of the Court of Appeals in CA-
G.R. SP No. 61919, is AFFIRMED insofar as it declares
respondent Roberto C. Yumul as a subscriber and stockholder
of one share of stock of Nautica Canning Corporation. The
Decision is REVERSED and SET ASIDE insofar as it affirms the
validity of the Deed of Trust and Assignment and orders its
registration in the Stock and Transfer Book of Nautica
Canning Corporation.

SO ORDERED.

Davide, Jr. (C.J., Chairman), Quisumbing, Carpio and
Azcuna, JJ., concur.

_______________

29 G.R. No. 92481, November 9, 1990, 191 SCRA 308, 323.

428

428


Re: Cases Left Undecided by Retired Judge Benjamin A.
Bongolan of the RTC, Br. 2, Bangued, Abra

Petition partially granted.

Notes.Where the questioned Court of Appeals decision is a
disposition on the merits, and where said Court has no
remaining issue to resolve, the proper remedy available to
the aggrieved party is a petition for review under Rule 45, not
Rule 65 of the Rules of Court. (Siasoco vs. Court of Appeals,
303 SCRA 186 [1999])

A derivative action is a suit by a shareholder to enforce a
corporate cause of action; the corporation is a necessary
party to the suit. (Chua vs. Court of Appeals, 443 SCRA 259
[2004])

[Nautica Canning Corporation vs. Yumul, 473 SCRA
415(2005)]
G.R. No. 150976. October 18, 2004.*
CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES,
XERXES NAVARRO, MARIA ANTONIA TEMPLO and MEDICAL
CENTER PARAAQUE, INC., petitioners, vs. ANGELES
BALINGHASAY, RENATO BERNABE, ALODIA DEL ROSARIO,
ROMEO FUNTILA, TERESITA GAYANILO, RUSTICO JIMENEZ,
ARACELI** JO, ESMERALDA MEDINA, CECILIA MONTALBAN,
VIRGILIO OBLEPIAS, CARMENCITA PARRENO, CESAR REYES,
REYNALDO SAVET, SERAPIO TACCAD, VICENTE VALDEZ,
SALVACION VILLAMORA, and HUMBERTO VILLAREAL,
respondents.

Corporation Law; Corporation Code; Voting Rights; The right
to vote is a right inherent in and incidental to the ownership
of corporate stock, and as such is a property right.One of
the rights of a stockholder is the right to participate in the
control and management of the corporation that is exercised
through his vote. The right to vote is a right inherent in and
incidental to the ownership of corporate stock, and as such is
a property right. The stockholder cannot be deprived of the
right to vote his stock nor may the right be essentially
impaired, either by the legislature or by the corporation,
without his consent, through amending the charter, or the
by-laws.

_______________

* FIRST DIVISION.

** Sometimes Arceli in some parts of the records.

443

VOL. 440, OCTOBER 18, 2004

443

Castillo vs. Balinghasay

Same; Same; Same; Retroactivity; Section 148 of the
Corporation Code expressly provides that it shall apply to
corporations in existence at the time of the effectivity of the
Code.Section 148 of the Corporation Code expressly
provides that it shall apply to corporations in existence at the
time of the effectivity of the Code. Hence, the non-
impairment clause is inapplicable in this instance. When
Article VII of the Articles of Incorporation of MCPI were
amended in 1992, the board of directors and stockholders
must have been aware of Section 6 of the Corporation Code
and intended that Article VII be construed in harmony with
the Code, which was then already in force and effect. Since
Section 6 of the Corporation Code expressly prohibits the
deprivation of voting rights, except as to preferred and
redeemable shares, then Article VII of the Articles of
Incorporation cannot be construed as granting exclusive
voting rights to Class A shareholders, to the prejudice of
Class B shareholders, without running afoul of the letter
and spirit of the Corporation Code.

PETITION for review on certiorari of a decision of the Regional
Trial Court of Paraaque City, Br. 258.


Gabriel T. Robeniol for petitioners.

Marciano S. Bacalla, Jr. and Ruben C. Ladia for
respondents.

QUISUMBING, J.:

For review on certiorari is the Partial Judgment1 dated
November 26, 2001 in Civil Case No. 01-0140, of the Regional
Trial Court (RTC) of Paraaque City, Branch 258. The trial
court declared the February 9, 2001, election of the board of
directors of the Medical Center Paraaque, Inc. (MCPI) valid.
The Partial Judgment dismissed petitioners first cause of
action, specifically, to annul said election for depriving
petitioners their voting rights and to be voted on as members
of the board.

_______________

1 Rollo, pp. 44-47. Penned by Hon. Judge Raul E. De Leon.

444

444



The facts, as culled from records, are as follows:

Petitioners and the respondents are stockholders of MCPI,
with the former holding Class B shares and the latter
owning Class A shares.

MCPI is a domestic corporation with offices at Dr. A. Santos
Avenue, Sucat, Paraaque City. It was organized sometime in
September 1977. At the time of its incorporation, Act No.
1459, the old Corporation Law was still in force and effect.
Article VII of MCPIs original Articles of Incorporation, as
approved by the Securities and Exchange Commission (SEC)
on October 26, 1977, reads as follows:

SEVENTH. That the authorized capital stock of the
corporation is TWO MILLION (P2,000,000.00) PESOS,
Philippine Currency, divided into TWO THOUSAND (2,000)
SHARES at a par value of P100 each share, whereby the ONE
THOUSAND SHARES issued to, and subscribed by, the
incorporating stockholders shall be classified as Class A shares
while the other ONE THOUSAND unissued shares shall be
considered as Class B shares. Only holders of Class A shares
can have the right to vote and the right to be elected as
directors or as corporate officers.2 (Stress supplied)

On July 31, 1981, Article VII of the Articles of Incorporation of
MCPI was amended, to read thus:

SEVENTH. That the authorized capital stock of the
corporation is FIVE MILLION (P5,000,000.00) PESOS, divided
as follows:

CLASS

NO. OF SHARES

PAR VALUE

A

1,000

P1,000.00

B

4,000

P1,000.00

Only holders of Class A shares have the right to vote and the
right to be elected as directors or as corporate officers.3
(Emphasis supplied)

_______________

2 Id., at pp. 128-129.

3 Id., at pp. 83-84.

445

VOL. 440, OCTOBER 18, 2004

445


The foregoing amendment was approved by the SEC on June
7, 1983. While the amendment granted the right to vote and
to be elected as directors or corporate officers only to
holders of Class A shares, holders of Class B stocks were
granted the same rights and privileges as holders of Class A
stocks with respect to the payment of dividends.

On September 9, 1992, Article VII was again amended to
provide as follows:

SEVENTH: That the authorized capital stock of the
corporation is THIRTY TWO MILLION PESOS (P32,000,000.00)
divided as follows:

CLASS

NO. OF SHARES

PAR VALUE

A

1,000

P1,000.00

B

31,000

1,000.00

Except when otherwise provided by law, only holders of Class
A shares have the right to vote and the right to be elected
as directors or as corporate officers4 (Stress and Italics
supplied).

The SEC approved the foregoing amendment on September
22, 1993.

On February 9, 2001, the shareholders of MCPI held their
annual stockholders meeting and election for directors.
During the course of the proceedings, respondent Rustico
Jimenez, citing Article VII, as amended, and notwithstanding
MCPIs history, declared over the objections of herein
petitioners, that no Class B shareholder was qualified to run
or be voted upon as a director. In the past, MCPI had seen
holders of Class B shares voted for and serve as members of
the corporate board and some Class B share owners were
in fact nominated for election as board members.
Nonetheless, Jimenez went on to announce that the
candidates holding

_______________

4 Id., at pp. 71-72.

446

446



Class A shares were the winners of all seats in the corporate
board. The petitioners protested, claiming that Article VII was
null and void for depriving them, as Class B shareholders, of
their right to vote and to be voted upon, in violation of the
Corporation Code (Batas Pambansa Blg. 68), as amended.

On March 22, 2001, after their protest was given short shrift,
herein petitioners filed a Complaint for Injunction, Accounting
and Damages, docketed as Civil Case No. CV-01-0140 before
the RTC of Paraaque City, Branch 258. Said complaint was
founded on two (2) principal causes of action, namely:

a. Annulment of the declaration of directors of the MCPI
made during the February 9, 2001 Annual Stockholders
Meeting, and for the conduct of an election whereat all
stockholders, irrespective of the classification of the shares
they hold, should be afforded their right to vote and be voted
for; and
b. Stockholders derivative suit challenging the validity of a
contract entered into by the Board of Directors of MCPI for
the operation of the ultrasound unit.5

Subsequently, the complaint was amended to implead MCPI
as party-plaintiff for purposes only of the second cause of
action.

Before the trial court, the herein petitioners alleged that they
were deprived of their right to vote and to be voted on as
directors at the annual stockholders meeting held on
February 9, 2001, because respondents had erroneously
relied on Article VII of the Articles of Incorporation of MCPI,
despite Article VII being contrary to the Corporation Code,
thus null and void. Additionally, respondents were in
estoppel, because in the past, petitioners were allowed to
vote and to be elected as members of the board. They further
claimed that the privilege granted to the Class A
shareholders was more in the nature of a right granted to
founders shares.

_______________

5 Id., at p. 377.

447

VOL. 440, OCTOBER 18, 2004

447


In their Answer, the respondents averred that the provisions
of Article VII clearly and categorically state that only holders
of Class A shares have the exclusive right to vote and be
elected as directors and officers of the corporation. They
denied that the exclusivity was intended only as a privilege
granted to founders shares, as no such proviso is found in
the Articles of Incorporation. The respondents further
claimed that the exclusivity of the right granted to Class A
holders cannot be defeated or impaired by any subsequent
legislative enactment, e.g. the New Corporation Code, as the
Articles of Incorporation is an intra-corporate contract
between the corporation and its members; between the
corporation and its stockholders; and among the
stockholders. They submit that to allow Class B
shareholders to vote and be elected as directors would
constitute a violation of MCPIs franchise or charter as
granted by the State.

At the pre-trial, the trial court ruled that a partial judgment
could be rendered on the first cause of action and required
the parties to submit their respective position papers or
memoranda.

On November 26, 2001, the RTC rendered the Partial
Judgment, the dispositive portion of which reads:

WHEREFORE, viewed in the light of the foregoing, the
election held on February 9, 2001 is VALID as the holders of
CLASS B shares are not entitled to vote and be voted for
and this case based on the First Cause of Action is DISMISSED.

SO ORDERED.6

In finding for the respondents, the trial court ruled that
corporations had the power to classify their shares of stocks,
such as voting and non-voting shares, conformably with
Section 67 of the Corporation Code of the Philippines. It

_______________

6 Rollo, p. 47.

7 SEC. 6. Classification of shares.The shares of stock of
stock corporations may be divided into classes or series of
shares, or

448

448



pointed out that Article VII of both the original and amended
Articles of Incorporation clearly provided that only Class A

_______________

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. Any or all of the shares or series of shares may
have a par value or have no par value as may be provided for
in the articles of incorporation: Provided, however, That
banks, trust companies, insurance companies, public utilities,
and building and loan associations shall not be permitted to
issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be
given preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the
provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value. The Board
of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon filing of a
certificate thereof with the Securities and Exchange
Commission.

Shares of capital stock issued without par value shall be
deemed fully paid and non-assessable and the holder of such
shares shall not be liable to the corporation or to its creditors
in respect thereto: Provided, That shares without par value
may not be issued for a consideration less than the value of
five (P5.00) pesos per share: Provided, further, That the
entire consideration received by the corporation for its no-
par value shares shall be treated as capital and shall not be
available for distribution as dividends.

A corporation may, furthermore, classify its shares for the
purpose of insuring compliance with constitutional or legal
requirements.

Except as otherwise provided by the articles of incorporation
and stated in the certificate of stock, each share shall be
equal in all respects to every other share.

449

VOL. 440, OCTOBER 18, 2004

449


shareholders could vote and be voted for to the exclusion of
Class B shareholders, the exception being in instances
provided by law, such as those enumerated in Section 6,
paragraph 6 of the Corporation Code. The RTC found merit in
the respondents theory that the Articles of Incorporation,
which defines the rights and limitations of all its shareholders,
is a contract between MCPI and its shareholders. It is thus the
law between the parties and should be strictly enforced as to
them. It brushed aside the petitioners claim that the Class
A shareholders were in estoppel, as the election of Class
B shareholders to the corporate board may be deemed as a
mere act of benevolence on the part of the officers. Finally,
the court brushed aside the founders shares theory of the
petitioners for lack of factual basis.

Hence, this petition submitting the sole legal issue of whether
or not the Court a quo, in rendering the Partial

_______________

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 corporate
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.

450

450



Judgment dated November 26, 2001, has decided a question
of substance in a way not in accord with law and
jurisprudence considering that:

1. Under the Corporation Code, the exclusive voting right
and right to be voted granted by the Articles of Incorporation
of the MCPI to Class A shareholders is null and void, or
already extinguished;
2. Hence, the declaration of directors made during the
February 9, 2001 Annual Stockholders Meeting on the basis
of the purported exclusive voting rights is null and void for
having been done without the benefit of an election and in
violation of the rights of plaintiffs and Class B shareholders;
and
3. Perforce, another election should be conducted to elect
the directors of the MCPI, this time affording the holders of
Class B shares full voting right and the right to be voted.8

The issue for our resolution is whether or not holders of Class
B shares of the MCPI may be deprived of the right to vote
and be voted for as directors in MCPI.

Before us, petitioners assert that Article VII of the Articles of
Incorporation of MCPI, which denied them voting rights, is
null and void for being contrary to Section 6 of the
Corporation Code. They point out that Section 6 prohibits the
deprivation of voting rights except as to preferred and
redeemable shares only. Hence, under the present law on
corporations, all shareholders, regardless of classification,
other than holders of preferred or redeemable shares, are
entitled to vote and to be elected as corporate directors or
officers. Since the Class B shareholders are not classified as
holders of either preferred or redeemable shares, then it
necessarily follows that they are entitled to vote and to be
voted for as directors or officers.

The respondents, in turn, maintain that the grant of exclusive
voting rights to Class A shares is clearly provided in the

_______________

8 Rollo, p. 23.

451

VOL. 440, OCTOBER 18, 2004

451


Articles of Incorporation and is in accord with Section 59 of
the Corporation Law (Act No. 1459), which was the prevailing
law when MCPI was incorporated in 1977. They likewise
submit that as the Articles of Incorporation of MCPI is in the

_______________

9 SEC. 5. The shares of any corporation formed under this Act
may be divided into classes with such rights, voting powers,
preferences, and restrictions as may be provided for in the
articles of incorporation. Any or all of the shares may have a
par value or have no par value, as provided in the articles of
incorporation: Provided, however, That banks, trust
companies, insurance companies, and building and loan
associations shall not be permitted to issue no-par value
shares of stock. Subject to the laws creating and defining the
duties of the Public Service Commission, shares of capital
stock without par value may be issued from time to time, (a)
for such consideration as may be prescribed in the articles of
incorporation; or (b) in the absence of fraud in the
transaction, for such consideration as, from time to time, may
be fixed by the board of directors pursuant to authority
conferred in the articles of incorporation; or (c) for such
consideration as shall be consented to or approved by the
holders of a majority of the shares entitled to vote at a
meeting called in the manner prescribed by the by-laws,
provided the call for such meeting shall contain notice of such
purpose. Any or all shares so issued shall be deemed fully
paid and non-assessable and the holder of such shares shall
not be liable to the corporation or to its creditors in respect
thereto: Provided, however, That shares without par value
may not be issued for a consideration less than the value of
five pesos per share. Except as otherwise provided by the
articles of incorporation, and stated in the certificate of stock,
each share shall be in all respects equal to every other share.

Preferred shares of stock issued by any corporation the
holders of which are entitled to any preference in the
distribution of the assets of the corporation in case of
liquidation, may be issued only with a stated par value and, in
all certificates for such shares of stock, the amount which the
holder of each of such preferred shares shall be entitled to
receive from the assets of the corporation in preference to
holders of other shares, shall be stated.

The entire consideration received by the corporation for its
nopar value shares shall be treated as capital, and shall not
be available for distribution as dividends.

452

452



nature of a contract between the corporation and its
shareholders and Section 6 of the Corporation Code could not
retroactively apply to it without violating the non-impairment
clause10 of the Constitution.

We find merit in the petition.

When Article VII of the Articles of Incorporation of MCPI was
amended in 1992, the phrase except when otherwise
provided by law was inserted in the provision governing the
grant of voting powers to Class A shareholders. This
particular amendment is relevant for it speaks of a law
providing for exceptions to the exclusive grant of voting rights
to Class A stockholders. Which law was the amendment
referring to? The determination of which law to apply is
necessary. There are two laws being cited and relied upon by
the parties in this case. In this instance, the law in force at the
time of the 1992 amendment was the Corporation Code (B.P.
Blg. 68), not the Corporation Law (Act No. 1459), which had
been repealed by then.

We find and so hold that the law referred to in the
amendment to Article VII refers to the Corporation Code and
no other law. At the time of the incorporation of MCPI in
1977, the right of a corporation to classify its shares of stock
was sanctioned by Section 5 of Act No. 1459. The law
repealing Act No. 1459, B.P. Blg. 68, retained the same grant
of right of classification of stock shares to corporations, but
with a significant change. Under Section 6 of B.P. Blg. 68, the
requirements and restrictions on voting rights were explicitly
provided for, such 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
and that there shall always be a class or series of shares
which have

_______________

10 THE 1987 CONSTITUTION OF THE REPUBLIC OF THE
PHILIPPINES, ARTICLE III.

SEC. 10. No law impairing the obligation of contracts shall be
passed.

453

VOL. 440, OCTOBER 18, 2004

453


complete voting rights. Section 6 of the Corporation Code
being deemed written into Article VII of the Articles of
Incorporation of MCPI, it necessarily follows that unless Class
B shares of MCPI stocks are clearly categorized to be
preferred or redeemable shares, the holders of said Class
B shares may not be deprived of their voting rights. Note
that there is nothing in the Articles of Incorporation nor an
iota of evidence on record to show that Class B shares were
categorized as either preferred or redeemable shares.
The only possible conclusion is that Class B shares fall under
neither category and thus, under the law, are allowed to
exercise voting rights.

One of the rights of a stockholder is the right to participate in
the control and management of the corporation that is
exercised through his vote. The right to vote is a right
inherent in and incidental to the ownership of corporate
stock, and as such is a property right. The stockholder cannot
be deprived of the right to vote his stock nor may the right be
essentially impaired, either by the legislature or by the
corporation, without his consent, through amending the
charter, or the by-laws.11

Neither do we find merit in respondents position that
Section 6 of the Corporation Code cannot apply to MCPI
without running afoul of the non-impairment clause of the
Bill of Rights. Section 14812 of the Corporation Code
expressly pro-

_______________

11 WILLIAM MEADE FLETCHER, 5 FLETCHER CYCLOPEDIA OF
THE LAW OF PRIVATE CORPORATIONS 2025, 116 (Revised
Volume 1976).

12 SEC. 148. Applicability to existing corporations.All
corporations lawfully existing and doing business in the
Philippines on the date of the effectivity of this Code and
heretofore authorized, licensed or registered by the
Securities and Exchange Commission, shall be deemed to
have been authorized, licensed or registered under the
provisions of this Code, subject to the terms and conditions of
its license, and shall be governed by the provisions hereof:
Provided, That where any such corporation is affected by the

454

454



vides that it shall apply to corporations in existence at the
time of the effectivity of the Code. Hence, the non-
impairment clause is inapplicable in this instance. When
Article VII of the Articles of Incorporation of MCPI were
amended in 1992, the board of directors and stockholders
must have been aware of Section 6 of the Corporation Code
and intended that Article VII be construed in harmony with
the Code, which was then already in force and effect. Since
Section 6 of the Corporation Code expressly prohibits the
deprivation of voting rights, except as to preferred and
redeemable shares, then Article VII of the Articles of
Incorporation cannot be construed as granting exclusive
voting rights to Class A shareholders, to the prejudice of
Class B shareholders, without running afoul of the letter
and spirit of the Corporation Code.

The respondents then take the tack that the phrase except
when otherwise provided by law found in the amended
Articles is only a handwritten insertion and could have been
inserted by anybody and that no board resolution was ever
passed authorizing or approving said amendment.

Said contention is not for this Court to pass upon, involving as
it does a factual question, which is not proper in this petition.
In an appeal via certiorari, only questions of law may be
reviewed.13 Besides, respondents did not adduce persuasive
evidence, but only bare allegations, to support their
suspicion. The presumption that in the amendment process,
the ordinary course of business has been followed14 and that
official duty has been regularly performed15 on the part of
the SEC, applies in this case.

_______________

new requirements of this Code, said corporation shall, unless
otherwise herein provided, be given a period of not more
than two (2) years from the effectivity of this Code within
which to comply with the same. (Emphasis supplied)

13 Bangko Sentral ng Pilipinas v. Santamaria, G.R. No.
139885, 13 January 2003, 395 SCRA 84, 92.

14 See Revised Rules of Court, Rule 131, Section 3(q).

15 Id., at Section 3(m).

455

VOL. 440, OCTOBER 18, 2004

455

Briones vs. Miguel

WHEREFORE, the petition is GRANTED. The Partial Judgment
dated November 26, 2001 of the Regional Trial Court of
Paraaque City, Branch 258, in Civil Case No. 01-0140 is
REVERSED AND SET ASIDE. No pronouncement as to costs.

SO ORDERED.

Davide Jr. (C.J., Chairman), Ynares-Santiago and Car-pio,
JJ., concur.

Azcuna, J., On Leave.

Petition granted, partial judgment reversed and set aside.

Note.A minority stockholder and member of the board of
directors has no power or authority to sue on behalf of the
corporation. (Tam Wing Tak vs. Makasiar, 350 SCRA 475
[2001])

[Castillo vs. Balinghasay, 440 SCRA 442(2004)]
G.R. No. 152578. November 23, 2005.*
REPUBLIC OF THE PHILIPPINES, Represented by the
Presidential Commission on Good Government, petitioner, vs.
ESTATE OF HANS MENZI (Through its Executor, MANUEL G.
MONTECILLO), EMILIO T. YAP, EDUARDO M. COJUANGCO, JR.,
ESTATE OF FERDINAND MARCOS, SR., and IMELDA R.
MARCOS, respondents.

G.R. No. 154487. November 23, 2005.*
EDUARDO M. COJUANGCO, JR., petitioner, vs. REPUBLIC OF
THE PHILIPPINES, respondent.

G.R. No. 154518. November 23, 2005.*
ESTATE OF HANS M. MENZI (Through its Executor, MANUEL
G. MONTECILLO), and HANS M. MENZI HOLDINGS AND
MANAGEMENT, INC. (HMHMI), petitioners, vs. REPUBLIC OF
THE PHILIPPINES, (represented by the PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT), respondents.

_______________

* EN BANC.

21

VOL. 476, NOVEMBER 23, 2005

21

Republic vs. Estate of Hans Menzi

Corporation Law; Stock Certificates; Transfer of Ownership;
The delivery of a duly indorsed stock certificate is sufficient to
transfer ownership of shares of stock in stock corporations;
The absence of a deed of assignment is not a fatal flaw which
renders the transfer invalid.The Corporation Code
acknowledges that the delivery of a duly indorsed stock
certificate is sufficient to transfer ownership of shares of
stock in stock corporations. Such mode of transfer is valid
between the parties. In order to bind third persons, however,
the transfer must be recorded in the books of the
corporation. Clearly then, the absence of a deed of
assignment is not a fatal flaw which renders the transfer
invalid as the Republic posits. In fact, as has been held in
Rural Bank of Lipa City, Inc. v. Court of Appeals, the execution
of a deed of sale does not necessarily make the transfer
effective.

Appeals; It is not the function of the Supreme Court to
examine and weigh all over again the evidence presented by
the parties in the proceedings before the Sandiganbayan.
The Sandiganbayans factual findings that the 154 block was
sold to US Automotive while Menzi was still alive, and that
Atty. Montecillo merely accepted payment by virtue of the
authority conferred upon him by Menzi himself are
conclusive upon this Court, supported, as they are, by the
evidence on record. As held by the Sandiganbayan: The sale
was made pursuant to the Stock Option executed in 1968
between the parties to the sale, considering the restrictions
contained in Bulletins Articles of Incorporation as amended
in 1968 limiting the transferability of its shares. Negotiations
for the sale took place and were concluded before the death
of Menzi. After his death, full payment of the entire
consideration of the sale, principal and interest, was made
only after judicial confirmation thereof in the Probate Case.
The transaction was duly supported by the corresponding
receipt, voucher, cancelled checks, cancelled promissory
note, and BIR certification of payment of the corresponding
taxes due thereon. The Supreme Court is not a trier of facts. It
is not our function to examine and weigh all over again the
evidence presented by the parties in the proceedings before
the Sandiganbayan.

Evidence; Burden of Proof; Affirmative Defenses; Pleadings
and Practice; It is procedurally required for each party in a
case to prove his own affirmative allegations by the degree of
evidence required by law; While it is incumbent upon the
plaintiff who is claiming a right to prove his case, the
defendant must likewise prove his own allega-

22

22



tions to buttress its claim that it is not liable.It is
procedurally required for each party in a case to prove his
own affirmative allegations by the degree of evidence
required by law. In civil cases such as this one, the degree of
evidence required of a party in order to support his claim is
preponderance of evidence, or that evidence adduced by one
party which is more conclusive and credible than that of the
other party. It is therefore incumbent upon the plaintiff who
is claiming a right to prove his case. Corollarily, the defendant
must likewise prove its own allegations to buttress its claim
that it is not liable.

Same; Same; Same; The burden of proof may be on the
plaintiff or defendantit is on the defendant if he alleges
affirmative defense which is not a denial of an essential
ingredient in the plaintiffs cause of action, but is one which,
if established, will be a good defense, i.e., an avoidance of
the claim.The party who alleges a fact has the burden of
proving it. The burden of proof may be on the plaintiff or the
defendant. It is on the defendant if he alleges an affirmative
defense which is not a denial of an essential ingredient in the
plaintiffs cause of action, but is one which, if established, will
be a good defensei.e., an avoidance of the claim. In the
instant case, Cojuangcos allegations are in the nature of
affirmative defenses which should be adequately
substantiated. He did not deny that Bulletin shares were
registered in his name but alleged that he held these shares
not as nominee of Marcos, as the Republic claimed, but as
nominee of Menzi. He did not, however, present any
evidence to support his claim and, in fact, filed a
Manifestation dated July 20, 1999 stating that he sees no
need to present any evidence in his behalf.

Ill-Gotten Wealth; Words and Phrases; Ill-gotten wealth is any
asset, property, business enterprise or material possession of
persons within the purview of Executive Orders Nos. 1 and 2,
acquired by them directly, or indirectly thru dummies,
nominees, agents, subordinates and/or business associates
by any of the means or similar schemes set out under the
Rules and Regulations of the Presidential Commission on
Good Government (PCGG).These pieces of uncontradicted
evidence suffice to establish that the 198 and 214 blocks are
indeed ill-gotten wealth as defined under the Rules and
Regulations of the PCGG, viz.: Sec. 1. Definition.(A) Ill-
gotten wealth is hereby defined as any asset, property,
business enterprise or material possession of persons within
the purview of Executive Orders

23


23


Nos. 1 and 2, acquired by them directly, or indirectly thru
dummies, nominees, agents, subordinates and/or business
associates by any of the following means or similar schemes:
(1) Through misappropriation, conversion, misuse or
malversation of public funds or raids on the public treasury;
(2) Through the receipt, directly or indirectly, of any
commission, gift, share, percentage, kickbacks or any other
form of pecuniary benefit from any person and/or entity in
connection with any government contract or project or by
reason of the office or position of the official concerned; (3)
By the illegal or fraudulent conveyance or disposition of
assets belonging to the government or any of its subdivisions,
agencies or instrumentalities or government-owned or
controlled corporations; (4) By obtaining, receiving or
accepting directly or indirectly any shares of stock, equity or
any other form of interest or participation in any business
enterprise or undertaking; (5) Through the establishment of
agricultural, industrial or commercial monopolies or other
combination and/or by the issuance, promulgation and/or
implementation of decrees and orders intended to benefit
particular persons or special interests; and (6) By taking
undue advantage of official position, authority, relationship
or influence for personal gain or benefit.

Same; Corporation Code; Stock Certificates; A stock
certificate is merely a tangible evidence of ownership of
shares of stockits presence or absence does not affect the
right of the registered owner to dispose of the shares covered
by the stock certificate.The fact that the stock certificates
covering the shares registered under the names of Campos,
Cojuangco and Zalamea were found in Menzis possession
does not necessarily prove that the latter owned the shares.
A stock certificate is merely a tangible evidence of ownership
of shares of stock. Its presence or absence does not affect the
by the stock certificate. Hence, as registered owners, Campos
and Zalamea validly ceded their shares in favor of the
Government. This assignment is now a fait accompli for the
benefit of the entire nation.

Same; Presidential Commission on Good Government
(PCGG); Sequestration; Exception; While it is true that PCGG
is not empowered to sell sequestered assets without prior
Sandiganbayan approval, this case clearly presents an
exception because the Supreme Court itself directed PCGG to
accept the cash deposit offered by Bulletin in payment for the
Cojuangco and Zalamea sequestered shares subject to the
alternatives mentioned therein and the outcome of the

24

24



remand to the Sandiganbayan on question of ownership of
these sequestered shares.The contention that the sale of
the 214 block to the Bulletin was null and void as the PCGG
failed to obtain approval from the Sandiganbayan is likewise
unmeritorious. While it is true that the PCGG is not
empowered to sell sequestered assets without prior
Sandiganbayan approval, this case presents a clear exception
because this Court itself, in the Teehankee Resolution,
directed the PCGG to accept the cash deposit offered by
Bulletin in payment for the Cojuangco and Zalamea
sequestered shares subject to the alternatives mentioned
therein and the outcome of the remand to the
Sandiganbayan on the question of ownership of these
sequestered shares.

Damages; An award of actual or compensatory damages
requires proof of pecuniary lossin this case, the Republic
has not proven with a reasonable degree of certainty,
premised on competent proof and the best evidence
obtainable, that it has suffered any actual pecuniary loss by
reason of the acts of the defendants.With regard to the
Republics prayer for damages, we find the same not
supported by sufficient evidence. An award of actual or
compensatory damages requires proof of pecuniary loss. In
this case, the Republic has not proven with a reasonable
degree of certainty, premised on competent proof and the
best evidence obtainable, that it has suffered any actual
pecuniary loss by reason of the acts of the defendants.
Hence, actual or compensatory damages may not be
awarded.

Same; While no proof of pecuniary loss is necessary in order
that moral, temperate, nominal and exemplary damages may
be adjudicated, proof of damage or injury should nonetheless
be adduced.While no proof of pecuniary loss is necessary in
order that moral, temperate, nominal and exemplary
damages may be adjudicated, proof of damage or injury
should nonetheless be adduced. As found by the
Sandiganbayan, however, the Republic failed to show the
factual basis for the award of moral damages and its causal
connection to defendants acts. Thus, moral damages, which
are designed to compensate the claimant for actual injury
suffered and not to impose a penalty on the wrongdoer, may
not be awarded. Temperate, nominal, and exemplary
damages, attorneys fees, litigation expenses and judicial
costs may likewise not be adjudicated for failure to present
sufficient evidence to establish entitlement to these awards.

25


25


PETITIONS for review on certiorari of a decision of the
Sandiganbayan.


The Solicitor General for the Republic of the Philippines.

Francis Gaw for Emilio T. Yap.

Siguion Reyna, Montecillo & Ongsiako for Estate of Hans
Menzi.

Estelito P. Mendoza for E.M. Cojuangco, Jr.

Robert A.C. Sison for Imelda R. Marcos.

TINGA, J.:

In the hope-filled but problem-laden aftermath of the EDSA
Revolution, President Corazon C. Aquino issued Executive
Order (EO) No. 1, creating the Presidential Commission on
Good Government (PCGG) tasked with, among others, the
recovery of all ill-gotten wealth accumulated by former
President Ferdinand Marcos, his immediate family, relatives,
subordinates and close associates. This was followed by EO
Nos. 2 and 14, respectively freezing all assets and properties
in the Philippines in which the former President, his wife,
their close relatives, subordinates, business associates,
dummies, agents or nominees have any interest or
participation, and defining the jurisdiction over cases
involving the ill-gotten wealth. Pursuant to the executive
orders, several writs of sequestration were issued by the
PCGG in pursuit of the reputedly vast Marcos fortune.

Following a lead that Marcos had substantial holdings in
Bulletin Publishing Corporation (Bulletin), the PCGG issued a
Writ of Sequestration dated April 22, 1986, sequestering the
shares of Marcos, Emilio T. Yap (Yap), Eduardo M. Cojuangco,
Jr. (Cojuangco), and their nominees and agents in Bulletin.

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26



This was followed by another Writ of Sequestration issued on
February 12, 1987, this time sequestering the shares of stock,
assets, properties, records and documents of Hans Menzi
Holdings and Management, Inc. (HMHMI).

The Republic then instituted before the Sandiganbayan on
July 29, 1987, a complaint for reconveyance, reversion,
accounting, restitution and damages entitled Republic of the
Philippines v. Emilio T. Yap, Manuel G. Montecillo, Eduardo
M. Cojuangco, Jr., Cesar C. Zalamea, Ferdinand E. Marcos and
Imelda R. Marcos and docketed as Civil Case No. 0022. The
complaint substantially averred that Yap knowingly and
willingly acted as the dummy, nominee or agent of the
Marcos spouses in appropriating shares of stock in domestic
corporations such as the Bulletin, and for the purpose of
preventing disclosure and recovery of illegally obtained
assets. It also averred that Cesar Zalamea (Zalamea) acted,
together with Cojuangco, as dummies, nominees and/or
agents of the Marcos spouses in acquiring substantial shares
in Bulletin in order to prevent disclosure and recovery of
illegally obtained assets, and that Zalamea established,
together with third persons, HMHMI which acquired Bulletin.

On March 10, 1988, the complaint was amended joining
Cojuangco as Zalameas co-actor instead of mere
collaborator. The complaint was amended for the second
time on October 17, 1990. The amendment consisted of
dropping Zalamea as defendant in view of the Deed of
Assignment dated October 15, 1987 which he executed,
assigning, transferring and ceding to the Government the
121,178 Bulletin shares registered in his name. These shares,
as will be explained forthwith, formed part of the 214,424.5
shares (214 block) which became the subject of a case1 that
reached this Court.

The Second Amended Complaint also included the Estate of
Hans M. Menzi (Estate of Menzi), through its executor,

_______________

1 Bulletin Publishing Corporation v. PCGG, No. L-79126, April
15, 1988, 160 SCRA 716.

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27


Atty. Manuel G. Montecillo (Atty. Montecillo), as one of the
defendants.

The issues presented for resolution as stated in the
Sandiganbayans Pre-Trial Order dated November 11, 1991
were:

1) Whether or not the sale of 154,470 shares of stock of
Bulletin Publishing Co., Inc., subject of this case by the late
Hans M. Menzi to the U.S. Automotive Co. Inc. is valid and
legal; and
2) Whether or not the shares of stock of Bulletin Publishing
Co. Inc. registered and/or issued in the name of defendants
Emilio T. Yap, Eduardo Cojuangco, Jr., Cesar Zalamea and the
late Hans M. Menzi (and/or his estate and/or his holding
company, HM Holding & Investment Corp.) are ill-gotten
wealth of the defendants Marcos spouses.

Make of record the oral manifestation of Atty. Estelito
Mendoza, counsel for defendant Eduardo Cojuangco. That:
(a) whether or not the said 154,470 shares of stock of Bulletin
Publishing Co. Inc. legally belonged to the late Hans Menzi
before he sold the same to U.S. Automotive Co. Inc. and (b)
whether or not plaintiff Republic is entitled to the same,
should also be threshed out during the trial on the merits.2

After protracted proceedings which spawned a number of
cases3 that went up to this Court, the Sandiganbayan
rendered a Decision4 dated March 14, 2002,5 the dispositive
portion of which states:

_______________

2 As quoted in the assailed Decision; G.R. No. 152578, Vol. I,
Rollo, pp. 10-51, at p. 12.

3 Bulletin Publishing Corporation v. PCGG, No. L-79126, April
15, 1988, 160 SCRA 716; Republic v. Sandiganbayan, G.R. No.
135789, January 31, 2002, 375 SCRA 425; Republic v.
Sandiganbayan, G.R. No. 107377, Min. Res., 10-29-92 (EO).

4 Supra note 2. The Decision was penned by Associate Justice
Rodolfo G. Palattao and concurred in by Associate Justices
Narciso S. Nario and Nicodemo T. Ferrer.

5 Though dated March 5, 2002, the Decision was actually
promulgated on March 14, 2002.

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28



WHEREFORE, judgment is hereby rendered:

1. Declaring that the following Bulletin shares are the
illgotten wealth of the defendant Marcos spouses:

A. The 46,626 Bulletin shares in the name of defendant
Eduardo M. Cojuangco, Jr., subject of the Resolution of the
Supreme Court dated April 15, 1988 in G.R. No. 79126.

Pursuant to alternative A mentioned therein, plaintiff
Republic of the Philippines through the PCGG is hereby
declared the legal owner of these shares, and is further
directed to execute, in accordance with the Agreement which
is entered into with Bulletin Publishing Corporation on June 9,
1988, the necessary documents in order to effect transfer of
ownership over these shares to the Bulletin Publishing
Corporation.

B. The 198,052.5 Bulletin shares in the names of:

No. of Shares

Jose Y. Campos

90,866.5

Eduardo M. Cojuangco, Jr.

90,877.0

Cesar C. Zalamea

16,309.0

Total

198,052.5

which they transferred to HM Holdings and Management, Inc.
onAugust 17, 1983, and which the latter sold to Bulletin
PublishingCorporation on February 21, 1986. The proceeds
from this sale arefrozen pursuant to PCGGs Writ of
Sequestration dated February 12,1987, and this writ is the
subject of the Decision of the SupremeCourt dated January
31, 2002 in G.R. No. 135789.

Accordingly, the proceeds from the sale of these 198,052.5
Bulletin shares, under Philtrust Bank Time Deposit Certificate
No. 136301 dated March 3, 1986 in the amount of
P19,390,156.68 plus interest earned, in the amount of
P104,967,112.62 as of February 28, 2002, per Philtrust Banks
Motion for Leave to Intervene and to consign the Proceeds of
Time Deposits of HMHMI, filed on February 28, 2002 with the
Supreme Court in G.R. No. 135789, are hereby declared
forfeited in favor of the plaintiff Republic of the Philippines.

2. Ordering the defendant Estate of Hans M. Menzi through
its Executor, Manuel G. Montecillo, to surrender for
cancellation the original eight Bulletin certificates of stock in
its possession, which were presented in court as Exhibits .,
which are part of the

29


29


212,424.5 Bulletin shares subject of the Resolution of the
Supreme Court dated April 15, 1988 in G.R. No. 79126.

3. Declaring that the following Bulletin shares are not the
illgotten wealth of the defendant Marcos spouses:

a. The 154,472 Bulletin shares sold by the late Hans M.
Menzi to U.S. Automotive Co., Inc., the sale thereof being
valid and legal;
b. The 2,617 Bulletin shares in the name of defendant
Emilio T. Yap which he owns in his own right; and
c. The 1 Bulletin share in the name of the Estate of Hans M.
Menzi which it owns in its own right.

4. Dismissing, for lack of sufficient evidence, plaintiffs claim
for damages, and defendants respective counterclaims.

SO ORDERED.6

In the present consolidated petitions, the foregoing
Sandiganbayan Decision is assailed on different grounds.

The Republic, in G.R. No. 152758, assails the afore-quoted
Decision insofar as it declared as not ill-gotten wealth of the
Marcos spouses the 154,472 shares (154 block) sold by Menzi
to U.S. Automotive Co., Inc. (US Automotive) and dismissed
the Republics claim for damages.

In G.R. No. 154487, Cojuangco questions paragraphs 1 and 2
of the Sandiganbayan Decision.

In G.R. No. 154518, on the other hand, the Estate of Menzi
imputes grave error and misinterpretation of facts and
evidence against the Sandiganbayan in declaring that the
46,626 Bulletin shares in the name of Cojuangco, and the
198,052.5 shares (198 block) in the names of Jose Campos
(Campos), Cojuangco and Zalamea are ill-gotten wealth of the
Marcoses.

The three blocks of Bulletin shares of stock subject of these
consolidated petitions are:

_______________

6 Id., at pp. 47-49.

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30



1. 154,472 shares (154 block) sold by the late Menzi and/or
Atty. Montecillo to US Automotive on May 15, 1985 for
P24,969,200.09;
2. 198,052.50 (198 block) issued and registered in the
names of Campos, Cojuangco, and Zalamea which were
transferred to HMHMI and subsequently sold by HMHMI
(through Atty. Montecillo) to Bulletin on February 21, 1986
for P23,675,195.85; and
3. 214,424.5 shares (214 block) issued and registered in the
names of Campos, Cojuangco, and Zalamea which were the
subject of the unanimous Resolution of this Court, through
Mr. Chief Justice Claudio Teehankee, in Bulletin v. PCGG7
(Teehankee Resolution) dated April 15, 1988 and the
Sandiganbayan Resolutions dated January 2, 1995 and April
25, 1996 in Civil Case No. 0022.

For clarity of presentation, the 154 block, which is the subject
of the Republics petition in G.R. No. 152578, is treated
separately from the 198 and 214 blocks, which are the
subjects of the petitions in G.R. No. 154487 and G.R. No.
154518.
154 Block

In 1957, Menzi purchased the entire interest in Bulletin from
its founder and owner, Mr. Carson Taylor. In 1961, Yap,
owner of US Automotive, purchased Bulletin shares from
Menzi and became one of the corporations major
stockholders.

On April 2, 1968, a stock option was executed by and
between Menzi and Menzi and Co. on the one hand, and Yap
and US Automotive on the other, whereby the parties gave
each other preferential right to buy the others Bulletin
shares.

_______________

7 Supra, note 1.

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31


On April 22, 1968, the stockholders of Bulletin approved
certain amendments to Bulletins Articles of Incorporation,
consisting of some restrictions on the transfer of Bulletin
shares to non-stockholders.8 The amendments were
approved

_______________

8 The Amended Articles of Incorporation provides:

That the subscription and ownership of any and all shares of
stock in the corporation are made and taken subject to the
condition that any stockholder desiring to sell, transfer,
convey or otherwise dispose of his/her shares of stock shall
first offer the same to the corporation who shall have priority
in acquiring the same. The stockholder concerned shall notify
the President and all the other stockholders of the
corporation of his/her intention to sell or dispose of his/her
stockholdings in writing, and duly receipted for by the
President of the corporation at its principal office in the City
of Manila and by all the other stockholders. The corporation
shall have thirty (30) days from date of receipt of written
offer by the President within which to exercise the option.
The selling price of the shares shall not be more than the
book value thereof based on the balance sheet at the end of
the preceding year of the corporation which has been
approved by the Board of Directors. Should the corporation
fail to exercise the option herein granted, the stockholders
concerned shall be free to sell, transfer, convey or otherwise
dispose of his/her stockholdings to any person, who must,
however, be a Filipino citizen or to a firm or corporation the
capital stock of which is 100% Filipino owned or controlled.

The foregoing restrictions and limitations shall not apply to
the sale, transfer, conveyance or disposition by any
stockholder of his/her shares of stock in favor of another
stockholder of the corporation or to the disposition by any
stockholder of the corporation of his/her shares of stock by
will, donation, inheritance, assignment or transfer in favor of
his/her legal heirs or direct descendants.

Any transfer of conveyance in violation of the foregoing,
terms and conditions shall be null and void and shall not e
transferable in the books of the corporation.

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by the Board of Directors of Bulletin and by the Securities and
Exchange Commission (SEC).

Several years later, on June 5, 1984, Atty. Amorsolo V.
Mendoza (Atty. Mendoza), Vice President of US Automotive,
executed a promissory note with his personal guarantee in
favor of Menzi, promising to pay the latter the sum of
P21,304,921.16 with interest at 18% per annum as
consideration for Menzis sale of his 154 block on or before
December 31, 1984.

One day after Menzis death on June 27, 1984, a petition for
the probate of his last will and testament was filed in the
Regional Trial Court (RTC) of Manila, Branch 29, by the named
executor, Atty. Montecillo, and docketed as Special
Proceeding No. 84-25244.

On January 10, 1985, Atty. Montecillo filed a motion praying
for the confirmation of the sale to US Automotive of Menzis
154 block. The probate court confirmed the sale in its Order
dated February 1, 1985.

Accordingly, on May 15, 1985, Atty. Montecillo received from
US Automotive two (2) checks in the amounts of
P21,304,778.24 and P3,664,421.85 in full payment of the
agreed purchase price and interest for the sale of the 154
block. On the same day, Atty. Montecillo signed a company
voucher acknowledging receipt of the payment for the
shares, indicating on the dorsal portion thereof the certificate
numbers of the 12 stock certificates covering the 154 block,
the number of shares covered by each certificate and the
date of issuance thereof.

Atty. Montecillo also wrote on the lower portion of the
promissory note executed by Atty. Mendoza the words Paid

_______________

The entire provisions of this amendment shall be printed on
the stock certificates of the corporation and shall be binding
on all stockholders, their successors, assigns, administrators
and representatives. Quoted from the Sandiganbayan
Decision, Supra, note 2 at pp. 13-14.

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May 15, 1985 (signed) M.G. Montecillo, Executor of the
Estate of Hans M. Menzi.

Upon these facts, the Sandiganbayan ruled that the sale of
the 154 block to US Automotive is valid and legal. According
to the Sandiganbayan, the sale was made pursuant to the
stock option executed in 1968 between the parties to the
sale. Negotiations took place and were concluded before
Menzis death, and full payment was made only after the
probate court had judicially confirmed the sale.

The Sandiganbayan dismissed the Republics claim, based on
the affidavit of Mariano B. Quimson, Jr. (Quimson) dated
October 9, 1986, that the sale should be nullified because US
Automotive only acted as a dummy of Marcos who was the
real buyer of the shares. According to the court, the Republic
failed to overcome its burden of proof since Quimsons
affidavit was not corroborated by other evidence and was, in
fact, refuted by Atty. Montecillo.

In its Memorandum9 dated July 7, 2003 in G.R. No. 152578,
the Republic argues that the Sandiganbayan failed to take
into account the fact that despite Menzis claim that he
acquired Bulletin in 1957, he did not include any Bulletin
shares in his Last Will and Testament executed in 1977. Atty.
Montecillo, the executor of Menzis estate, likewise did not
include any Bulletin share in the initial inventory of Menzis
properties filed on May 15, 1985. Neither were any Bulletin
shares declared by Atty. Montecillo even after the probate
court issued an Order dated November 17, 1992 for the
submission of an updated inventory of Menzis assets.

The Republic claims that despite these circumstances,
coupled with Quimsons affidavit detailing how Marcos used
his dummies to conceal his control over Bulletin, as well as
the letters and correspondence between Marcos and Menzi
indicating that Menzi consistently updated Marcos on the
affairs of Bulletin, the Sandiganbayan ruled that the 154 block
was

_______________

9 G.R. No. 152578, Vol. II, Rollo, pp. 1503-1582.

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34



not ill-gotten wealth of the Marcoses. The Sandiganbayans
erroneous inference allegedly warrants a review of its
findings.

Moreover, the Republic disputes the Sandiganbayans ruling
that it heavily leaned on the affidavit of Quimson without
presenting any other corroborating evidence.10 It argues that

_______________

10 As stated in the assailed Decision, Quimson, former
President of Bulletin, testified regarding what he knew about
the nominees of Marcos in Bulletin, as follows:

There were three (3) NOMINEES OF THE President and
corresponding shares were issued to them after the
accompanying infusion of funds, which Menzi got from
Marcos. The three (3) nominees were:

Jose Y. Campos

Cesar C. Zalamea

Ramon Cojuangco

Shares of stock representing around 54% of the equity were
issued in the name of the above nominees and surrendered
to Menzi in 1973. After a short period, Menzi called me and
instructed me to change nominee Ramon Cojuangco, in favor
of Eduardo Cojuangco, saying that this was upon instruction
of the President. Ramon Cojuangcos shares were cancelled
and new shares were issued to Eduardo Cojuangco. None of
these nominees showed up in any stockholders meetings.
Nor did they send representative to attend or observe the
meetings.

Sometime in 1983, Menzi requested me to prepare a listing of
all stock certificates in the name of the nominees, saying that
a holding company (which I later on learned as the H M
Holdings and Management, Inc.) was being organized by Atty.
Manuel Montecillo and Mr. Rolando Gapud to which
company all the Bulletin shares in the name of the nominees
and shares held by Hans M. Menzi for the President in
Liwayway Publishing, Inc. (about 92% of the total shares)
Menzi & Co., Inc., Menzi Agricultural, Inc., Menzi
Development Corporation, and M & M Consolidated, Inc. will
be transferred. I recall Gen. Menzi as saying He (President
Marcos) knows I (Menzi) am sickly; and the children now
want a piece of the action.

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35


in the proceedings before the PCGG, Quimson was subjected
to cross-examination by the lawyers of Bulletin which is
controlled by Yap. Further, the evidence it presented before
the PCGG purportedly showing that the transfer of Bulletin
shares from Menzi to US Automotive was undertaken due to
pressure exerted by Marcos on Menzi should have been
taken into account.

The Republic insists that the sale between Menzi and U.S.
Automotive was a sham because the parties failed to comply
with the basic requirement of a deed of sale in the transfer of
the subject shares. Further, a number of questions were
allegedly not resolved, such as: (a) Who was the seller of the
subject sharesthe late Menzi as the alleged owner or Atty.
Montecillo as then special administrator and later executor of
Menzis estate; (b) If Menzi sold the shares, was there a need
to confirm the sale? If Atty. Montecillo was the one who sold
them, what was his authority to sell the said shares?

The Republic also contends that Menzi and Yap were both
dummies of the late President Marcos, used by the latter in
order to conceal his interest in Bulletin. Hence, the 154 block
should also have been declared ill-gotten wealth and
forfeited in favor of the Government.

The foregoing allegedly warrants the award of damages in
favor of the Republic which the Sandiganbayan erroneously
failed to do.

_______________

About 3 months before his death, Menzi instructed me to
follow and implement what he (Menzi) had been told by
President Marcos to do, namely, to report monthly results of
the operations of both Bulletin Publishing Corporation and
Liwayway Publishing, Inc. to Mr. Rolando Gapud of Security
Bank and to deliver all the dividends checks (1983) for the
three Bulletin nominees (Zalamea, Cojuangco and Campos) to
Mr. Gapud. This was faithfully complied with and I saw Mr.
Gapud monthly until I retired in May, 1985.

Supra, note 2 at pp. 24-25, 27-28.

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36



The Republic, therefore, prays that the Sandiganbayan
Decision, insofar as it declares the sale of the 154 block to be
valid and legal, be reconsidered and judgment accordingly
rendered declaring the 154 block as ill-gotten wealth,
forfeiting the same or the proceeds thereof in favor of the
Republic, and awarding actual, temperate and nominal
damages in the Courts discretion, moral damages in the
amount of 50 Billion Pesos, exemplary damages of 1 Billion
Pesos, attorneys fees, litigation expenses and treble judicial
costs.

The Estate of Menzi and HMHMI filed a Memorandum11
dated March 10, 2005, averring that the Republic failed to
adduce evidence of any kind that the 154 block was ill-gotten
wealth of the Marcoses. They claim that the requirements for
a valid transfer of stocks, namely: (1) there must be delivery
of the stock certificate; (2) the certificate must be indorsed by
the owner or his attorney-in-fact or other persons legally
authorized to make the transfer; and (3) the transfer must be
recorded in the books of the corporation in order to be valid
against third parties, have all been met.

The parties to the sale allegedly confirm the indorsement and
delivery of the Bulletin shares of stock representing the 154
block. The requirement that the transfer be recorded in the
books of the corporation was also met because US
Automotive exercised its rights as shareholder.

It is also allegedly immaterial whether it was Menzi or Atty.
Montecillo who indorsed the stock certificates. If it was
Menzi, then his indorsement was an act of ownership; if it
was Montecillo, then the indorsement was pursuant to the
duly executed General Power of Attorney filed with the SEC
and, subsequently, on the basis of his authority as Special
Administrator and Executor of Menzis estate.

In his Memorandum12 dated May 10, 2005, Yap also
maintains that the sale of the 154 block was valid and legal.
The

_______________

11 Supra, note 9 at pp. 1649-1771.

12 Id., at pp. 1882-1957.

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37


non-inclusion of the said block of shares in the inventory of
Menzis estate was purportedly due to the fact that the same
had, by then, been sold to US Automotive. Yap also claims
that Atty. Montecillo was duly authorized to effect the sale by
virtue of the General Power of Authority and the Last Will and
Testament executed by Menzi.

The absence of a deed of sale evidencing the sale is allegedly
not irregular because the law itself does not require any deed
for the validity of the transfer of shares of stock, it being
sufficient that such transfer be effected by delivery of the
stock certificates duly indorsed. At any rate, a duly notarized
Receipt covering the sale was executed.13

Moreover, the BIR certified that the Estate of Menzi paid the
final tax on capital gains derived from the sale of the 154
block and authorized the Corporate Secretary to register the
transfer of the said shares in the name of US Automotive.
Further, a stock certificate covering the 154 block was issued
to US Automotive by Quimson himself as Corporate
Secretary.

Sec. 63 of the Corporation Code provides the requisites for a
valid transfer of shares:

Sec. 63. Certificate of stock and transfer of shares.The
capital stock of stock corporations shall be divided into shares
for which certificates signed by the president or vice-
president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be
issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer is
recorded in the books of the corporation showing the names
of the parties to the transaction, the date of the

_______________

13 Supra, note 2, at p. 16; Exhs. 4 and 4-A-Yap; Exh. AA.

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38



transfer, the number of the certificate or certificates and the
number of shares transferred.

No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation. [Emphasis supplied]

The Corporation Code acknowledges that the delivery of a
duly indorsed stock certificate is sufficient to transfer
ownership of shares of stock in stock corporations. Such
mode of transfer is valid between the parties. In order to bind
third persons, however, the transfer must be recorded in the
books of the corporation.

Clearly then, the absence of a deed of assignment is not a
fatal flaw which renders the transfer invalid as the Republic
posits. In fact, as has been held in Rural Bank of Lipa City, Inc.
v. Court of Appeals,14 the execution of a deed of sale does
not necessarily make the transfer effective.

In that case, petitioners argued that by virtue of the deed of
assignment, private respondents had relinquished to them all
their rights as stockholders of the bank. This Court, however,
ruled that the delivery of the stock certificate duly indorsed
by the owner is the operative act that transfers the shares.
The absence of delivery is a fatal defect which is not cured by
mere execution of a deed of assignment. Consequently,
petitioners, as mere assignees, cannot enjoy the status of a
stockholder, cannot vote nor be voted for, and will not be
entitled to dividends, insofar as the assigned shares are
concerned.

There appears to be no dispute in this case that the stock
certificates covering the 154 block were duly indorsed and
delivered to the buyer, US Automotive. The parties to the
sale, in fact, do not question the validity and legality of the
transfer.

_______________

14 G.R. No. 124535, September 28, 2001, 366 SCRA 188.

39


39


The objection raised by the Republic actually concerns the
authority of Atty. Montecillo, the executor of Menzis estate,
to indorse the said certificates. However, Atty. Montecillos
authority to negotiate the transfer and execute the necessary
documents for the sale of the 154 block is found in the
General Power of Attorney executed by Menzi on May 23,
1984, which specifically authorizes Atty. Montecillo *T+o sell,
assign, transfer, convey and set over upon such consideration
and under such terms and conditions as he may deem proper,
any and all stocks or shares of stock, now standing or which
may thereafter stand in my name on the books of any and all
company or corporation, and for that purpose to make, sign
and execute all necessary instruments, contracts, documents
or acts of assignment or transfer.15

Atty. Montecillos authority to accept payment of the
purchase price for the 154 block sold to US Automotive after
Menzis death springs from the latters Last Will and
Testament and the Order of the probate court confirming the
sale and authorizing Atty. Montecillo to accept payment
therefor. Hence, before and after Menzis death, Atty.
Montecillo was vested with ample authority to effect the sale
of the 154 block to US Automotive.

That the 154 block was not included in the inventory is
plausibly explained by the fact that at the time the inventory
of the assets of Menzis estate was taken, the sale of the 154
block had already been consummated. Besides, the non-
inclusion of the proceeds of the sale in the inventory does not
affect the validity and legality of the sale itself.

At any rate, the Sandiganbayans factual findings that the 154
block was sold to US Automotive while Menzi was still alive,
and that Atty. Montecillo merely accepted payment by virtue
of the authority conferred upon him by Menzi himself

_______________

15 The General Power of Attorney is attached as Annex 3 of
Yaps Memorandum and marked as Yaps Exhibit 10; Supra,
note 9 at pp. 1973-1976.

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40



are conclusive upon this Court, supported, as they are, by the
evidence on record.16 As held by the Sandiganbayan:

The sale was made pursuant to the Stock Option executed
in 1968 between the parties to the sale, considering the
restrictions contained in Bulletins Articles of Incorporation as
amended in 1968 limiting the transferability of its shares.
Negotiations for the sale took place and were concluded
before the death of Menzi. After his death, full payment of
the entire consideration of the sale, principal and interest,
was made only after judicial confirmation thereof in the
Probate Case. The transaction was duly supported by the
corresponding receipt, voucher, cancelled checks, cancelled
promissory note, and BIR certification of payment of the
corresponding taxes due thereon.17

The Supreme Court is not a trier of facts. It is not our function
to examine and weigh all over again the evidence presented
by the parties in the proceedings before the
Sandiganbayan.18

It is also significant that even Quimsons affidavit does not
state, in a categorical manner, that Yap was a Marcos dummy
used by the latter to conceal his Bulletin shareholdings. In
contrast, Quimson unqualifiedly declared that Campos, Co-

_______________

16 Republic v. Sandiganbayan, G.R. No. 128606, December 4,
2000, 346 SCRA 760.

17 Supra note 2 at p. 19.

18 Republic v. Sandiganbayan, G.R. No. 135789, January 31,
2002, 375 SCRA 425. In that case, the Sandiganbayan held
that *B+ased on the evidence the PCGG submitted so far to
the Sandiganbayan, the late Hans M. Menzi owned the
Bulletin Publishing Corporation almost one hundred (100%)
percent since 1957, except those Bulletin shares sold to U.S.
Automotive Corporation in 1985, those converted to treasury
shares in 1986, and those sold to the general public at public
offerings (Per Pardo, J. Chief Justice Davide and Associate
Justices Puno, Kapunan and Ynares-Santiago, concurring)

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juangco and Zalamea were the former dictators nominees to
Bulletin.19

We, therefore, agree with the Sandiganbayan that the sale of
the 154 block to US Automotive was valid and legal.
198 and 214 blocks

HMHMI was incorporated on May 20, 1982 by Menzi,
Campos, Cojuangco, Rolando C. Gapud (Gapud) and Zalamea,
with an authorized capital stock of P1,000,000.00 divided into
100,000 shares with par value of P10.00 each.

A Deed of Transfer and Conveyance was executed by Menzi,
Campos, Cojuangco and Zalamea on August 17, 1983,
transferring the shares of stock registered in their names in
various corporations to HMHMI in exchange for 6,000,000
shares of the latters capital stock, subject to the approval by
the SEC of HMHMIs Certificate of Increase of Capital Stock.
The shares of stock transferred included the 198 block of
Bulletin shares, 90,866.5 of which were registered in the
name of Campos; 90,877 in the name of Cojuangco; and
16,309 in the name of Zalamea.

On February 14, 1984, HMHMI amended its Articles of
Incorporation by increasing its authorized capital stock to
P100,000,000.00 divided into 10,000,000 shares with par
value of P10.00 per share.

On January 15, 1986, the law firm of Siguion Reyna,
Montecillo & Ongsiako wrote a letter to Bulletins corporate
secretary, Atty. Mendoza, requesting that three (3)
certificates of stock representing 90,866.5, 90,877, and
16,309 Bulletin shares be issued in favor of HMHMI in
exchange for 21 certificates of stock in HMHMI.

Atty. Mendoza acknowledged receipt of the 21 certificates of
stock but replied that the transfer by Campos, Cojuangco

_______________

19 Affidavit of Quimson attached as Annex S to Cojuangcos
petition in G.R. No. 154487. G.R. No. 154487 Rollo, pp. 522-
526.

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and Zalamea of their Bulletin shares to HMHMI cannot be
recorded in the books of Bulletin because it was made in
violation of Bulletins Articles of Incorporation which provides
restrictions and limitations on the transferability of the shares
of the company by its stockholders. Bulletin, however,
offered to buy the shares at the price fixed in the Articles of
Incorporation. The offer appears to have been accepted by
HMHMI through its President, Atty. Montecillo.

Thus, on January 30, 1986, HMHMIs Board of Directors
passed a resolution approving the sale to Bulletin of the 198
block and authorizing its President or Corporate Secretary to
sign and execute the corresponding deed of sale. Accordingly,
a Deed of Sale was executed on February 21, 1986 by Atty.
Montecillo whereby HMHMI sold the 198 block to Bulletin for
the amount of P23,675,195.85.

On April 22, 1986, the shares of Marcos, Yap, Cojuangco and
their nominees or agents in the Bulletin were sequestered by
virtue of a Sequestration Order issued by the PCGG.

The SEC issued a certification to the effect that as of Feb-
ruary 21, 1986, the total subscribed shares of Bulletin was
756,861. Of these, 198,052.5 were treasury shares, leaving
the total outstanding shares at 567,808.5. The stockholders
of Bulletin and the shares of stock held by each of them were
listed as follows:

Name

No. of Shares

Emilio T. Yap

2,617

Menzi Trust Fund

28,977

Estate of Hans M. Menzi

1

U.S. Automotive Co. Inc.

318,084

x x x

x x x

Cesar Zalamea

121,178

Jose Campos

46,620.5

Eduardo Cojuangco

46,626

x x x

x x x

Total

567,808.5

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On February 12, 1987, another Writ of Sequestration was
issued by the PCGG, sequestering all the shares of stock, as
well as the assets, properties, records and documents of
HMHMI. Because of this Sequestration Order, the proceeds
from the sale of the 198 block which were deposited with
Philtrust Bank were frozen.20

On March 16, 1987, the sequestration of the 2,617 Bulletin
shares of Yap was lifted upon the latters motion.

On April 14, 1987, the PCGG wrote a letter/order to the
Corporate Secretary of Bulletin, asking for the schedule of the
annual stockholders meeting of the corporation because the
sequestered shares consisting of the 214 block will be voted
by the Commission. This letter became the subject of a
petition21 filed by Bulletin with this Court questioning the
validity of the PCGGs letter/order and seeking to compel
PCGG to accept Bulletins offer of a cash deposit in the
amount of P34,592,903.34 representing the value of the 214
block of sequestered Bulletin shares. The Court issued a
temporary restraining order.

On July 31, 1987, the PCGG received from Bulletin the
amount of P8,173,506.06 as full payment of 46,620.5 Bulletin
shares registered in the name of Campos. The receipt stated
that Mr. Jose Y. Campos has waived the ownership of said
shares in favor of the Republic of the Philippines through the
Presidential Commission on Good Government.

A Deed of Assignment was likewise executed by Zalamea on
October 15, 1987, assigning and waiving in favor of the
Republic his rights to 121,178 Bulletin shares registered in his
name. On the same day, Bulletin issued in favor of PCGG

_______________

20 On April 13, 1998, however, the Sandiganbayan lifted the
Writ of Sequestration dated February 12, 1987, reasoning
that there was no prima facie factual basis for its issuance.
This Resolution was affirmed by the Supreme Court in
Republic v. Sandiganbayan, G.R. No. 135789, January 31,
2002, 375 SCRA 425.

21 Supra note 5.

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a check in the amount of P21,244,926.96 as full payment of
Zalameas shares.

This Court, on April 15, 1988, issued the Teehankee
Resolution, the dispositive portion of which pertinently
states:

2. Directing the Commission to accept the cash deposit of
P8,174,470.32 offered by petitioner for the 46,626
sequestered shares in the name of Mr. Eduardo M.
Cojuangco, Jr. expressly subject to the alternative conditions
(A and B) hereinabove set forth, and likewise directing the
Commission to accept the cash deposit, if it has not actually
sold the Cesar C. Zalamea Bulletin shares to petitioner (supra,
p. 13, par [2]) of P21,244,926.96 for the sequestered shares
of Bulletin in the name of Mr. Cesar Zalamea under the same
alternatives already mentioned; and
3. Remanding the case regarding the issue of ownership of
the said sequestered Bulletin shares for determination and
adjudication to the Sandiganbayan.22

An agreement was thereafter executed between PCGG and
Bulletin on June 9, 1988 regarding the 46,626 Bulletin shares
of Cojuangco whereby PCGG accepted Bulletins deposit in
the amount of P8,174,470.32, subject to the alternatives set
forth in the Teehankee Resolution, as follows:

Alternative ATo standby as full payment plus whatever
interest earnings thereon upon final judgment of the Court
declaring the Republic of the Philippines as owners of the
46,626 shares, accompanied by the corresponding original
stock certificates, issued in the name of the government, duly
endorsed in favor of the Bulletin Publishing Corporation, free
from liens and encumbrances; or

Alternative BTo immediately return to Bulletin Publishing
Corporation the cash deposit in the amount of P8,174,470.32
plus whatever interest earnings thereon upon final judgment
by the Court declaring that Mr. Eduardo Cojuangco, Jr. is the
true owner of the 46,626 shares.23

_______________

22 Id., at p. 728.

23 Id., at p. 727.

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With this factual backdrop, the Sandiganbayan ruled that
Campos, Cojuangco and Zalamea were nominees and
dummies of Marcos. Hence, the 198 block which these
nominees transferred to HMHMI and which, in turn, were
sold to Bulletin are ill-gotten wealth.

The Sandiganbayan anchored its finding on the Deposition of
Campos taken on November 25, 1994 before the Philippine
Consulate General in Vancouver, British Columbia, Canada,
that he held shares in Bulletin and HMHMI per instruction of
President Marcos; that the beneficial owner of these shares
must be President Marcos; and that he received three (3)
dividend checks from Bulletin for the benefit of President
Marcos.

Based on the Deed of Assignment executed by Zalamea on
October 15, 1987, wherein he manifested that he does not
claim true and beneficial ownership of the 121,178 Bulletin
shares registered in his name and that he voluntarily waived
and assigned these shares in favor of PCGG, the
Sandiganbayan concluded that Zalamea could not have been
a nominee of Menzi, as the latters estate claims, but of
Marcos.

The Sandiganbayan likewise rejected Cojuangcos contention
that the Bulletin and HMHMI shares registered in his name
were not acquired and held by him as dummy, nominee
and/or agent of defendants Ferdinand E. Marcos and Imelda
Romualdez Marcos, but upon the request, and as nominee, of
the late Hans Menzi who owned and delivered to him said
shares. According to the Sandiganbayan, Cojuangco failed to
present evidence necessary to establish his affirmative
defense.

As regards the 214 block, the Sandiganbayan ruled that there
is no longer any dispute concerning the ownership of the
46,620.5 shares held by Campos and the 121,178 shares held
by Zalamea in view of the Teehankee Resolution and the fact
that these shares have been waived and assigned to PCGG.
The Sandiganbayan went on to declare that the only
remaining issue pertaining to Cojuangcos claim to his alleged

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46



portion of the 214 block should be resolved in favor of the
Republic because of Cojuangcos consistent disavowal of any
proprietary interest in the shares which are the subject
matter of the instant case and his claim that he held the
shares as nominee of Menzi.

The Sandiganbayan further ruled that Yaps shares, which
were acquired by him in 1961 before Marcos became
President, are not ill-gotten wealth of the Marcoses.
Moreover, the one (1) Bulletin share for which dividend
checks were issued to and received by the Estate of Menzi
was deemed to belong to the latter.

In G.R. No. 154487, petitioner Cojuangco assails paragraphs 1
and 2 of the Sandiganbayan Decision. Allegedly, the
Government does not claim that in acquiring the Bulletin
shares registered in Cojuangcos name, the late President
Marcos used government funds or resources. Cojuangco
raises several issues, namely: (a) Were the Bulletin shares, at
any time, of government ownership? (b) Were the Bulletin
shares acquired by Marcos and, if so, did he use government
funds to acquire them? (c) Did petitioner Cojuangco act as
the dummy or nominee of Marcos to acquire, or to
conceal the acquisition of the shares by the latter?

In the Memorandum for Eduardo M. Cojuangco, Jr.24 dated
May 6, 2005, Cojuangco argues that the Republic neither
alleged nor presented evidence to prove that that the Bulletin
shares registered in his name were owned by the Republic
but were taken by the Marcoses by taking advantage of their
public office and/or using their powers, authority, influence,
connections or relationship or that they were acquired by
the Marcoses from Menzi with the use of government or
public funds. Hence, the conclusion should be sustained that
the shares were owned by Menzi and never by the Republic,
and no public funds were used in their acquisition.

_______________

24 G.R. No. 154487 Rollo, pp. 1280-1366.

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47


Cojuangco attacks the Sandiganbayans reliance on
Quimsons affidavit saying that it is hearsay because Quimson
was not presented in court to affirm the contents of his
affidavit and was not subjected to cross-examination as he
had already passed away when Civil Case No. 0022 was tried.
Quimsons affidavit is allegedly double hearsay insofar as it
alleges that Marcos owned the Bulletin shares and that
Cojuangco was merely Marcos nominee because Quimson
had no contact with Marcos and his knowledge of the latters
purported ownership of the Bulletin shares was merely
relayed to him by Menzi.

Even the supposed corroborating evidence, consisting of the
affidavits of Pedro Teodoro, Evelyn S. Singson, Gapud, and
Angelita Reyes, have allegedly been declared as having no
probative value inasmuch as the affiants did not take the
witness stand and could not be cross-examined.

The Republic likewise allegedly failed to prove its contention
that Bulletin issued checks in favor of Campos, Cojuangco and
Zalamea which were deposited into numbered accounts in
Security Bank & Trust Company owned by the Marcoses.
Moreover, the dividend checks supposedly indorsed by
Cojuangco in blank do not conclusively demonstrate that they
were indorsed in favor of the Marcoses.

On the other hand, there is allegedly sufficient evidence on
record to prove that Cojuangco was a nominee of Menzi.
These documents consist of the testimony of Atty. Montecillo
to the effect that, as far as he knew, Cojuangco really acted
as nominee for the General, and the originals of the stock
certificates covering the Bulletin shares registered in
Cojuangcos name.

Cojuangco further avers that the allegation that the Bulletin
shares were registered in his name upon the request, and as
nominee, of Menzi is a specific denial and not an affirmative
defense as the Sandiganbayan declared. As a specific denial,
the allegation need not be proven unless the Republic

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48



presents adequate evidence proving the allegations in its
complaint which, Cojuangco insists, the Republic failed to do.

He likewise argues that the Republic is not entitled to
damages of any kind because it failed to establish that it has
any proprietary interest in the Bulletin shares registered in his
name; that the said shares are owned by the Marcoses; and
that it suffered any pecuniary loss by reason of such
ownership.

Based on these allegations, Cojuangco prays that he be
declared the owner of the 46,626 Bulletin shares registered in
his name, together with all cash and stock dividends which
have accrued in favor of said shares from October 15, 1987,
and ordering the PCGG to return the cash deposit of
P8,174,470.32 plus interest to Bulletin.

In its Memorandum25 dated March 17, 2005, the Republic
maintains that Cojuangco has consistently denied any
proprietary interest in the Bulletin shares. Hence, he cannot
claim ownership of the Bulletin shares registered in his name.
His allegation that that he was a nominee of Menzi was
pleaded by way of defense. Thus, he has the burden of
proving this material allegation, set up as new matter, that
the shares were not his but Menzis.

Since the Bulletin shares were not included in the inventory
of Menzis assets, it allegedly follows that Cojuangco could
not have been a nominee of Menzi who did not own the
subject Bulletin shares.

As regards the contention that the Republic failed to show
that the shares belong to the Government or were acquired
using public funds, the Republic maintains that Marcos
acquired the Bulletin shares using his political clout. His very
act of participating in a business enterprise using nominees to
conceal his ownership of Bulletin shares is already a violation
of the Constitution.

_______________

25 Id., at pp. 1191-1262.

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49


Furthermore, Campos and Zalamea, who, like Cojuangco,
held shares in the 198 and 214 blocks, have already
surrendered and assigned their respective shares to the
Government and acknowledged the right of the Government
over the Bulletin registered in their names. Such is allegedly a
clear indication that they acted as dummies of Marcos. The
admission of Campos and Zalamea that their shares in the
214 block belonged to Marcos may allegedly be used to prove
that the 198 block was likewise held by them as dummies of
the former dictator.

The Sandiganbayan also allegedly did not rely on the
Teehankee Resolution to support its conclusion that the 198
and 214 blocks are ill-gotten wealth but made its own finding
after a full-blown trial at which all the parties, except
Cojuangco, presented their respective evidence.

Moreover, the evidence presented by the Republic allegedly
preponderates in favor of its theory that the Bulletin shares in
the names of Campos, Cojuangco and Zalamea were actually
held in trust for the benefit of the Marcoses. Notably, the
PCGG Resolution dated May 22, 1987, presented by the
Republic as its Exhibit I declares that Quimson and Teodoro,
close associates of Menzi, stated under oath that when
Marcos allowed the Bulletin to reopen during Martial Law,
Menzi was allowed only 20% participation, and that Marcos
put his shares in the names of Campos, Cojuangco and
Zalamea.

Besides, Menzi did not execute any deed of trust in his favor
as trustor and Campos, Cojuangco and Zalamea as trustees.
Neither did the Estate of Menzi claim that Campos,
Cojuangco and Zalamea were nominees of Menzi as no
crossclaim was filed by the Estate of Menzi even as it claimed
ownership of the 198 and 214 blocks.

In their Memorandum26 dated March 10, 2005 in G.R. Nos.
154487 and 154518, the Estate of Menzi and HMHMI argue
that the Sandiganbayan erred in not resolving the issue of the

_______________

26 Id., at pp. 1068-1188.

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50



ownership of the 198 and 214 blocks. The Sandiganbayan
instead allegedly relied on its misinterpretation of the
Teehankee Resolution to the effect that there is no longer
any controversy as regards the ownership of the portion of
the 214 block held by Zalamea. According to said
respondents, the Teehankee Resolution clearly directed the
Sandiganbayan to resolve the issue of ownership of both the
Zalamea and Cojuangco portions of the 214 block.

Respondents Estate of Menzi and HMHMI also contend that
the Quimson affidavit should have been treated as having no
probative value with respect to the 154 block and the 198
and 214 blocks alike. The affidavit was allegedly not at all
corroborated by the other documents presented by the
Republic and cited in the assailed Decision.

They insist that Campos, Cojuangco and Zalamea were
nominees of Menzi, not dummies of Marcos, because, as
allegedly established during trial, the stock certificates
covering the contested blocks of shares were indorsed in
blank and remained in Menzis possession. Even Campos
allegedly testified that he was never in possession of the
stock certificates.

Assuming that Campos was indeed a Marcos dummy, his
admission should apply solely to the Bulletin shares
registered in his name. Likewise, Zalamea allegedly never
declared himself to be a Marcos nominee, only that he does
not claim true and beneficial ownership of the Bulletin shares
recorded in his name. The dividend checks for Zalameas
shareholdings, in fact, allegedly indicate the Estate of Menzi
as the payee, proving that Zalamea was Menzis nominee.

Respondents Estate of Menzi and HMHMI further claim that
the 198 and 214 blocks were not mentioned in Menzis Last
Will and Testament because Menzi knew of the impending
promulgation of a decree which would limit to only 20% the
ownership of media enterprises by one person or family.
Allegedly, in order to get around this restriction, Menzi
devised the nominee structure whereby he used three (3)
nominees to enable him to retain his 80% stake in Bulletin.
Be-

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sides, there was allegedly a legal question as to whether
sequestered shares need to be declared for estate tax
purposes in the meantime that a case involving these shares
was pending.

Said respondents finally posit that assuming that the 198 and
214 blocks are ill-gotten, the shares themselves, and not
merely the proceeds, should be forfeited in favor of the
Government.

Yap, on the other hand, claims in his Memorandum27 dated
May 10, 2005 filed in G.R. Nos. 154487 and 154518 that
Cojuangco may not raise in his petition a new specific relief
consisting of the prayer that he be declared the owner of the
46,626 Bulletin shares registered in his name which
Cojuangco never asked for during the proceedings before the
Sandiganbayan. Cojuangco is allegedly bound by his judicial
admission that he has no proprietary interest over the said
Bulletin shares.

Purportedly, because of this judicial admission, Alternative B
mentioned in the Teehankee Resolution was eliminated. The
only option which remained was, as held by the
Sandiganbayan, to declare that the Government is the legal
owner of the shares and direct the PCGG to execute the
necessary documents to effect the transfer thereof in
accordance with Alternative A.

As regards the prayer that the shares themselves be forfeited
in favor of the Government, Yap contends that this cannot be
done because the Government is barred by the Constitution
from acquiring ownership of private mass media.

The Estate of Menzi and HMHMI should also not be allowed
to claim the portion of the 214 block held by Campos and
Zalamea whose ownership has allegedly been settled by this
Court in the Teehankee Resolution.

_______________

27 Id., at pp. 1368-1443.

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Yap also claims that the Estate of Menzi and HMHMI have
unlawfully concealed the stock certificates representing a
portion of the shares held by Campos and Zalamea. Their
lawyers, specifically Atty. Montecillo, have also allegedly
staked an unfounded claim on the Bulletin shares in violation
of their duty, as lawyers of Bulletin for several years, to
protect the latters interests.

Cojuangco filed a Reply Memorandum28 dated October 17,
2005, substantially reiterating his argument that the
Sandiganbayan failed to make a finding that the Bulletin
shares are ill-gotten as defined by the pertinent executive
orders and that they were owned by the Marcoses.
Consequently, he insists that there is no basis for the
Sandiganbayans conclusion that the Republic is the legal
owner of the said shares.

The Republic also filed a Memorandum29 dated March 17,
2005 in G.R. No. 154518, averring that the petition raises
factual issues not proper in a petition for review under Rule
45 of the Rules of Court.

The Republic insists that the Decision of the Sandiganbayan
relative to the 198 and 214 blocks was not based on
Quimsons affidavit alone but on the totality of the evidence
presented to support the complaint. Quimsons affidavit was
allegedly given prominence because it related in detail how
Campos, Cojuangco and Zalamea came to be nominees of
Marcos. The allegations in Quimsons affidavit were allegedly
confirmed by Menzis Last Will and Testament, the initial
inventory of his assets, the letters and correspondence
between Marcos and Menzi, Campos deposition, and the
dividend checks issued to Campos, Cojuangco and Zalamea
even after they have supposedly transferred their Bulletin
shares to HMHMI.

Moreover, Atty. Montecillo did not institute any action
against Campos, Cojuangco and Zalamea to recover the

_______________

28 Id., at pp. 1246-1282.

29 G.R. No. 154518, Vol. II, Rollo, pp. 1590-1711.

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53


shares. This allegedly indicates that the shares were not
owned by Menzi and that Campos, Cojuangco and Zalamea
did not act as Menzis nominees.

As regards the claim that Menzi owned the shares registered
in the names of Campos, Cojuangco and Zalamea because the
stock certificates covering them were in Menzis possession,
the Republic maintains that mere possession of the stock
certificates does not operate to vest ownership on Menzi
considering that Campos already declared that Marcos
owned those shares and Zalamea surrendered his shares to
the Government.

Furthermore, the Republic alleges that the Sandiganbayan
had already ruled with finality that the Estate of Menzi and
HMHMI cannot recover the Campos and Zalamea portions of
the 214 block. Specifically, in the Resolution dated January 2,
1995, the Sandiganbayan declared that the Estate of Menzi
cannot recover the Campos shares because the latter, who
was not a co-defendant in the case, had already voluntarily
surrendered the same to the PCGG. Zalameas shares could
likewise not be recovered because he was also not a party,
either as defendant, cross-defendant or third-party
defendant. Moreover, in another Resolution dated July 10,
1993, the Sandiganbayan held that the Estate of Menzi has
not pleaded any claim of ownership over the Bulletin shares
in the names of Campos, Cojuangco and Zalamea, much less
has it intervened to express any prejudice to it should any
judgment be rendered for or against Campos, Cojuangco and
Zalamea.

We again affirm the ruling of the Sandiganbayan.

It should be noted at the outset that there is no more dispute
as regards the Bulletin shares registered in the name of
Campos. In fact, Campos was not included as a defendant in
Civil Case No. 0022. The Bulletin shares registered in his name
have been voluntarily surrendered to the PCGG and the
proceeds thereof have accordingly been forfeited in favor of
the Government.

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54



The Pre-Trial Order of the Sandiganbayan dated November
11, 1991 likewise does not mention as an issue the ownership
of the Campos-held Bulletin shares.

The same cannot be said, however, of the Bulletin shares
registered in the name of Zalamea. Although he was dropped
as a party-defendant in the Second Amended Complaint
dated October 17, 1990 purportedly by reason of the Deed of
Assignment he executed on October 15, 1987, the Zalamea-
held shares are clearly still covered by the Teehankee
Resolution remanding the issue on the ownership of the
sequestered Cojuangco and Zalamea shares for
determination and adjudication by the Sandiganbayan.

Having said that, we now proceed to determine whether the
Sandiganbayan committed reversible error in rendering the
assailed Decision.

As with the 154 block, the issues raised by the petitioners
assailing the Sandiganbayans disposition of the 198 and 214
blocks are largely factual and, therefore, generally beyond
the scope of our review under Rule 45 of the Rules of Court.
Nonetheless, as will be shown in the following disquisition,
there is no cause for this Court to reverse the Sandiganbayan
because the evidence on record amply supports its findings
and conclusions.

The 46,626 shares registered in the name of Cojuangco which
formed part of the 214 block were declared to be illgotten
wealth based on the evidence presented by the Republic to
show that Cojuangco acted as a nominee of Marcos and on
Cojuangcos unsubstantiated allegation that he acted as a
nominee not of Marcos but of Menzi.

Cojuangco counters, however, that the allegation that he
acted as Menzis nominee is a specific denial which he does
not have the burden of proving.

Notably, in the Answer of Defendant Eduardo M. Cojuangco,
Jr. dated March 16, 1989, Cojuangco claimed as part of his
denial that whatever shares of stock he may have in Bulletin
Publishing Corporation and/or H.M. Holdings and

Management, Inc. were not acquired and held by him as
dummy, nominee and/or agent of defendants Ferdinand E.
Marcos and Imelda Romualdez Marcos, but upon the request,
and as nominee, of the late Hans Menzi who owned and
delivered to him said shares.30

Likewise, in his Pre-Trial Brief dated January 15, 1992,
Cojuangco stated that *I+n regard shares of stock in the
name of defendant Cojuangco in Bulletin Publishing
Corporation and/or HM Holdings & Management, Inc., he
was never, and is not, a nominee of any other person but the
late Brig. Gen. Hans M. Menzi. Defendant Cojuangco
therefore reiterates that he has no proprietary interest in the
shares which are the subject matter of the instant case. They
properly belong to the estate of the late Hans Menzi.31

It is procedurally required for each party in a case to prove his
own affirmative allegations by the degree of evidence
required by law. In civil cases such as this one, the degree of
evidence required of a party in order to support his claim is
preponderance of evidence, or that evidence adduced by one
party which is more conclusive and credible than that of the
other party. It is therefore incumbent upon the plaintiff who
is claiming a right to prove his case. Corollarily, the defendant
must likewise prove its own allegations to buttress its claim
that it is not liable.32

The party who alleges a fact has the burden of proving it. The
burden of proof33 may be on the plaintiff or the defendant. It
is on the defendant if he alleges an affirmative defense which
is not a denial of an essential ingredient in the plain-

_______________

33 Sec. 1. Burden of proof.Burden of proof is the duty of a
party to present evidence on the facts in issue necessary to
establish his claim or defense by the amount of evidence
required by law. Rule 131, Rules of Court.

tiffs cause of action, but is one which, if established, will be a
good defensei.e., an avoidance of the claim.34

In the instant case, Cojuangcos allegations are in the nature
of affirmative defenses which should be adequately
substantiated. He did not deny that Bulletin shares were
registered in his name but alleged that he held these shares
not as nominee of Marcos, as the Republic claimed, but as
nominee of Menzi. He did not, however, present any
evidence to support his claim and, in fact, filed a
Manifestation dated July 20, 1999 stating that he sees no
need to present any evidence in his behalf.35

In contrast to Cojuangcos consistent, albeit unsupported,
disclaimer, the Sandiganbayan found the Republics evidence
to be preponderant. These pieces of evidence consist of: the
affidavit of Quimson detailing how Campos, Cojuangco and
Zalamea became Marcos nominees in Bulletin; the affidavit
Teodoro relative to the circumstances surrounding the sale of
Menzis substantial shares in Bulletin to Marcos nominees
and Menzis retention of only 20% of the corporation; the
sworn statement of Gapud describing the business interests
and associates of Marcos and stating that Bulletin checks
were periodically issued to Campos, Cojuangco and Zalamea
but were deposited after indorsement to Security Bank
numbered accounts owned by the Marcoses dividend checks
issued to Campos, Cojuangco and Zalamea even after their
shares have been transferred to HMHMI; the Certificate of
Incorporation, Articles of Incorporation and Amended Articles
of Incorporation of HMHMI showing that Bulletin shares held
by Campos, Cojuangco and Zalamea were used to set up
HMHMI; Deed of Transfer and Conveyance showing that
Campos, Cojuangco, Zalamea and Menzi transferred several
shares, including Bulletin shares, to HMHMI in exchange for

_______________

34 Sambar v. Levi Strauss & Co., G.R. No. 132604, March 6,
2002, 378 SCRA 364; Supreme Transliner Inc. v. Court of
Appeals, G.R. No. 125356, November 21, 2001, 370 SCRA 41.


shares of stock in the latter which shares were not issued; the
Inventory of Menzis assets as of May 15, 1985 which does
not include Bulletin shares; notes written by Marcos
regarding Menzis resignation as aide-de-camp to devote his
time to run Bulletins operations and the reduction of his
shares in the corporation to 12%; and letters and
correspondence between Marcos and Menzi regarding the
affairs of Bulletin.

These pieces of uncontradicted evidence suffice to establish
that the 198 and 214 blocks are indeed ill-gotten wealth as
defined under the Rules and Regulations of the PCGG, viz.:

Sec. 1. Definition.(A) Ill-gotten wealth is hereby defined as
any asset, property, business enterprise or material
possession of persons within the purview of Executive Orders
Nos. 1 and 2, acquired by them directly, or indirectly thru
dummies, nominees, agents, subordinates and/or business
associates by any of the following means or similar schemes:

(1) Through misappropriation, conversion, misuse or
malversation of public funds or raids on the public treasury;
(2) Through the receipt, directly or indirectly, of any
commission, gift, share, percentage, kickbacks or any other
form of pecuniary benefit from any person and/or entity in
connection with any government contract or project or by
reason of the office or position of the official concerned;
(3) By the illegal or fraudulent conveyance or disposition of
assets belonging to the government or any of its subdivisions,
agencies or instrumentalities or government-owned or
controlled corporations;
(4) By obtaining, receiving or accepting directly or indirectly
any shares of stock, equity or any other form of interest or
participation in any business enterprise or undertaking;
(5) Through the establishment of agricultural, industrial or
commercial monopolies or other combination and/or by the
issuance, promulgation and/or implementation of decrees
and orders intended to benefit particular persons or special
interests; and
(6) By taking undue advantage of official position,
authority, relationship or influence for personal gain or
benefit.
Cojuangcos disavowal of any proprietary interest in the
Bulletin shares is conclusive upon him. His prayer that he be
declared the owner of the said shares, together with all the
cash and stock dividends which have accrued thereto since
October 15, 1987, and that the PCGG be ordered to return
the cash deposit of P8,174,470.32 to Bulletin, therefore, has
no legal basis and should perforce be denied.

In this connection, it should be said that Cojuangco
apparently desisted from presenting evidence and chose
instead to stake his claim with the Estate of Menzi and
HMHMI. As found by the Sandiganbayan, however, the Estate
of Menzi and HMHMI failed to prove their allegation that
Campos, Cojuangco and Zalamea were Menzis nominees.
Neither did the Estate of Menzi and HMHMI institute an
action to recover the shares from Menzis nominees.

Significantly, even as they claimed ownership of the Bulletin
shares in their Answer to the Republics Second Amended
Complaint, the Estate of Menzi and HMHMI did not file any
cross-claim against the purported Menzi nominees.

Quite revealing, too, is the fact that Campos, in his Answers
to Direct Interrogatories36 taken before the Consul General
at the Philippine Consulate General in Vancouver, British
Columbia, Canada on November 25, 1994, repeatedly
declared that he owned a portion of the 198 block per
instruction of President Marcos37 and that he became the
shareholder, per instruction of President Marcos.38

Likewise, in his Deed of Assignment dated October 15, 1987,
Zalamea manifested that he does not claim true and
beneficial ownership of the Bulletin shares registered in his
name and that he voluntarily waived and assigned the same
in favor of the PCGG.

_______________


These declarations should have alerted the Estate of Menzi
and HMHMI to file cross-claims against Campos and Zalamea.
The fact that they did not enfeebles their claim of ownership.

It is also important to note that the Estate of Menzi did not
include the 198 and 214 blocks in the inventory of the
estates assets dated May 15, 1985. If, as it claims, the
Bulletin shares of Campos, Cojuangco and Zalamea were held
by them as nominees of Menzi, then these shares should
have been included in the inventory. The justification
advanced for the said non-inclusion, which is that the stock
certificates covering them were not in the possession of Atty.
Montecillo, is nothing but a hollow pretext given the fact that
even after the certificates came to Atty. Montecillos
possession in 1987, an updated inventory declaring the said
shares as part of Menzis estate was not filed pursuant to the
Order of the probate court dated November 17, 1992.

Further, the claim that Menzi would need dummies because
of the impending promulgation of a decree which would limit
to 20% the ownership of media enterprises by one person or
family is incredulous since no such decree was ever issued.
Parenthetically, the fact that the stock certificates covering
the shares registered under the names of Campos, Cojuangco
and Zalamea were found in Menzis possession does not
necessarily prove that the latter owned the shares. A stock
certificate is merely a tangible evidence of ownership of
shares of stock.39 Its presence or absence does not affect the
by the stock certificate. Hence, as registered owners, Campos
and Zalamea validly ceded their shares in favor of the
Government. This assignment is now a fait accompli for the
benefit of the entire nation.

_______________

The contention that the sale of the 214 block to the Bulletin
was null and void as the PCGG failed to obtain approval from
the Sandiganbayan is likewise unmeritorious. While it is true
that the PCGG is not empowered to sell sequestered assets
without prior Sandiganbayan approval,40 this case presents a
clear exception because this Court itself, in the Teehankee
Resolution, directed the PCGG to accept the cash deposit
offered by Bulletin in payment for the Cojuangco and
Zalamea sequestered shares subject to the alternatives
mentioned therein and the outcome of the remand to the
Sandiganbayan on the question of ownership of these
sequestered shares.

In light of the foregoing, we are not inclined to disturb the
Sandiganbayans evaluation of the weight and sufficiency of
the evidence presented by the Republic and its finding that
the evidence adduced by the Estate of Menzi and HMHMI do
not prove their allegation that Campos, Cojuangco and
Zalamea are Menzis nominees, taking into account the
express admission of Campos that he owned the shares upon
Marcos instruction, the declaration of Zalamea that he does
not claim true and beneficial ownership of the shares, and
the absolute dearth of evidence regarding Cojuangcos
assertion that he is Menzis nominee.

With regard to the Republics prayer for damages, we find the
same not supported by sufficient evidence.

An award of actual or compensatory damages requires proof
of pecuniary loss. In this case, the Republic has not proven
with a reasonable degree of certainty, premised on
competent proof and the best evidence obtainable, that it
has suffered any actual pecuniary loss by reason of the acts of
the defendants. Hence, actual or compensatory damages may
not be awarded.41

_______________

On the other hand, while no proof of pecuniary loss is
necessary in order that moral, temperate, nominal and
exemplary damages may be adjudicated, proof of damage or
injury should nonetheless be adduced. As found by the
Sandiganbayan, however, the Republic failed to show the
factual basis for the award of moral damages and its causal
connection to defendants acts. Thus, moral damages, which
are designed to compensate the claimant for actual injury
suffered and not to impose a penalty on the wrongdoer,42
may not be awarded. Temperate, nominal, and exemplary
damages, attorneys fees, litigation expenses and judicial
costs may likewise not be adjudicated for failure to present
sufficient evidence to establish entitlement to these awards.

WHEREFORE, the petitions in G.R. No. 152578, G.R. No.
154487 and G.R. No. 154518 are DENIED. The Decision of the
Sandiganbayan dated March 14, 2002 is AFFIRMED.

SO ORDERED.

Davide, Jr. (C.J.), Panganiban, Quisumbing, Ynares-
Santiago, Sandoval-Gutierrez, Carpio, Austria-Martinez,
Corona, Carpio-Morales, Callejo and Garcia, JJ., concur.

Puno, J., In the result.

Azcuna, J., I take no part. I was counsel in the case.

Chico-Nazario, J.,On Leave.

Petitions denied, judgment affirmed.

Notes.The PCGG is the agency empowered to bring
proceedings for forfeiture of property allegedly acquired
unlawfully before February 25, 1986, while the power to
investigate cases of ill-gotten or unexplained wealth acquired
after that date is vested in the Ombudsman. (Republic vs.
Sandiganbayan, 237 SCRA 242 [1994])

_______________

42 Pantranco v. Kierulf, G.R. No. 99343, March 13, 1997, 269
SCRA 433.

62

62


Francia, Jr. vs. Power Merge Corporation

Even if the sequestration order over a particular property has
already been lifted but the property has not yet been turned
over to the alleged owner, the Sandiganbayan still has
jurisdiction to look into allegations that the property in
question actually belongs to another firm which is listed in a
complaint for recovery of ill-gotten wealth pending before
said court. (Republic vs. Tacloban City Ice Plant, Inc., 258
SCRA 145 [1996])

[Republic vs. Estate of Hans Menzi, 476 SCRA 20(2005)]

G.R. No. 143312. August 12, 2005.*
RICARDO S. SILVERIO, JR., ESSES DEVELOPMENT
CORPORATION, and TRI-STAR FARMS, INC., petitioners, vs.
FILIPINO BUSINESS CONSULTANTS, INC., respondent.

Actions; Judgments; Appeals; Certiorari; Interlocutory Orders;
Pleadings and Practice; Words and Phrases; Interlocutory
orders are those that determine incidental matters that do
not touch on the merits of the case or put an end to the
proceedings; An order staying the execution of the writ of
possession is an interlocutory order; The proper remedy to
question an improvident interlocutory order is a petition for
certiorari under Rule 65, not Rule 45a petition for review
under Rule 45 is the proper mode of redress to question final
judgments.Interlocutory orders are those that determine
incidental matters that do not touch on the merits of the case
or put an end to the proceedings. The proper remedy to
question an improvident interlocutory order is a petition for
certiorari under Rule 65, not Rule 45. A petition for review
under Rule 45 is the proper mode of redress to question final
judgments. An order staying the execution of the writ of
possession is an interlocutory order. Clearly, this order cannot
be appealed. A petition for certiorari was therefore the
correct remedy. Moreover, Silverio, Jr., Esses and Tri-Star
pointed out that the RTC Balayan acted on an ex-parte
motion to suspend the writ of possession, which is a litigious
matter, without complying with the rules on notice and
hearing. Silverio, Jr., Esses and Tri-Star also assail the RTC
Balayans impending move to accept FBCIs evidence on its
subsequent ownership of Esses and Tri-Star. In effect,
Silverio, Jr., Esses and Tri-Star accuse the RTC Balayan of
acting without or in excess of jurisdiction or with grave abuse
of discretion, which is within the ambit of certiorari.
However, in the exercise of our judicial discretion, we will
treat the appeal as a petition under Rule 65. Technical rules
must be suspended whenever the purposes of justice warrant
it, such as in this case where substantial and important issues
await resolution.

_______________

* FIRST DIVISION.

585

VOL. 466, AUGUST 12, 2005

585

Silverio, Jr. vs. Filipino Business Consultants, Inc.

Same; Forum Shopping; Words and Phrases; Forum shopping
consists of filing multiple suits involving the same parties for
the same cause of action, either simultaneously or
successively, to obtain a favorable judgment.Silverio, Jr.,
Esses and Tri-Star are not guilty of forum shopping for filing
another action against FBCI with the RTC Las Pias during the
pendency of this case with the RTC Balayan. Forum shopping
consists of filing multiple suits involving the same parties for
the same cause of action, either simultaneously or
successively, to obtain a favorable judgment. The parties and
cause of action in the present case before the RTC Balayan
and in the case before the RTC Las Pias are different. The
present case was filed by FBCI against Silverio, Jr., Esses and
Tri-Star for the consolidation of title over the Calatagan
Property. On the other hand, the case before the RTC Las
Pias was filed by Silverio, Jr., Esses and Tri-Star against FBCI
and other defendants for the annulment of contract with
damages, tort and culpa aquiliana (civil fraud).

Same; Judgments; The court may stay immediate execution
of a judgment when supervening events, occurring
subsequent to the judgment, bring about a material change
in the situation of the parties; To justify the stay of immediate
execution, the supervening events must have a direct effect
on the matter already litigated and settled.The court may
stay immediate execution of a judgment when supervening
events, occurring subsequent to the judgment, bring about a
material change in the situation of the parties. To justify the
stay of immediate execution, the supervening events must
have a direct effect on the matter already litigated and
settled. Or, the supervening events must create a substantial
change in the rights or relations of the parties which would
render execution of a final judgment unjust, impossible or
inequitable making it imperative to stay immediate execution
in the interest of justice.

Same; Same; Writs of Possession; Words and Phrases; A writ
of possession is an order whereby the sheriff is commanded
to place a person in possession of real or personal
property.The issuance of the writ of possession in favor of
Silverio, Jr., Esses and Tri-Star is also not a judgment on the
merits. A writ of possession is an order whereby the sheriff is
commanded to place a person in possession of real or
personal property. The issuance of the writ of possession to
Silverio, Jr., Esses and Tri-Star is but an order of restitutiona

586

586



consequence of the nullification of the judgment by default.
The order of restitution placed the parties in the situation
prior to the RTC Balayans rendition of the void judgment by
default. Title to the Calatagan Property is still in the names of
Esses and Tri-Star. Possession of the Calatagan Property must
revert to Esses and Tri-Star as legal owners of the property.

Same; Same; Same; Res Judicata; Res judicata does not set in
where the court is without jurisdiction over the subject or
person, and therefore, the judgment is a nullity; It is the court
issuing the writ of possession that has control and supervision
over its processes.We do not agree with Silverio, Jr., Esses
and Tri-Stars assertion that the RTC Balayan has no power to
conduct a hearing on the existence of a supervening event
because of res judicata. Res judicata does not set in where
the court is without jurisdiction over the subject or person,
and therefore, the judgment is a nullity such as the judgment
by default in this case. The order that voided the judgment by
default and the order of restitution merely recognized the
nullity of the judgment by default. The orders did not
adjudicate on the merits of the case. Since res judicata had
not set in, the case was tried anew upon the proper service of
summons on Silverio, Jr., Esses and Tri-Star. Moreover, it is
the court issuing the writ of possession that has control and
supervision over its processes. The RTC Balayan can therefore
hear the evidence on the existence of a supervening event,
provided the subject matter is within the jurisdiction of the
court, as this could affect the execution of the writ of
possession.

Same; Courts; The Supreme Court is dismayed with the RTC
Balayans referral of the existence of the supervening event
to the higher courtscourts must not shirk from their duty
to rule on an issue; The duty of the appellate or higher courts
is to review the findings and rulings of the lower courts, not
to issue advisories.We are, therefore, dismayed with the
RTC Balayans referral of the existence of the supervening
event to the higher courts. Courts must not shirk from their
duty to rule on an issue. The duty of the appellate or higher
courts is to review the findings and rulings of the lower
courts, not to issue advisories. Courts must execute its
processes and should not succumb to threats by any of the
parties to resort to violence in case of such enforcement. Had
the RTC Balayan immediately passed upon FBCIs allegation of
a supervening event, it would have been apparent that this
claim is without merit. The RTC Ba-

587

VOL. 466, AUGUST 12, 2005

587


layan should have then enforced posthaste the writ of
possession in Silverio, Jr., Esses and Tri-Stars favor.

Same; Judgments; Writs of Possession; Corporation Law;
Principle of Separate Juridical Personality; A corporations
acquisition of substantial and controlling shares of stocks of
other corporations does not create a substantial change in
the rights or relations of the parties that would entitle the
former to possession of the property of the lattera
corporation has a personality distinct from that of its
stockholders.FBCIs acquisition of the substantial and
controlling shares of stocks of Esses and Tri-Star does not
create a substantial change in the rights or relations of the
parties that would entitle FBCI to possession of the Calatagan
Property, a corporate property of Esses and Tri-Star. Esses
and Tri-Star, just like FBCI, are corporations. A corporation
has a personality distinct from that of its stockholders. As
early as the case of Stockholders of F. Guanzon and Sons, Inc.
v. Register of Deeds of Manila, the Court explained the
principle of separate juridical personality in this wise: A
corporation is a juridical person distinct from the members
Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is
(Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St.,
474). The stockholder is not a co-owner or tenant in common
of the corporate property (Harton v. Hohnston, 166 Ala., 317,
51 So., 992).

Same; Same; Same; Same; Same; A corporations alleged
controlling shareholdings in other corporations merely
represent a proportionate or aliquot interest in the
properties of the latter, and even assuming that it is the
controlling shareholder, it does not legally make it the owner
of the property legally owned by the latter corporations as
distinct juridical persons.FBCIs alleged controlling

588

588



shareholdings in Esses and Tri-Star merely represent a
proportionate or aliquot interest in the properties of the two
corporations. Such controlling shareholdings do not vest FBCI
with any legal right or title to any of Esses and Tri-Stars
corporate properties. As a stockholder, FBCI has an interest in
Esses and Tri-Stars corporate properties that is only
equitable or beneficial in nature. Even assuming that FBCI is
the controlling shareholder of Esses and Tri-Star, it does not
legally make it the owner of the Calatagan Property, which is
legally owned by Esses and Tri-Star as distinct juridical
persons. As such, FBCI is not entitled to the possession of any
definite portion of the Calatagan Property or any of Esses and
Tri-Stars properties or assets. FBCI is not a co-owner or
tenant in common of the Calatagan Property or any of Esses
and Tri-Stars corporate properties.

Appeals.


Vicente B. Chuidian for petitioners.

Carmelo M. Mendoza for respondent.

CARPIO, J.:
The Case

Before us is a petition for review of the Order of the Regional
Trial Court, Fourth Judicial Region, Branch XI, Balayan,
Batangas (RTC Balayan) dated 26 May 2000.1 The order
suspended the enforcement of the writ of possession that the
RTC Balayan had previously issued in favor of petitioners
Ricardo S. Silverio, Jr. (Silverio, Jr.), Esses Development
Corporation (Esses) and Tri-Star Farms, Inc. (Tri-Star).
Filipino Business Consultants, Inc. (FBCI), now Filipino
Vastland Company, Inc. sought to suspend the writ of
possession on the ground of a supervening event. FBCI
claimed that it had just acquired all the stocks of Esses and

_______________

1 Penned by Judge Roberto L. Makalintal.

589

VOL. 466, AUGUST 12, 2005

589


Tri-Star. As the new owner of Esses and Tri-Star, FBCI
asserted its right of possession to the disputed property.
Petitioners Silverio, Jr., Esses and Tri-Star question the RTC
Balayans suspension of the writ of possession and its
jurisdiction to hold hearings on the supervening event.
The Antecedent Facts

The parties are wrangling over possession of a 62 hectare-
land in Calatagan, Batangas (Calatagan Property). Silverio,
Jr. is the President of Esses and Tri-Star. Esses and Tri-Star
were in possession of the Calatagan Property, covered by TCT
No. T-55200 and registered in the names of Esses and Tri-
Star.

On 22 September 1995, Esses and Tri-Star executed a Deed of
Sale with Assumption of Mortgage in favor of FBCI. Esses and
Tri-Star failed to redeem the Calatagan Property.

On 27 May 1997, FBCI filed a Petition for Consolidation of
Title of the Calatagan Property with the RTC Balayan.2

FBCI obtained a judgment by default. Subsequently, TCT No.
T-55200 in the names of Esses and Tri-Star was cancelled and
TCT No. T-77656 was issued in FBCIs name. On 20 April 1998,
the RTC Balayan issued a writ of possession in FBCIs favor.
FBCI then entered the Calatagan Property.

When Silverio, Jr., Esses and Tri-Star learned of the judgment
by default and writ of possession, they filed a petition for
relief from judgment and the recall of the writ of possession.
Silverio, Jr., Esses and Tri-Star alleged that the judgment by
default is void because the RTC Balayan did not acquire
jurisdiction over them. FBCI allegedly forged the service of
summons on them.

On 28 December 1998, the RTC Balayan nullified and set
aside the judgment by default and the writ of possession. The
RTC Balayan found that the summons and the complaint

_______________

2 Docketed as Civil Case No. 3356.

590

590



were not served on Silverio, Jr., Esses and Tri-Star. The RTC
Balayan directed the service of summons anew on Silverio,
Jr., Esses and Tri-Star.

The RTC Balayan denied FBCIs motion for reconsideration of
the order. FBCI then filed a petition for certiorari with the
Court of Appeals questioning the RTC Balayans 28 December
1998 Order.3 On 28 April 2000, the Court of Appeals denied
FBCIs petition. The Court of Appeals also denied FBCIs
motion for reconsideration. On 13 August 2001, the Supreme
Court denied FBCIs petition.

On 14 April 1999, the RTC Balayan modified its 28 December
1998 Order by upholding FBCIs possession of the Calatagan
Property. The RTC Balayan ruled that FBCI could not be
deprived of possession of the Calatagan Property because
FBCI made substantial improvements on it. Possession could
revert to Silverio, Jr., Esses and Tri-Star only if they reimburse
FBCI. The RTC Balayan gave Silverio, Jr., Esses and Tri-Star 15
days to file their responsive pleadings.

Silverio, Jr., Esses and Tri-Star moved for the partial
reconsideration of the 14 April 1999 Order. Silverio, Jr., Esses
and Tri-Star argued that since the judgment by default was
nullified, they should be restored to their possession of the
Calatagan Property. FBCI did not file any opposition to the
motion.

On 9 November 1999, the RTC Balayan reversed its 14 April
1999 Order by holding that Silverio, Jr., Esses and Tri-Star had
no duty to reimburse FBCI. The RTC Balayan pointed out that
FBCI offered no evidence to substantiate its claim for
expenses. The 9 November 1999 Order also restored
possession of the Calatagan Property to Silverio, Jr., Esses and
Tri-Star pursuant to Rule 39, Section 5 of the 1997 Rules of
Civil Procedure. This provision provides for restitution in case
of reversal of an executed judgment. On 7 January 2000, the
RTC Balayan denied FBCIs motion for reconsideration.

_______________

3 Docketed as CA-G.R. SP No. 56924.

591

VOL. 466, AUGUST 12, 2005

591


On 8 May 2000, the RTC Balayan issued the writ of possession
to Silverio, Jr., Esses and Tri-Star.

On 12 May 2000, FBCI filed with the RTC Balayan a
Manifestation and Motion to Recall Writ of Possession on the
ground that the decision of the Court of Appeals in CA-G.R. SP
No. 56924 was not yet final and FBCIs motion for
reconsideration was still pending. The RTC Balayan set the
hearing on 26 May 2000.

On 23 May 2000, FBCI filed with the RTC Balayan an Urgent
Ex-Parte Motion to Suspend Enforcement of Writ of
Possession. FBCI pointed out that it is now the new owner of
Esses and Tri-Star having purchased the substantial and
controlling shares of stocks4 of the two corporations.

On the 26 May 2000 hearing, FBCI reiterated its claim of a
supervening event, its ownership of Esses and Tri-Star. FBCI
informed the RTC Balayan that a new board of directors for
Esses and Tri-Star had been convened following the
resignation of the members of the board of directors. The
previous actions of the former board of directors have been
abandoned and the services of Atty. Vicente B. Chuidian, the
counsel of petitioners Silverio, Jr., Esses and Tri-Star, have
been terminated.

On the same day, the RTC Balayan issued the order
suspending the writ of possession it had earlier issued to
Silverio, Jr., Esses and Tri-Star. The RTC Balayan reasoned that
it would violate the law on forum shopping if it executed the
writ while FBCIs motion for reconsideration of the Court of
Appeals decision and urgent motion to suspend the issuance
of the writ of possession remained pending with the Court of
Appeals. The RTC Balayan noted that because of FBCIs strong
resistance, Silverio, Jr., Esses and Tri-Star have still to take
possession of the Calatagan Property. More than ten days
had already passed from the time that the RTC Balayan had
issued the writ of possession. FBCI had barricaded the

_______________

4 Rollo, pp. 70-71.

592

592



Calatagan Property, threatening bloodshed if possession will
be taken away from it. The RTC Balayan believed that if it
would not restrain Silverio, Jr., Esses and Tri-Star from taking
possession of the Calatagan Property, a violent confrontation
between the parties might erupt as reported in the Tempo
newspaper in its 26 May 2000 issue. Without issuing a
restraining order, the RTC Balayan suspended the writ by
requesting the counsel of Silverio, Jr., Esses and Tri-Star to
allow the court to study the voluminous records of the case,
which are to be presented at the hearing on 16 June 2000.
The hearing would determine the existence of a supervening
event.

On 15 June 2000, the RTC Balayan issued an Order cancelling
the 16 June 2000 hearing so that the Court of Appeals could
resolve the issue regarding the existence of a supervening
event. However, the RTC Balayan declared that the
suspension of the writ of possession would be lifted on 17
June 2000.

On 8 August 2000, Silverio, Jr., Esses and Tri-Star filed a
complaint for annulment of contracts with damages with the
Regional Trial Court of Las Pias City, Branch 275 (RTC Las
Pias).5
Issues

Silverio, Jr., Esses and Tri-Star argue that:

I

An ex parte motion cannot legally constitute an initiatory
basis for the RTC Balayan to conduct additional hearings in
order to validate certain new allegations. Neither can said ex
parte motion be the basis for the suspension of a writ of
possession being implemented.

_______________

5 Docketed as Civil Case No. LP-00-0163.

593

VOL. 466, AUGUST 12, 2005

593


II

When the RTC Balayan suspended the writ of possession, it
was barred from hearing intra-corporate disputes. And
though Congress has now amended our law on the matter,
the RTC still cannot proceed because of due process and res
judicata reasons.

III

A final and executory judgment cannot be enjoined except by
an appropriate petition for relief, a direct attack in another
action or a collateral act in another action.

IV

Respondent FBCI is asking for a suspension of the writ of
possession while at the same time threatening violence if the
writ of possession were to be implemented. The RTC Balayan
had no lawful basis to suspend the writ under these admitted
circumstances.

V

Respondent has not directly answered petitioners legal
theory. The petition is founded on admitted facts upon which
relief is sought under Rule 45. Respondent has altered these
factspresenting its so called counterstatements of facts
and issueswhich involve questions of fact that are still litis
pendentia at the RTC Balayan. And which even involve an
attempt to vary res judicata.

VI

Contrary to respondents claims, that the RTC order of 15
June 2000 has rendered this case moot and academic
quite on the contrarysaid order calls upon the Supreme
Court to decide whether or not, the RTC Balayan may
continue to conduct its hearings on suspending the writ of
possession.

VII

Respondents theory that an order suspending a writ of
possession is interlocutory in nature, and therefore
inappealable, is not supported by jurisprudence.

VIII

Respondents views on when suspending a writ of execution
is appropriatewould make the exception as rule. And
respondents

594

594



reliance on Flores vs. CA, et al. is totally misplaced. In the
Flores case, the party being dispossessed was a judgment
creditor, who was admitted by the adverse party to be the
owner.

IX

The question of jus possessionis on the Calatagan Property is
already res judicata while the question of jus possidendi is
still under litis pendentia. For that reason, respondent has
lost all his legal options in retaining the property procured
under a faked service of summons.

X

Respondents arguments in his 11-06-01 Memoon (a)
forum shopping, (b) petitioners lack of capacity to sue,
(c) service of summons already served (d) no intra-
corporate dispute and (e) the relief herein preempted by
eventsare ratiocinations of miniscule weight, meriting only
the slightest comment.6

FBCI raises the following issues:

1. Whether the present case has been rendered moot and
academic by the Order of the RTC Balayan dated 15 June
2000 and the filing of an action with the Regional Trial Court
of Las Pias City;
2. Whether the present appeal should be dismissed on the
ground of forum shopping;
3. Whether the RTC Balayan had the authority to suspend
enforcement of the writ of possession and to conduct
hearings on a new set of facts;
4. Whether the present case involves an intra-corporate
controversy;
5. Whether appeal by certiorari under Rule 45 is the proper
remedy under the given facts of the case.7

_______________

6 Rollo, pp. 356-357.

7 Ibid., p. 231.

595

VOL. 466, AUGUST 12, 2005

595

The Ruling of the Court

The petition has merit.
Procedural Issues

Before resolving the threshold issue, which is the existence of
a supervening event, we first address the following
procedural issues: (1) whether appeal is the proper remedy
against an order suspending the execution of a writ of
possession; (2) whether the issue of possession was mooted
by the 15 June 2000 Order of the RTC Balayan; and (3)
whether the filing of a civil case with the RTC Las Pias
constitutes forum shopping.

First, interlocutory orders are those that determine incidental
matters that do not touch on the merits of the case or put an
end to the proceedings.8 The proper remedy to question an
improvident interlocutory order is a petition for certiorari
under Rule 65, not Rule 45.9 A petition for review under Rule
45 is the proper mode of redress to question final
judgments.10

An order staying the execution of the writ of possession is an
interlocutory order.11 Clearly, this order cannot be appealed.
A petition for certiorari was therefore the correct remedy.
Moreover, Silverio, Jr., Esses and Tri-Star pointed out that the
RTC Balayan acted on an ex-parte motion to suspend the writ
of possession, which is a litigious matter, without complying
with the rules on notice and hearing. Silverio, Jr., Esses and
Tri-Star also assail the RTC Balayans impending move to
accept FBCIs evidence on its subsequent ownership of Esses
and Tri-Star. In effect, Silverio, Jr., Esses and Tri-Star accuse
the RTC Balayan of acting without or in

_______________

8 Diesel Construction Company, Inc. v. Jollibee Foods
Corporation, 380 Phil. 813; 323 SCRA 844 (2000).

9 Ibid.

10 Ibid.

11 Ibid.

596

596



excess of jurisdiction or with grave abuse of discretion, which
is within the ambit of certiorari.

However, in the exercise of our judicial discretion, we will
treat the appeal as a petition under Rule 65.12 Technical
rules must be suspended whenever the purposes of justice
warrant it, such as in this case where substantial and
important issues await resolution.

Second, the RTC Balayans 15 June 2000 Order lifting the
suspension of the writ of possession was issued to correct its
action on FBCIs ex-parte motion, which did not have the
required notice and hearing. This issue has thus become a fait
accompli. However, while the 15 June 2000 Order is
supposed to have mooted the suspension of the execution of
the writ of possession by lifting the suspension on 17 June
2000, Silverio, Jr., Esses and Tri-Star claim that the writ has
not been executed in their favor. Thus, the issues in this
petition are far from being moot. Also, the existence of a
supervening event is another issue that must be resolved
since the RTC Balayan had instead submitted to the higher
courts the resolution of this issue.

Third, Silverio, Jr., Esses and Tri-Star are not guilty of forum
shopping for filing another action against FBCI with the RTC
Las Pias during the pendency of this case with the RTC
Balayan. Forum shopping consists of filing multiple suits
involving the same parties for the same cause of action,
either simultaneously or successively, to obtain a favorable
judgment.13

The parties and cause of action in the present case before the
RTC Balayan and in the case before the RTC Las Pias are
different. The present case was filed by FBCI against Silverio,
Jr., Esses and Tri-Star for the consolidation of title

_______________

12 Ibid.; Go v. Court of Appeals, 358 Phil. 214; 297 SCRA 574
(1998).

13 The Executive Secretary v. Gordon, 359 Phil. 266; 298
SCRA 736 (1998).

597

VOL. 466, AUGUST 12, 2005

597


over the Calatagan Property. On the other hand, the case
before the RTC Las Pias was filed by Silverio, Jr., Esses and
Tri-Star against FBCI and other defendants for the annulment
of contract with damages, tort and culpa aquiliana (civil
fraud).

In its complaint before the RTC Las Pias, Silverio, Jr., Esses
and Tri-Star informed the court that there is a pending case
with the RTC Balayan over the Calatagan Property.14 Silverio,
Jr., Esses and Tri-Star made it clear in the complaint that the
case before the RTC Las Pias will focus on the Makati
Tuscany property and any reference to the Calatagan
Property is meant to serve only as proof or evidence of the
plan, system, scheme, habit, etc., lurking behind defendants
interlocking acts constituting interlocking tort and
interlocking fraud.15 Clearly, FBCIs claim of forum shopping
against Silverio, Jr., Esses and Tri-Star has no basis.
No Supervening Event in this Case

FBCI took possession of the Calatagan Property after the RTC
Balayan rendered a judgment by default in FBCIs favor. The
judgment by default was nullified after the RTC Balayan found
out that the service of summons on Silverio, Jr., Esses and Tri-
Star was procured fraudulently. The RTC Balayan thus
recalled the writ of possession it had issued to FBCI. Silverio,
Jr., Esses and Tri-Star were served anew with summons. The
RTC Balayan restored possession of the Calatagan Property to
Silverio, Jr., Esses and Tri-Star as restitution resulting from the
annulment of the judgment by default. The order restoring
possession of the Calatagan Property to Silverio, Jr., Esses and
Tri-Star has attained finality. This case then proceeded to pre-
trial.

FBCI has resisted the enforcement of the writ of possession
by barricading the Calatagan Property and threatening vio-

_______________

14 Rollo, p. 253.

15 Ibid.

598

598



lence if its possession of the property is taken away from it.
To avoid bloodshed, as FBCI also claimed that Silverio, Jr. had
armed civilians threatening to shoot FBCIs representatives,16
the RTC Balayan momentarily suspended the execution of the
writ. The RTC Balayan also had to rule on FBCIs claim of a
supervening event that would allegedly make the execution
of the writ absurd,17 as FBCI alleges it now owns the
controlling interest in Esses and Tri-Star. The RTC Balayan
lifted the suspension of the writ but it cancelled the hearings
on the supervening event to give way to the Court of Appeals
action on this issue. The RTC Balayan decided to await the
appellate courts resolution because it did not want to violate
the rule against forum shopping.

Silverio, Jr., Esses and Tri-Star argue that the RTC Balayan has
no power to conduct hearings on the supervening event
because res judicata has set in on the issue. They also
contend that the supervening event is an intra-corporate
controversy that is within the jurisdiction of the Securities
and Exchange Commission, not the trial court. Silverio, Jr.,
Esses and Tri-Star point out that despite the lifting of the
suspension RTC Balayan has still to execute the writ of
possession in their favor. On the other hand, FBCI maintains
that its acquisition of Esses and Tri-Star is a supervening
event, which the RTC Balayan could hear and is sufficient
ground to stay the execution of the writ of possession.

We rule in favor of Silverio, Jr., Esses and Tri-Star.

The court may stay immediate execution of a judgment when
supervening events, occurring subsequent to the judgment,
bring about a material change in the situation of the
parties.18 To justify the stay of immediate execution, the
supervening events must have a direct effect on the matter

_______________

16 Ibid., p. 74.

17 Ibid.

18 Serrano v. Court of Appeals, G.R. No. 133883, 10
December 2003, 417 SCRA 415.

599

VOL. 466, AUGUST 12, 2005

599


already litigated and settled.19 Or, the supervening events
must create a substantial change in the rights or relations of
the parties which would render execution of a final judgment
unjust, impossible or inequitable making it imperative to stay
immediate execution in the interest of justice.20

In this case, there is no judgment on the merits, only a
judgment on a technicality. Even then, the judgment of
default rendered in FBCIs favor was voided because the RTC
Balayan did not acquire jurisdiction over Silverio, Jr., Esses
and Tri-Star due to a fraudulent service of summons. The case
for consolidation of title, from which this petition stemmed, is
in fact still being litigated before the RTC Balayan.

The issuance of the writ of possession in favor of Silverio, Jr.,
Esses and Tri-Star is also not a judgment on the merits.21 A
writ of possession is an order whereby the sheriff is
commanded to place a person in possession of real or
personal property.22 The issuance of the writ of possession
to Silverio, Jr., Esses and Tri-Star is but an order of
restitutiona consequence of the nullification of the
judgment by default. The order of restitution placed the
parties in the situation prior to the RTC Balayans rendition of
the void judgment by default. Title to the Calatagan Property
is still in the names of Esses and Tri-Star. Possession of the
Calatagan Property must revert to Esses and Tri-Star as legal
owners of the property.

However, with the reinstitution of the case for consolidation
of title with the RTC Balayan, possession of the Calatagan
Property is now subject to the outcome of the case.
Nonetheless, while this case is still under litigationit is only
in the pre-trial stageEsses and Tri-Star in whose names the

_______________

19 Ibid.

20 Ibid.

21 See OSCAR M. HERERRA, REMEDIAL LAW, Vol. II, 2000 ed.,
p. 451.

22 Ibid.

600

600



Calatagan Property is titled and in whose favor the order of
restitution was issued, are the ones entitled to possession of
the property.

We do not agree with Silverio, Jr., Esses and Tri-Stars
assertion that the RTC Balayan has no power to conduct a
hearing on the existence of a supervening event because of
res judicata. Res judicata does not set in where the court is
without jurisdiction over the subject or person, and
therefore, the judgment is a nullity23 such as the judgment
by default in this case. The order that voided the judgment by
default and the order of restitution merely recognized the
nullity of the judgment by default. The orders did not
adjudicate on the merits of the case. Since res judicata had
not set in, the case was tried anew upon the proper service of
summons on Silverio, Jr., Esses and Tri-Star.

Moreover, it is the court issuing the writ of possession that
has control and supervision over its processes.24 The RTC
Balayan can therefore hear the evidence on the existence of a
supervening event, provided the subject matter is within the
jurisdiction of the court, as this could affect the execution of
the writ of possession.

We are, therefore, dismayed with the RTC Balayans referral
of the existence of the supervening event to the higher
courts. Courts must not shirk from their duty to rule on an
issue. The duty of the appellate or higher courts is to review
the findings and rulings of the lower courts, not to issue
advisories. Courts must execute its processes and should not
succumb to threats by any of the parties to resort to violence
in case of such enforcement. Had the RTC Balayan
immediately passed upon FBCIs allegation of a supervening
event, it

_______________

23 Arevalo v. Hon. Benedicto, 157 Phil. 175; 58 SCRA 186
(1974).

24 Heirs of Francisco Guballa, Sr. v. Court of Appeals, G.R. No.
78223, 19 December 1988, 168 SCRA 518 citing Vda. de
Dimayuga vs. Raymundo and Nable, 76 Phil. 143 (1946).

601

VOL. 466, AUGUST 12, 2005

601


would have been apparent that this claim is without merit.
The RTC Balayan should have then enforced posthaste the
writ of possession in Silverio, Jr., Esses and Tri-Stars favor.

FBCIs acquisition of the substantial and controlling shares of
stocks25 of Esses and Tri-Star does not create a substantial
change in the rights or relations of the parties that would
entitle FBCI to possession of the Calatagan Property, a
corporate property of Esses and Tri-Star. Esses and Tri-Star,
just like FBCI, are corporations. A corporation has a
personality distinct from that of its stockholders. As early as
the case of Stockholders of F. Guanzon and Sons, Inc. v.
Register of Deeds of Manila,26 the Court explained the
principle of separate juridical personality in this wise:

A corporation is a juridical person distinct from the members
Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is
(Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St.,
474). The stockholder is not a co-owner or tenant in common
of the corporate property (Harton v. Hohnston, 166 Ala., 317,
51 So., 992).

_______________

25 Rollo, pp. 70-71.

26 G.R. No. L-18216, 30 October 1962, 6 SCRA 373; See also
Martinez v. Court of Appeals, G.R. No. 131673, 10 September
2004, 438 SCRA 130; Good Earth Emporium, Inc. v. Court of
Appeals, G.R. No. 82797, 27 February 1991, 194 SCRA 544;
Magsaysay-Labrador v. Court of Appeals, G.R. No. 58168, 19
December 1989, 180 SCRA 266.

602

602



Thus, FBCIs alleged controlling shareholdings in Esses and Tri-
Star merely represent a proportionate or aliquot interest in
the properties of the two corporations. Such controlling
shareholdings do not vest FBCI with any legal right or title to
any of Esses and Tri-Stars corporate properties. As a
stockholder, FBCI has an interest in Esses and Tri-Stars
corporate properties that is only equitable or beneficial in
nature. Even assuming that FBCI is the controlling
shareholder of Esses and Tri-Star, it does not legally make it
the owner of the Calatagan Property, which is legally owned
by Esses and Tri-Star as distinct juridical persons. As such,
FBCI is not entitled to the possession of any definite portion
of the Calatagan Property or any of Esses and Tri-Stars
properties or assets. FBCI is not a co-owner or tenant in
common of the Calatagan Property or any of Esses and Tri-
Stars corporate properties.

We see no reason why the execution of the writ of possession
has been long delayed. Possession of the Calatagan Property
must be restored to Esses and Tri-Star through their
representative, Silverio, Jr. There is no proof on record that
Silverio, Jr. has ceased to be the representative of Esses and
Tri-Star in this case.

WHEREFORE, we GRANT the petition. The Regional Trial
Court, Branch XI, Balayan, Batangas is ordered to immediately
execute the writ of possession in Civil Case No. 3356 in favor
of Esses Development Corporation and Tri-Star Farms, Inc.
through their representative, Ricardo S. Silverio, Jr. No costs.

SO ORDERED.

Davide, Jr. (C.J., Chairman), Quisumbing, Ynares-Santiago
and Azcuna, JJ., concur.

Petition granted.

603

VOL. 466, AUGUST 12, 2005

603


Notes.Respondent courts invocation of General Order No.
3 of September 21, 1972 is nothing short of an unwarranted
abdication of judicial authority, which no judge duly imbued
with the implications of the paramount principle of
independence of the judiciary should ever think of doing. It is
unfortunate indeed that respondent judge is apparently
unaware that it is a matter of highly significant historical fact
that this Court has always deemed General Order No. 3
including its amendment by General Orders No. 3-a as
practically inoperative even in the light of Proclamation 1081
of September 21, 1972 and Proclamation 1104 of January 17,
1973 placing the whole Philippines under martial law. While
the members of the Court are not agreed on whether or not
particular instances of attack against the validity of certain
Presidential Decrees raise political questions which the
judiciary would not interfere with, there is unanimity among
Us in the view that it is for the Court rather than the
Executive to determine whether or not we may take
cognizance of any given case involving the validity of acts of
the Executive Department purportedly under the authority of
the martial law proclamations. (Lina vs. Purisima, 82 SCRA
344 [1978])

While certiorari is generally not available to challenge an
interlocutory order of a trial court, the Supreme Court may
allow certiorari as a mode of redress where the assailed order
is patently erroneous and appeal would not afford adequate
and expeditious relief. (Salcedo-Ortaez vs. Court of Appeals,
235 SCRA 111 [1994]) [Silverio, Jr. vs. Filipino Business
Consultants, Inc., 466 SCRA 584(2005)]

G.R. No. 140667. August 12, 2004.*
WOODCHILD HOLDINGS, INC., petitioner, vs. ROXAS ELECTRIC
AND CONSTRUCTION COMPANY, INC., respondent.

Corporations; Corporate Officers; Apparent Authority;
Agency; The property of the corporation is not the property
of its stockholders or members and may not be sold by the
stockholders or members without express authorization from
the corporations board of directors.A corporation is a
juridical person separate and distinct from its stockholders or
members. Accordingly, the property of the corporation is not
the property of its stockholders or members and may not be
sold by the stockholders or members without express
authorization from the corporations board of direc-tors.
Section 23 of BP 68, otherwise known as the Corporation
Code of the Philippines, provides: SEC. 23. The Board of
Directors or Trustees.Unless otherwise provided in this
Code, the corporate powers of all corporations formed under
this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the
board of directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1)
year and until their successors are elected and qualified.
Indubitably, a corporation may act only through its board of
directors or, when authorized either by its by-laws or by its
board resolution, through its officers or agents in the normal
course of business. The general principles of agency govern
the relation between the corporation and its officers or
agents, subject to the articles of incorporation, by-laws, or
relevant provisions of law. . . .

Same; Same; Same; Estoppel; Acts done by corporate officers
beyond the scope of their authority cannot bind the
corporation unless it has ratified such acts expressly or tacitly,
or is estopped from denying them. Generally, the acts of
the corporate officers within the scope of their authority are
binding on the corporation. However, under Article 1910 of
the New Civil Code, acts done by such officers beyond the
scope of their authority cannot bind the corporation unless it
has ratified such acts expressly or tacitly, or is estopped from
denying them: Art. 1910. The principal must comply with all
the obligations which the agent may have contracted within
the scope of his authority. As for any obligation wherein the
agent has exceeded his power, the principal is not bound
except when he ratifies it expressly or tacitly. Thus, contracts
entered into by corporate officers beyond the scope of
authority are unenforceable against the corporation unless
ratified by the corporation.

_______________

* SECOND DIVISION.

236

236


Woodchild Holdings, Inc. vs. Roxas Electric and Construction
Company, Inc.

Same; Same; Same; Same; Power of Attorney; Powers of
attorney are generally construed strictly and courts will not
infer or presume broad powers from deeds which do not
sufficiently include property or subject under which the agent
is to deal.Powers of attorney are generally construed
strictly and courts will not infer or presume broad powers
from deeds which do not sufficiently include property or
subject under which the agent is to deal.The general rule is
that the power of attorney must be pursued within legal
strictures, and the agent can neither go beyond it; nor beside
it. The act done must be legally identical with that authorized
to be done.

Same; Same; Same; Same; The apparent power of an agent is
to be determined by the acts of the principal and not by the
acts of the agent.It bears stressing that apparent authority
is based on estoppel and can arise from two instances: first,
the principal may knowingly permit the agent to so hold
himself out as having such authority, and in this way, the
principal becomes estopped to claim that the agent does not
have such authority; second, the principal may so clothe the
agent with the indicia of authority as to lead a reasonably
prudent person to believe that he actually has such authority.
There can be no apparent authority of an agent without acts
or conduct on the part of the principal and such acts or
conduct of the principal must have been known and relied
upon in good faith and as a result of the exercise of
reasonable prudence by a third person as claimant and such
must have produced a change of position to its detriment.
The apparent power of an agent is to be determined by the
acts of the principal and not by the acts of the agent.

Same; Same; Same; Elements; For the principle of apparent
authority to apply, the petitioner was burdened to prove the
following.For the principle of apparent authority to apply,
the petitioner was burdened to prove the following: (a) the
acts of the respondent justifying belief in the agency by the
petitioner; (b) knowledge thereof by the respondent which is
sought to be held; and, (c) reliance thereon by the petitioner
consistent with ordinary care and prudence.

Same; Same; Same; Implied Ratification; Ratification cannot
be inferred from acts that a principal has a right to do
independently of the unauthorized act of the agent.For an
act of the principal to be considered as an implied ratification
of an unauthorized act of an agent, such act must be
inconsistent with any other hypothesis than that he approved
and intended to adopt what had been done in his name.
Ratification is based on waiverthe intentional
relinquishment of a known right. Ratification cannot be
inferred from acts that a principal has a right to do
independently of the unauthorized act of the agent.
Moreover, if a writing is required to grant an authority to do a
particular act, ratification of that act must also be in writing.

237

VOL. 436, AUGUST 12, 2004

237

Company, Inc.

Appeals.


Castro and Associates for petitioner.

J.O. Villanueva Law Office for private respondent.

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision1 of
the Court of Appeals in CA-G.R. CV No. 56125 reversing the
Decision2 of the Regional Trial Court of Makati, Branch 57,
which ruled in favor of the petitioner.
The Antecedents

The respondent Roxas Electric and Construction Company,
Inc. (RECCI), formerly the Roxas Electric and Construction
Company, was the owner of two parcels of land, identified as
Lot No. 491-A-3-B-1 covered by Transfer Certificate of Title
(TCT) No. 78085 and Lot No. 491-A-3-B-2 covered by TCT No.
78086. A portion of Lot No. 491-A-3-B-1 which abutted Lot
No. 491-A-3-B-2 was a dirt road accessing to the Sumulong
Highway, Antipolo, Rizal.

At a special meeting on May 17, 1991, the respondents
Board of Directors approved a resolution authorizing the
corporation, through its president, Roberto B. Roxas, to sell
Lot No. 491-A-3-B-2 covered by TCT No. 78086, with an area
of 7,213 square meters, at a price and under such terms and
conditions which he deemed most reasonable and
advantageous to the corporation; and to execute, sign and
deliver the pertinent sales documents and receive the
proceeds of the sale for and on behalf of the company.3

Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot
No. 491-A-3-B-2 covered by TCT No. 78086 on which it
planned to construct its warehouse building, and a portion of
the adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot
container van would be able to readily enter or leave the
property. In a Letter to Roxas dated

_______________

1 Penned by Associate Justice Salome A. Montoya, with
Associate Justices Conrado M. Vasquez, Jr. and Teodoro P.
Regino, concurring.

2Penned by Judge Francisco X. Velez.

3Exhibit L, Records, p. 213.

238

238


Company, Inc.

June 21, 1991, WHI President Jonathan Y. Dy offered to buy
Lot No. 491-A-3-B-2 under stated terms and conditions for
P1,000 per square meter or at the price of P7,213,000.4 One
of the terms incorporated in Dys offer was the following
provision:

5. This Offer to Purchase is made on the representation and
warranty of the OWNER/SELLER, that he holds a good and
registrable title to the property, which shall be conveyed
CLEAR and FREE of all liens and encumbrances, and that the
area of 7,213 square meters of the subject property already
includes the area on which the right of way traverses from
the main lot (area) towards the exit to the Sumulong Highway
as shown in the location plan furnished by the Owner/Seller
to the buyer. Furthermore, in the event that the right of way
is insufficient for the buyers purposes (example: entry of a
45-foot container), the seller agrees to sell additional square
meter from his current adjacent property to allow the buyer
to full access and full use of the property.5

Roxas indicated his acceptance of the offer on page 2 of the
deed. Less than a month later or on July 1, 1991, Roxas, as
President of RECCI, as vendor, and Dy, as President of WHI, as
vendee, executed a contract to sell in which RECCI bound and
obliged itself to sell to Dy Lot No. 491-A-3-B-2 covered by TCT
No. 78086 for P7,213,000.6 On September 5, 1991, a Deed of
Absolute Sale7 in favor of WHI was issued, under which Lot
No. 491-A-3-B-2 covered by TCT No. 78086 was sold for
P5,000,000, receipt of which was acknowledged by Roxas
under the following terms and conditions:

The Vendor agree (sic), as it hereby agrees and binds itself to
give Vendee the beneficial use of and a right of way from
Sumulong Highway to the property herein conveyed consists
of 25 square meters wide to be used as the latters egress
from and ingress to and an additional 25 square meters in the
corner of Lot No. 491-A-3-B-1, as turning and/or maneuvering
area for Vendees vehicles.

The Vendor agrees that in the event that the right of way is
insufficient for the Vendees use (ex entry of a 45-foot
container) the Vendor agrees to sell additional square meters
from its current adjacent property to allow the Vendee full
access and full use of the property.

. . .

_______________

4Exhibit M, Id., at p. 214.

5Ibid.

6Exhibit N, Id., at p. 216.

7Exhibit C, Id., at pp. 192-195.

239

VOL. 436, AUGUST 12, 2004

239

Company, Inc.

The Vendor hereby undertakes and agrees, at its account, to
defend the title of the Vendee to the parcel of land and
improvements herein conveyed, against all claims of any and
all persons or entities, and that the Vendor hereby warrants
the right of the Vendee to possess and own the said parcel of
land and improvements thereon and will defend the Vendee
against all present and future claims and/or action in relation
thereto, judicial and/or administrative. In particular, the
Vendor shall eject all existing squatters and occupants of the
premises within two (2) weeks from the signing hereof. In
case of failure on the part of the Vendor to eject all occupants
and squatters within the two-week period or breach of any of
the stipulations, covenants and terms and conditions herein
provided and that of contract to sell dated 1 July 1991, the
Vendee shall have the right to cancel the sale and demand
reimbursement for all payments made to the Vendor with
interest thereon at 36% per annum.8

On September 10, 1991, the Wimbeco Builders, Inc. (WBI)
submitted its quotation for P8,649,000 to WHI for the
construction of the warehouse building on a portion of the
property with an area of 5,088 square meters.9 WBI
proposed to start the project on October 1, 1991 and to turn
over the building to WHI on February 29, 1992.10

In a Letter dated September 16, 1991, Ponderosa Leather
Goods Company, Inc. confirmed its lease agreement with
WHI of a 5,000-square-meter portion of the warehouse yet to
be constructed at the rental rate of P65 per square meter.
Ponderosa emphasized the need for the warehouse to be
ready for occupancy before April 1, 1992.11 WHI accepted
the offer. However, WBI failed to commence the construction
of the warehouse in October 1, 1991 as planned because of
the presence of squatters in the property and suggested a
renegotiation of the contract after the squatters shall have
been evicted.12 Subsequently, the squatters were evicted
from the property.

On March 31, 1992, WHI and WBI executed a Letter-Contract
for the construction of the warehouse building for
P11,804,160.13 The contractor started construction in April
1992 even before the

_______________

8Id., at pp. 193-194.

9Exhibit D, Id., at p. 196.

10Exhibit D-1, Id., at p. 197.

11Exhibit G, Id., at p. 201.

12Exhibit E, Id., at p. 198.

13Exhibit F, Id., at p. 199.

240

240


Company, Inc.

building officials of Antipolo City issued a building permit on
May 28, 1992. After the warehouse was finished, WHI issued
on March 21, 1993 a certificate of occupancy by the building
official. Earlier, or on March 18, 1993, WHI, as lessor, and
Ponderosa, as lessee, executed a contract of lease over a
portion of the property for a monthly rental of P300,000 for a
period of three years from March 1, 1993 up to February 28,
1996.14

In the meantime, WHI complained to Roberto Roxas that the
vehicles of RECCI were parked on a portion of the property
over which WHI had been granted a right of way. Roxas
promised to look into the matter. Dy and Roxas discussed the
need of the WHI to buy a 500-square-meter portion of Lot
No. 491-A-3-B-1 covered by TCT No. 78085 as provided for in
the deed of absolute sale. However, Roxas died soon
thereafter. On April 15, 1992, the WHI wrote the RECCI,
reiterating its verbal requests to purchase a portion of the
said lot as provided for in the deed of absolute sale, and
complained about the latters failure to eject the squatters
within the three-month period agreed upon in the said deed.

The WHI demanded that the RECCI sell a portion of Lot No.
491-A-3-B-1 covered by TCT No. 78085 for its beneficial use
within 72 hours from notice thereof, otherwise the
appropriate action would be filed against it. RECCI rejected
the demand of WHI. WHI reiterated its demand in a Letter
dated May 29, 1992. There was no response from RECCI.

On June 17, 1992, the WHI filed a complaint against the RECCI
with the Regional Trial Court of Makati, for specific
performance and damages, and alleged, inter alia, the
following in its complaint:

5. The current adjacent property referred to in the
aforequoted paragraph of the Deed of Absolute Sale pertains
to the property covered by Transfer Certificate of Title No. N-
78085 of the Registry of Deeds of Antipolo, Rizal, registered in
the name of herein defendant Roxas Electric.
6. Defendant Roxas Electric in patent violation of the
express and valid terms of the Deed of Absolute Sale
unjustifiably refused to deliver to Woodchild Holdings the
stipulated beneficial use and right of way consisting of 25
square meters and 55 square meters to the prejudice of the
plaintiff.
7. Similarly, in as much as the 25 square meters and 55
square meters alloted to Woodchild Holdings for its beneficial
use is inadequate as

_______________

14Exhibit H, Id., at pp. 202-206.

241

VOL. 436, AUGUST 12, 2004

241

Company, Inc.

turning and/or maneuvering area of its 45-foot container
van, Woodchild Holdings manifested its intention pursuant to
para. 5 of the Deed of Sale to purchase additional square
meters from Roxas Electric to allow it full access and use of
the purchased property, however, Roxas Electric refused and
failed to merit Woodchild Holdings request contrary to
defendant Roxas Electrics obligation under the Deed of
Absolute Sale (Annex A).
8. Moreover, defendant, likewise, failed to eject all existing
squatters and occupants of the premises within the stipulated
time frame and as a consequence thereof, plaintiffs planned
construction has been considerably delayed for seven (7)
months due to the squatters who continue to trespass and
obstruct the subject property, thereby Woodchild Holdings
incurred substantial losses amounting to P3,560,000.00
occasioned by the increased cost of construction materials
and labor.
9. Owing further to Roxas Electrics deliberate refusal to
comply with its obligation under Annex A, Woodchild
Holdings suffered unrealized income of P300,000.00 a month
or P2,100,000.00 supposed income from rentals of the
subject property for seven (7) months.
10. On April 15, 1992, Woodchild Holdings made a final
demand to Roxas Electric to comply with its obligations and
warranties under the Deed of Absolute Sale but
notwithstanding such demand, defendant Roxas Electric
refused and failed and continue to refuse and fail to heed
plain-tiffs demand for compliance.
Copy of the demand letter dated April 15, 1992 is hereto
attached as Annex B and made an integral part hereof.
11. Finally, on 29 May 1991, Woodchild Holdings made a
letter request addressed to Roxas Electric to particularly
annotate on Transfer Certificate of Title No. N-78085 the
agreement under Annex A with respect to the beneficial
use and right of way, however, Roxas Electric unjustifiably
ignored and disregarded the same.
Copy of the letter request dated 29 May 1992 is hereto
attached as Annex C and made an integral part hereof.
12. By reason of Roxas Electrics continuous refusal and
failure to comply with Woodchild Holdings valid demand for
compliance under Annex A, the latter was constrained to
litigate, thereby incurring damages as and by way of
attorneys fees in the amount of P100,000.00 plus costs of
suit and expenses of litigation.15

The WHI prayed that, after due proceedings, judgment be
rendered in its favor, thus:

_______________

15Records, pp. 2-4.

242

242


Company, Inc.

WHEREFORE, it is respectfully prayed that judgment be
rendered in favor of Woodchild Holdings and ordering Roxas
Electric the following:

a) to deliver to Woodchild Holdings the beneficial use of
the stipulated 25 square meters and 55 square meters;
b) to sell to Woodchild Holdings additional 25 and 100
square meters to allow it full access and use of the purchased
property pursuant to para. 5 of the Deed of Absolute Sale;
c) to cause annotation on Transfer Certificate of Title No. N-
78085 the beneficial use and right of way granted to
Woodchild Holdings under the Deed of Absolute Sale;
d) to pay Woodchild Holdings the amount of
P5,660,000.00, representing actual damages and unrealized
income;
e) to pay attorneys fees in the amount of P100,000.00; and
f) to pay the costs of suit.

Other reliefs just and equitable are prayed for.16

In its answer to the complaint, the RECCI alleged that it never
authorized its former president, Roberto Roxas, to grant the
beneficial use of any portion of Lot No. 491-A-3-B-1, nor
agreed to sell any portion thereof or create a lien or burden
thereon. It alleged that, under the Resolution approved on
May 17, 1991, it merely authorized Roxas to sell Lot No. 491-
A-3-B-2 covered by TCT No. 78086. As such, the grant of a
right of way and the agreement to sell a portion of Lot No.
491-A-3-B-1 covered by TCT No. 78085 in the said deed are
ultra vires. The RECCI further alleged that the provision
therein that it would sell a portion of Lot No. 491-A-3-B-1 to
the WHI lacked the essential elements of a binding
contract.17

In its amended answer to the complaint, the RECCI alleged
that the delay in the construction of its warehouse building
was due to the failure of the WHIs contractor to secure a
building permit thereon.18

During the trial, Dy testified that he told Roxas that the
petitioner was buying a portion of Lot No. 491-A-3-B-1
consisting of an area of 500 square meters, for the price of
P1,000 per square meter.

On November 11, 1996, the trial court rendered judgment in
favor of the WHI, the decretal portion of which reads:

_______________

16Id., at pp. 4-5.

17Id., at pp. 24-25.

18Id., at p. 247.

243

VOL. 436, AUGUST 12, 2004

243

Company, Inc.

WHEREFORE, judgment is hereby rendered directing
defendant:

(1) To allow plaintiff the beneficial use of the existing right
of way plus the stipulated 25 sq. m. and 55 sq. m.;
(2) To sell to plaintiff an additional area of 500 sq. m.
priced at P1,000 per sq. m. to allow said plaintiff full access
and use of the purchased property pursuant to Par. 5 of their
Deed of Absolute Sale;
(3) To cause annotation on TCT No. N-78085 the beneficial
use and right of way granted by their Deed of Absolute Sale;
(4) To pay plaintiff the amount of P5,568,000 representing
actual damages and plaintiffs unrealized income;
(5) To pay plaintiff P100,000 representing attorneys fees;
and

To pay the costs of suit.

SO ORDERED. 19

The trial court ruled that the RECCI was estopped from
disowning the apparent authority of Roxas under the May 17,
1991 Resolution of its Board of Directors. The court reasoned
that to do so would prejudice the WHI which transacted with
Roxas in good faith, believing that he had the authority to
bind the WHI relating to the easement of right of way, as well
as the right to purchase a portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085.

The RECCI appealed the decision to the CA, which rendered a
decision on November 9, 1999 reversing that of the trial
court, and ordering the dismissal of the complaint. The CA
ruled that, under the resolution of the Board of Directors of
the RECCI, Roxas was merely authorized to sell Lot No. 491-A-
3-B-2 covered by TCT No. 78086, but not to grant right of way
in favor of the WHI over a portion of Lot No. 491-A-3-B-1, or
to grant an option to the petitioner to buy a portion thereof.
The appellate court also ruled that the grant of a right of way
and an option to the respondent were so lopsided in favor of
the respondent because the latter was authorized to fix the
location as well as the price of the portion of its property to
be sold to the respondent. Hence, such provisions contained
in the deed of absolute sale were not binding on the RECCI.
The appellate court ruled that the delay in the construction of
WHIs warehouse was due to its fault.

_______________

19 Id., at p. 482.

244

244


Company, Inc.
The Present Petition

The petitioner now comes to this Court asserting that:

I.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED
OF ABSOLUTE SALE (EXH. C) IS ULTRA VIRES.

II.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE
RULING OF THE COURT A QUO ALLOWING THE PLAINTIFF-
APPELLEE THE BENEFICIAL USE OF THE EXISTING RIGHT OF
WAY PLUS THE STIPULATED 25 SQUARE METERS AND 55
SQUARE METERS BECAUSE THESE ARE VALID STIPULATIONS
AGREED BY BOTH PARTIES TO THE DEED OF ABSOLUTE SALE
(EXH. C).

III.

THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT
OF APPEALS TO RULE THAT THE STIPULATIONS OF THE DEED
OF ABSOLUTE SALE (EXH. C) WERE DISADVANTAGEOUS TO
THE APPELLEE, NOR WAS APPELLEE DEPRIVED OF ITS
PROPERTY WITHOUT DUE PROCESS.

IV.

IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF
PROPERTY WITHOUT DUE PROCESS BY THE ASSAILED
DECISION.

V.

THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE
OF THE APPELLANT TO EVICT THE SQUATTERS ON THE LAND
AS AGREED IN THE DEED OF ABSOLUTE SALE (EXH. C).

VI.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE
RULING OF THE COURT A QUO DIRECTING THE DEFENDANT
TO PAY THE PLAINTIFF THE AMOUNT OF P5,568,000.00
REPRESENTING ACTUAL DAMAGES AND PLAINTIFFS
UNREALIZED INCOME AS WELL AS ATTORNEYS FEES.20

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20Rollo, pp. 22-23.

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Company, Inc.

The threshold issues for resolution are the following: (a)
whether the respondent is bound by the provisions in the
deed of absolute sale granting to the petitioner beneficial use
and a right of way over a portion of Lot No. 491-A-3-B-1
accessing to the Sumulong Highway and granting the option
to the petitioner to buy a portion thereof, and, if so, whether
such agreement is enforceable against the respondent; (b)
whether the respondent failed to eject the squatters on its
property within two weeks from the execution of the deed of
absolute sale; and, (c) whether the respondent is liable to the
petitioner for damages.

On the first issue, the petitioner avers that, under its
Resolution of May 17, 1991, the respondent authorized
Roxas, then its president, to grant a right of way over a
portion of Lot No. 491-A-3-B-1 in favor of the petitioner, and
an option for the respondent to buy a portion of the said
property. The petitioner contends that when the respondent
sold Lot No. 491-A-3-B-2 covered by TCT No. 78086, it
(respondent) was well aware of its obligation to provide the
petitioner with a means of ingress to or egress from the
property to the Sumulong Highway, since the latter had no
adequate outlet to the public highway. The petitioner asserts
that it agreed to buy the property covered by TCT No. 78085
because of the grant by the respondent of a right of way and
an option in its favor to buy a portion of the property covered
by TCT No. 78085. It contends that the respondent never
objected to Roxas acceptance of its offer to purchase the
property and the terms and conditions therein; the
respondent even allowed Roxas to execute the deed of
absolute sale in its behalf. The petitioner asserts that the
respondent even received the purchase price of the property
without any objection to the terms and conditions of the said
deed of sale. The petitioner claims that it acted in good faith,
and contends that after having been benefited by the said
sale, the respondent is estopped from assailing its terms and
conditions. The petitioner notes that the respondents Board
of Directors never approved any resolution rejecting the deed
of absolute sale executed by Roxas for and in its behalf. As
such, the respondent is obliged to sell a portion of Lot No.
491-A-3-B-1 covered by TCT No. 78085 with an area of 500
square meters at the price of P1,000 per square meter, based
on its evidence and Articles 649 and 651 of the New Civil
Code.

For its part, the respondent posits that Roxas was not so
authorized under the May 17, 1991 Resolution of its Board of
Directors to

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Company, Inc.

impose a burden or to grant a right of way in favor of the
petitioner on Lot No. 491-A-3-B-1, much less convey a portion
thereof to the petitioner. Hence, the respondent was not
bound by such provisions contained in the deed of absolute
sale. Besides, the respondent contends, the petitioner cannot
enforce its right to buy a portion of the said property since
there was no agreement in the deed of absolute sale on the
price thereof as well as the specific portion and area to be
purchased by the petitioner.

We agree with the respondent.

In San Juan Structural and Steel Fabricators, Inc. v. Court of
Appeals,21 we held that:

A corporation is a juridical person separate and distinct from
its stockholders or members. Accordingly, the property of the
corporation is not the property of its stockholders or
members and may not be sold by the stockholders or
members without express authorization from the
corporations board of directors. Section 23 of BP 68,
otherwise known as the Corporation Code of the Philippines,
provides:

SEC. 23. The Board of Directors or Trustees.Unless
otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations
controlled and held by the board of directors or trustees to
be elected from among the holders of stocks, or where there
is no stock, from among the members of the corporation,
who shall hold office for one (1) year and until their
successors are elected and qualified.

Indubitably, a corporation may act only through its board of
directors or, when authorized either by its by-laws or by its
board resolution, through its officers or agents in the normal
course of business. The general principles of agency govern
the relation between the corporation and its officers or
agents, subject to the articles of incorporation, by-laws, or
relevant provisions of law. . . .22

Generally, the acts of the corporate officers within the scope
of their authority are binding on the corporation. However,
under Article 1910 of the New Civil Code, acts done by such
officers beyond the scope of their authority cannot bind the
corporation unless it has ratified such acts expressly or tacitly,
or is estopped from denying them:

_______________

21296 SCRA 631 (1998).

22Id., at pp. 644-645.

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247

Company, Inc.

Art. 1910. The principal must comply with all the obligations
which the agent may have contracted within the scope of his
authority.

As for any obligation wherein the agent has exceeded his
power, the principal is not bound except when he ratifies it
expressly or tacitly.

Thus, contracts entered into by corporate officers beyond the
scope of authority are unenforceable against the corporation
unless ratified by the corporation.23

In BA Finance Corporation v. Court of Appeals,24 we also
ruled that persons dealing with an assumed agency, whether
the assumed agency be a general or special one, are bound at
their peril, if they would hold the principal liable, to ascertain
not only the fact of agency but also the nature and extent of
authority, and in case either is controverted, the burden of
proof is upon them to establish it.

In this case, the respondent denied authorizing its then
president Roberto B. Roxas to sell a portion of Lot No. 491-A-
3-B-1 covered by TCT No. 78085, and to create a lien or
burden thereon. The petitioner was thus burdened to prove
that the respondent so authorized Roxas to sell the same and
to create a lien thereon.

Central to the issue at hand is the May 17, 1991 Resolution of
the Board of Directors of the respondent, which is worded as
follows:

RESOLVED, as it is hereby resolved, that the corporation, thru
the President, sell to any interested buyer, its 7,213-sq.-
meter property at the Sumulong Highway, Antipolo, Rizal,
covered by Transfer Certificate of Title No. N-78086, at a price
and on terms and conditions which he deems most
reasonable and advantageous to the corporation;

FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President
of the corporation, be, as he is hereby authorized to execute,
sign and deliver the pertinent sales documents and receive
the proceeds of sale for and on behalf of the company.25

_______________

23 Art. 1403. The following contracts are unenforceable,
unless they are ratified:

(1) Those entered into in the name of another person by one
who has been given no authority or legal representation, or
who has acted beyond his powers.

24211 SCRA 112 (1992).

25 Records, p. 213.

248

248


Company, Inc.

Evidently, Roxas was not specifically authorized under the
said resolution to grant a right of way in favor of the
petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to
sell to the petitioner a portion thereof. The authority of
Roxas, under the resolution, to sell Lot No. 491-A-3-B-2
covered by TCT No. 78086 did not include the authority to sell
a portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create
or convey real rights thereon. Neither may such authority be
implied from the authority granted to Roxas to sell Lot No.
491-A-3-B-2 to the petitioner on such terms and conditions
which he deems most reasonable and advantageous. Under
paragraph 12, Article 1878 of the New Civil Code, a special
power of attorney is required to convey real rights over
immovable property.26 Article 1358 of the New Civil Code
requires that contracts which have for their object the
creation of real rights over immovable property must appear
in a public document.27 The petitioner cannot feign
ignorance of the need for Roxas to have been specifically
authorized in writing by the Board of Directors to be able to

_______________

26Art. 1878. Special powers of attorney are necessary in the
following cases:

. . .

(5) To enter into any contract by which the ownership of an
immovable is transmitted or acquired either gratuitously or
for a valuable consideration;

. . .

(12) To create or convey real rights over immovable property;

. . .

(14) To ratify or recognize obligations contracted before the
agency;

(15) Any other act of strict dominion.

27 Art. 1358. The following must appear in a public
document:

(1) Acts and contracts which have for their object the
creation, transmission, modification or extinguishment of real
rights over immovable property; sales of real property or of
an interest therein are governed by articles 1403, No. 2, and
1405;

. . .

(3) The power to administer property, or any other power
which has for its object an act appearing or which should
appear in a public document, or should prejudice a third
person;

(4) The cession of actions or rights proceeding from an act
appearing in a public document.

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Company, Inc.

validly grant a right of way and agree to sell a portion of Lot
No. 491-A-3-B-1. The rule is that if the act of the agent is one
which requires authority in writing, those dealing with him
are charged with notice of that fact.28

Powers of attorney are generally construed strictly and courts
will not infer or presume broad powers from deeds which do
not sufficiently include property or subject under which the
agent is to deal.29 The general rule is that the power of
attorney must be pursued within legal strictures, and the
agent can neither go beyond it; nor beside it. The act done
must be legally identical with that authorized to be done.30
In sum, then, the consent of the respondent to the assailed
provisions in the deed of absolute sale was not obtained;
hence, the assailed provisions are not binding on it.

We reject the petitioners submission that, in allowing Roxas
to execute the contract to sell and the deed of absolute sale
and fail-ing to reject or disapprove the same, the respondent
thereby gave him apparent authority to grant a right of way
over Lot No. 491-A-3-B-1 and to grant an option for the
respondent to sell a portion thereof to the petitioner. Absent
estoppel or ratification, apparent authority cannot remedy
the lack of the written power required under the statement
of frauds.31 In addition, the petitioners fallacy is its wrong
assumption of the unproved premise that the respondent
had full knowledge of all the terms and conditions contained
in the deed of absolute sale when Roxas executed it.

It bears stressing that apparent authority is based on
estoppel and can arise from two instances: first, the principal
may knowingly permit the agent to so hold himself out as
having such authority, and in this way, the principal becomes
estopped to claim that the agent does not have such
authority; second, the principal may so clothe the agent with
the indicia of authority as to lead a reasonably prudent
person to believe that he actually has such authority.32 There
can be no apparent authority of an agent without acts or
conduct on the part of the principal and such acts or

_______________

28 State v. Sellers and Resolute Insurance Company, 258
N.W.2d 292 (1977).

29Prior v. Hager, 440 S.W.2d 167 (1969).

30Lang v. Bair, 36 Mo. 85, Id.

31Union Camp Corporation v. Dyal, Jr., 460 F.2d 678 (1972).

32 Bankers Protective Life Insurance Co. v. Addison, 273
S.W.2d 694 (1951).

250

250


Company, Inc.

conduct of the principal must have been known and relied
upon in good faith and as a result of the exercise of
reasonable prudence by a third person as claimant and such
must have produced a change of position to its detriment.
The apparent power of an agent is to be determined by the
acts of the principal and not by the acts of the agent.33

For the principle of apparent authority to apply, the
petitioner was burdened to prove the following: (a) the acts
of the respondent justifying belief in the agency by the
petitioner; (b) knowledge thereof by the respondent which is
sought to be held; and, (c) reliance thereon by the petitioner
consistent with ordinary care and prudence.34 In this case,
there is no evidence on record of specific acts made by the
respondent35 showing or indicating that it had full
knowledge of any representations made by Roxas to the
petitioner that the respondent had authorized him to grant to
the respondent an option to buy a portion of Lot No. 491-A-3-
B-1 covered by TCT No. 78085, or to create a burden or lien
thereon, or that the respondent allowed him to do so.

The petitioners contention that by receiving and retaining
the P5,000,000 purchase price of Lot No. 491-A-3-B-2, the
respondent effectively and impliedly ratified the grant of a
right of way on the adjacent lot, Lot No. 491-A-3-B-1, and to
grant to the petitioner an option to sell a portion thereof, is
barren of merit. It bears stressing that the respondent sold
Lot No. 491-A-3-B-2 to the petitioner, and the latter had
taken possession of the property. As such, the respondent
had the right to retain the P5,000,000, the purchase price of
the property it had sold to the petitioner. For an act of the
principal to be considered as an implied ratification of an
unauthorized act of an agent, such act must be inconsistent
with any other hypothesis than that he approved and
intended to adopt what had been done in his name.36
Ratification is based on waiverthe intentional
relinquishment of a known right. Ratification cannot be
inferred from acts that a principal has a right to do
independently of the unauthorized act of the agent.
Moreover, if a writing is re-

_______________

33 Id., at p. 696.

34Residon v. Miller Distributors Co., Inc., 139 N.W.2d 12
(1966).

35 See Wells Fargo Business v. Kozoff, 695 F.2d 940 (1983).

36 The Board of Supervisors v. Schack, 18 L.E.2d 556 (1897);
American Food Corporation v. Central Carolina Bank & Trust
Company, 291 S.W.2d 892.

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Company, Inc.

quired to grant an authority to do a particular act, ratification
of that act must also be in writing.37 Since the respondent
had not ratified the unauthorized acts of Roxas, the same are
unenforceable.38 Hence, by the respondents retention of
the amount, it cannot thereby be implied that it had ratified
the unauthorized acts of its agent, Roberto Roxas.

On the last issue, the petitioner contends that the CA erred in
dismissing its complaint for damages against the respondent
on its finding that the delay in the construction of its
warehouse was due to its (petitioners) fault. The petitioner
asserts that the CA should have affirmed the ruling of the trial
court that the respondent failed to cause the eviction of the
squatters from the property on or before September 29,
1991; hence, was liable for P5,660,000. The respondent, for
its part, asserts that the delay in the construction of the
petitioners warehouse was due to its late filing of an
application for a building permit, only on May 28, 1992.

The petitioners contention is meritorious. The respondent
does not deny that it failed to cause the eviction of the
squatters on or before September 29, 1991. Indeed, the
respondent does not deny the fact that when the petitioner
wrote the respondent demanding that the latter cause the
eviction of the squatters on April 15, 1992, the latter were
still in the premises. It was only after receiving the said letter
in April 1992 that the respondent caused the eviction of the
squatters, which thus cleared the way for the petitioners
contractor to commence the construction of its warehouse
and secure the appropriate building permit therefor.

The petitioner could not be expected to file its application for
a building permit before April 1992 because the squatters
were still occupying the property. Because of the
respondents failure to cause their eviction as agreed upon,
the petitioners contractor failed to commence the
construction of the warehouse in October 1991 for the
agreed price of P8,649,000. In the meantime, costs of
construction materials spiraled. Under the construction
contract entered into between the petitioner and the
contractor, the petitioner was obliged to pay P11,804,160,39
including the additional

_______________

37 Reuschlin and Gregory, The Law of Agency and
Partnership, 2nd ed., p. 75.

38Article 1403, New Civil Code (infra).

39 Exhibit F, Records, p. 199.

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252


Company, Inc.

work costing P1,441,500, or a net increase of P1,712,980.40
The respondent is liable for the difference between the
original cost of construction and the increase thereon,
conformably to Article 1170 of the New Civil Code, which
reads:

Art. 1170. Those who in the performance of their obligations
are guilty of fraud, negligence, or delay and those who in any
manner contravene the tenor thereof, are liable for damages.

The petitioner, likewise, lost the amount of P3,900,000 by
way of unearned income from the lease of the property to
the Ponderosa Leather Goods Company. The respondent is,
thus, liable to the petitioner for the said amount, under
Articles 2200 and 2201 of the New Civil Code:

Art. 2200. Indemnification for damages shall comprehend not
only the value of the loss suffered, but also that of the profits
which the obligee failed to obtain.

Art. 2201. In contracts and quasi-contracts, the damages for
which the obligor who acted in good faith is liable shall be
those that are the natural and probable consequences of the
breach of the obligation, and which the parties have foreseen
or could have reasonably foreseen at the time the obligation
was constituted.

In case of fraud, bad faith, malice or wanton attitude, the
obligor shall be responsible for all damages which may be
reasonably attributed to the non-performance of the
obligation.

In sum, we affirm the trial courts award of damages and
attorneys fees to the petitioner.

IN LIGHT OF ALL THE FOREGOING, judgment is hereby
rendered AFFIRMING the assailed Decision of the Court of
Appeals WITH MODIFICATION. The respondent is ordered to
pay to the petitioner the amount of P5,612,980 by way of
actual damages and P100,000 by way of attorneys fees. No
costs.

SO ORDERED.

Puno (Chairman), Austria-Martinez, Tinga and Chico-
Nazario, JJ., concur.

Judgment affirmed with modification.

_______________

40 TSN, 30 September 1993, p. 13.
Note.If a corporation knowingly permits one of its officers,
or any other agent, to act within the scope of an apparent
authority, it holds him out to the public as possessing the
power to do those acts. (Soler vs. Court of Appeals, 358 SCRA
57 [2001])

[Woodchild Holdings, Inc. vs. Roxas Electric and Construction
Company, Inc., 436 SCRA 235(2004)]

G.R. No. 150959. August 4, 2006.*

UNITED PARAGON MINING CORPORATION, petitioner, vs.
COURT OF APPEALS, former 12th DIVISION, ATTY. MURLY P.
MENDEZ and CESARIO1 F. ERMITA, respondents.

Corporation Law; The power of a corporation to sue and be
sued in any court is lodged with its board of directors that
exercises its corporate powers, and in turn, physical acts of
the corporation, like the signing of documents, can be
performed only by natural persons duly authorized for the
purpose by the corporate by-laws or by a specific act of the
board of directors.We start with the basic concept that a
corporation, like petitioner UPMC, has no power except those
expressly conferred on it by the Corporation Code and those
that are implied or incidental to its existence. In turn, a
corporation exercises

_______________

* SECOND DIVISION.

1 Also referred as Ceasario.

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United Paragon Mining Corporation vs. Court of Appeals

said powers through its board of directors and/or its duly
authorized officers and agents. It has thus been observed that
the power of a corporation to sue and be sued in any court is
lodged with its board of directors that exercises its corporate
powers. In turn, physical acts of the corporation, like the
signing of documents, can be performed only by natural
persons duly authorized for the purpose by the corporate by-
laws or by a specific act of the board of directors.

Same; Parties; Being not a real party-in-interest, a Personnel
Superintendent has no right to file a petition in behalf of the
corporation without any authority from its board of
directorsit is basic in law that a corporation has a legal
personality entirely separate and distinct from that of its
officers and the latter cannot act for and on its behalf without
being so authorized by its governing board.Throughout the
proceedings before the Voluntary Arbitrator, that is, from the
filing of the position papers up to the filing of the motion for
reconsideration, UPMC was duly represented by its counsel,
Atty. Archimedes O. Yanto. True it is that Cesarios complaint
for illegal dismissal was filed against the corporation and
Daniel. It appears obvious to us, however, that Daniel was
merely a nominal party in that proceedings, as in fact he was
impleaded thereat in his capacity as UPMCs Personnel
Superintendent who signed the termination letter. For sure,
Cesarios complaint contains no allegation whatsoever for
specific claim or charge against Daniel in whatever capacity.
As it is, Daniel was not in anyway affected by the outcome of
the illegal dismissal case because only the corporation was
made liable therein to Cesario. Being not a real party-in-
interest, Daniel has no right to file the petition in CA-G.R. SP
No. 44450 in behalf of the corporation without any authority
from its board of directors. It is basic in law that a corporation
has a legal personality entirely separate and distinct from
that of its officers and the latter cannot act for and on its
behalf without being so authorized by its governing board. In
Premium Marble Resources, Inc. v. Court of Appeals, 264
SCRA 11 (1996), we made it clear that in the absence of an
authority from the board of directors, no person, not even
the officers of the corporation, can validly bind the latter.

Procedural Rules and Technicalities; To merit the Courts
liberal consideration, a party must show reasonable cause
justifying non-compliance with the rules and must convince
the Court that the outright dismissal of the petition would
defeat the administration of

640

640



justice.Ample jurisprudence exists to the effect that
subsequent and substantial compliance of a petitioner may
call for the relaxation of the rules of procedure in the interest
of justice. But to merit the Courts liberal consideration,
petitioner must show reasonable cause justifying non-
compliance with the rules and must convince the Court that
the outright dismissal of the petition would defeat the
administration of justice. Here, petitioner has not adequately
explained its failure to have the certification against forum
shopping signed by its duly authorized officer. Instead, it
merely persisted in its thesis that it was not necessary to
show proof that its Personnel Superintendent was duly
authorized to file that petition and to sign the verification
thereof and the certification against forum shopping despite
the absence of the necessary board authorization, thereby
repeating in the process its basic submission that CA-G.R. SP
No. 44450 is merely a continuation of the proceedings before
the Voluntary Arbitrator and that its Personnel
Superintendent was impleaded as one of the respondents in
Cesarios complaint for illegal dismissal.



Archimedes O. Yanto for petitioner.

Leopoldo S. Perillo, Sr. for respondent Cesario F. Ermita.

GARCIA, J.:

Assailed and sought to be set aside in this petition for review
under Rule 45 of the Rules of Court is the Decision2 dated
July 24, 2001 of the Court of Appeals (CA), as reiterated in its
Resolution3 of November 7, 2001, dismissing the

_______________

2 Penned by Associate Justice Conrado M. Vasquez, Jr. and
concurred in by Associate Justices Martin S. Villarama, Jr. and
Sergio L. Pestao; Rollo, pp. 28-32.

3 Id., at p. 33-A.

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VOL. 497, AUGUST 4, 2006

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petition for certiorari with prayer for a temporary restraining
order and preliminary injunction thereat filed by the herein
petitioner in CA-G.R. SP No. 44450, entitled United Paragon
Mining Corporation, represented by Feliciano M. Daniel v.
Atty. Murly P. Mendez, in his capacity as Accredited
Voluntary Arbitrator, Region V, and Cesario F. Ermita.

The facts:

Prior to the instant controversy, private respondent Cesario F.
Ermita (Cesario, for brevity) was a regular employee working
as a foreman of petitioner United Paragon Mining
Corporation (UPMC, hereafter).

On January 18, 1996, Cesario received a termination letter
bearing date January 16, 1996 and signed by UPMCs
Personnel Superintendent, Feliciano M. Daniel, informing
Cesario that his employment as foreman is terminated
effective thirty days after his receipt of the letter. As stated in
the letter, the termination was on account of Cesarios
violation of company rules against infliction of bodily injuries
on a co-employee, it being alleged therein that Cesario
inflicted bodily injuries on a co-employee, a certain Jerry
Romero, as well as for unlawfully possessing a deadly
weapon, a bolo, again in violation of company rules.

As a result of the termination, the matter was brought to the
grievance machinery as mandated under the Collective
Bargaining Agreement existing at that time between UPMC
and the United Paragon Supervisors Union. Having failed to
reach a settlement thereat, the parties agreed to submit the
dispute to voluntary arbitration. Accordingly, the complaint
for illegal dismissal was referred to Voluntary Arbitrator Atty.
Murly P. Mendez of the National Conciliation and Mediation
Board, Regional Branch No. V, Legaspi City, whereat the same
was docketed as VA Case No. RB5-657-04-002-96.

On February 28, 1997, Voluntary Arbitrator Mendez rendered
a decision4 in Cesarios favor, stating that although the

_______________

4 Id., at p. 98.

642

642



procedural requirements in the termination of an employee
had been complied with, the termination of Cesario was
unjustified because it was arrived at through gross
misapprehension of facts. Explains the Voluntary Arbitrator:

An analysis of the tenor of the termination letter would seem
to indicate that Ceasario Ermita was separated from service
simply because his explanation was not acceptable to the
company. Stated more bluntly, Ermita was terminated not
because there was a definite finding of fact relative to his
supposed culpability, but because his answer did not find
favor with management.

x x x x x x x x x

The evidence on record partakes of the uncorroborated
statement of Jerry Romero claiming that he was assaulted by
[Cesario]. This claim has been disputed and is denied by
[Cesario] in the statement executed by him on January 2,
1996 as well as in his written explanation (Annex 6,
Respondents Position Paper).

On this point, it can be argued that since this is a case of
ones word against another, the best that could be said of
managements evidence is that it has achieved a level at an
equi-poise with that of the Constitution. The spirit of
prevailing jurisprudence as well as a liberal interpretation of
the new Constitutional provision on labor, would mandate
that where a doubt exists, the same should be resolved in
favor of labor. The position of [Cesario] appears to have been
strengthened by the document jointly signed by [him] and
Jerry Romero, the supposed victim of the assault charged.

This amicable settlement would serve to negate the charge of
physical injury against [Cesario] as a basis for termination, it
appearing that even [his] supposed victim, Jerry Romero, who
has been made to appear as a complainant in the
proceedings which resulted in the termination letter, has
admitted in this amicable settlement (Annex A,
Complainants Position Paper) that hindi naming sinasadya
yon at itong ginawa naming sulat na ito ay siya ang
magpapatunay na ayos kaming dalawa at walang problema sa
isat isa.

This admission, that comes no less from the supposed
accuser of [Cesario], clearly establishes the fact that whatever
may have happened between them on New Years eve was
something that neither of them willfully and voluntarily did.
Since it has been established that the supposed scuffle
between [Cesario] and Romero was

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643


hindi sinasadya, then it would necessarily follow that there
could not have been a willful and voluntary assault by
[Cesario] upon Romero. This situation is further rendered
more puzzling by the fact that the suspected assailant was
himself the bearer of the tell-tale marks of injury.

x x x x x x x x x

It has been established to the satisfaction of this Arbitrator
that the bolo seen that night was used to chop wood to be
burnt in the bonfire. This statement by people who happened
to be unbiased and disinterested remains uncontested and
undisputed.

Further, the preponderance of evidence shows that it was not
[Cesario] who used said bolo, but his son.

x x x x x x x x x

On these points, it is the finding of this Arbitrator, and it is so
ruled, that Ceasario Ermita was unjustifiably terminated.5
(Words in brackets supplied).

On the basis of the above, the Voluntary Arbitrator, in his
aforementioned decision of February 28, 1997, ordered
Cesarios reinstatement, to wit:

WHEREFORE, judgment is hereby issued ordering
respondent United Paragon Mining Corporation to
immediately reinstate Ceasario F. Ermita to his former
position prior to the termination without loss of seniority nor
interruption of service, and to pay said Ceasario F. Ermita his
back wages, including such other fringe benefits as he would
have been entitled to, from the date of his termination
effective February 17, 1996 up to the time of actual
reinstatement. Attorneys fees are hereby granted equivalent
to 10 per cent of such monetary award as the complainant is
entitled to.

For lack of merit, all other claims for damages are hereby
dismissed.

SO ORDERED.

In time, UPMC moved for a reconsideration of the decision
insofar as it ordered Cesarios reinstatement which UPMC

_______________

5 Id., at pp. 93-94.

644

644



sought to avert by offering separation pay instead. UPMC
cites the following against the decreed reinstatement: 1)
Cesarios position has already been filled up; and 2)
reinstatement is no longer appropriate in view of the
supposed strained relations between Cesario and UPMC.

In his Order6 of April 22, 1997, the Voluntary Arbitrator
denied the desired reconsideration stressing that UPMCs
management misapprehended the facts when it caused
Cesarios termination, which cannot support the claim of the
existence of strained relations between him and the
corporation.

Unsatisfied, UPMC, thru its Personnel Superintendent
Feliciano M. Daniel, elevated the case to the CA on a Petition
for Certiorari with Prayer for Temporary Restraining Order
and Injunction, thereat docketed as CA-G.R. SP No. 44450,
asserting that the Voluntary Arbitrator committed grave
abuse of discretion, erroneous interpretation of the law and
denial of substantial justice.

In the herein assailed Decision7 dated July 24, 2001, the CA,
without going into the merits of the petition, dismissed the
same on the following grounds:

1) The petition for certiorari was not the proper remedy in
order to seek review or nullify decisions or final orders issued
by the Labor Arbiter;

2) The verification in the petition is ineffective and
insufficient because it was merely signed by the companys
Personnel Superintendent without alleging or showing that
he is authorized for the said purpose and that the verification
was based on knowledge and information;

3) The petitioners ground of grave abuse of discretion,
erroneous interpretation of the law and denial of justice are
actually dwelling on the appreciation of facts, which cannot
be entertained in a petition for certiorari.

_______________

6 Id., at pp. 102-105.

7 Supra note 2.

645

VOL. 497, AUGUST 4, 2006

645


With its motion for reconsideration having been denied by
the CA in its Resolution of November 7, 2001,8 petitioner
UPMC is now with this Court via the present recourse,
submitting for our consideration the following questions:

I

WHETHER OR NOT THE COURT OF APPEALS ERRED IN
DISMISSING THE PETITION AFTER FINDING THAT THE PROPER
REMEDY SHOULD HAVE BEEN A PETITION FOR REVIEW ON
CERTIORARI AND NOT A PETITION FOR CERTIORARI;

II

WHETHER OR NOT THE PUBLIC RESPONDENT COURT OF
APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING
THAT THE VERIFICATION PORTION OF THE PETITION WAS
INEFFECTIVE AND INSUFFICIENT IN THE ABSENCE OF
ALLEGATION OR SHOWING THAT FELICIANO DANIEL, AS
PERSONNEL SUPERINTENDENT WAS DULY AUTHORIZED TO
FILE THE PETITION;

III

WHETHER OR NOT THE PUBLIC RESPONDENT COURT OF
APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING
THAT THE PETITION LACKS MERIT BECAUSE IT DWELLED ON
THE APPRECIATION OF FACTS WHICH IS NOT PROPER IN
PETITION FOR CERTIORARI.

The recourse must have to be DENIED, no reversible error
having been committed by the CA in its challenged decision.

We start with the basic concept that a corporation, like
petitioner UPMC, has no power except those expressly
conferred on it by the Corporation Code and those that are
implied or incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its
duly authorized officers and agents. It has thus been
observed that the power of a corporation to sue and be sued
in any court is

_______________

8 Supra note 3.

646

646



lodged with its board of directors that exercises its corporate
powers. In turn, physical acts of the corporation, like the
persons duly authorized for the purpose by the corporate by-
laws or by a specific act of the board of directors.9

It is petitioners posture that there is no necessity for a board
resolution authorizing its Personnel Superintendent to file in
its behalf the certiorari petition in CA-G.R. SP No. 44450
because said petition arose out of the labor dispute filed
against it and its Personnel Superintendent, Feliciano M.
Daniel. It is argued that in Cesarios complaint for illegal
dismissal, Daniel was made a co-respondent of the
corporation. Upon this premise, UPMC argues that Daniel has
all the right to answer the complaint and to appeal an
unfavorable judgment therein, which he actually did, in his
capacity as the corporations Personnel Superintendent and
as its representative. Plodding on, petitioner contends that
were the CA to insist that Daniel could not represent the
corporation, it follows that the proceedings before the
Voluntary Arbitrator could only be binding as against Daniel
because the company then could not have been duly
represented in said proceedings.

Throughout the proceedings before the Voluntary Arbitrator,
that is, from the filing of the position papers up to the filing of
the motion for reconsideration, UPMC was duly represented
by its counsel, Atty. Archimedes O. Yanto. True it is that
Cesarios complaint for illegal dismissal was filed against the
corporation and Daniel. It appears obvious to us, however,
that Daniel was merely a nominal party in that proceedings,
as in fact he was impleaded thereat in his capacity as UPMCs
Personnel Superintendent who signed the termination letter.
For sure, Cesarios complaint contains no allegation
whatsoever for specific claim or charge against Daniel in
whatever

_______________

9 Monfort Hermanos Agricultural Development Corporation
v. Monfort III, G.R. No. 152542, July 8, 2004, 434 SCRA 27.

647

VOL. 497, AUGUST 4, 2006

647


capacity. As it is, Daniel was not in anyway affected by the
outcome of the illegal dismissal case because only the
corporation was made liable therein to Cesario. Being not a
real party-in-interest, Daniel has no right to file the petition in
CA-G.R. SP No. 44450 in behalf of the corporation without
any authority from its board of directors. It is basic in law that
a corporation has a legal personality entirely separate and
distinct from that of its officers and the latter cannot act for
and on its behalf without being so authorized by its governing
board.

In Premium Marble Resources, Inc. v. Court of Appeals,10 we
made it clear that in the absence of an authority from the
board of directors, no person, not even the officers of the
corporation, can validly bind the latter:

We agree with the finding of public respondent Court of
Appeals, that in the absence of any board resolution from its
board of directors the [sic] authority to act for and in behalf
of the corporation, the present action must necessary fail.
The power of the corporation to sue and be sued in any court
is lodged with the board of directors that exercises its
corporate powers. Thus, the issue of authority and the
invalidity of plaintiff-appellants subscription which is still
pending, is a matter that is also addressed, considering the
premises, to the sound judgment of the Securities and
Exchange Commission.

Given the reality that the petition in CA-G.R. SP No. 44450
was filed by Daniel in behalf of and in representation of
petitioner UPMC without an enabling resolution of the
latters board of directors, that petition was fatally defective,
inclusive of the verification and the certification of non-forum
shopping executed by Daniel himself.

True, ample jurisprudence exists to the effect that
subsequent and substantial compliance of a petitioner may
call for the relaxation of the rules of procedure in the interest
of jus-

_______________

10 G.R. No. 96551, November 4, 1996, 264 SCRA 11.

648

648



tice.11 But to merit the Courts liberal consideration,
petitioner must show reasonable cause justifying non-
compliance with the rules and must convince the Court that
the outright dismissal of the petition would defeat the
administration of justice.12 Here, petitioner has not
adequately explained its failure to have the certification
against forum shopping signed by its duly authorized officer.
Instead, it merely persisted in its thesis that it was not
necessary to show proof that its Personnel Superintendent
was duly authorized to file that petition and to sign the
verification thereof and the certification against forum
shopping despite the absence of the necessary board
authorization, thereby repeating in the process its basic
submission that CA-G.R. SP No. 44450 is merely a
continuation of the proceedings before the Voluntary
Arbitrator and that its Personnel Superintendent was
impleaded as one of the respondents in Cesarios complaint
for illegal dismissal.

With the view we take of this case, we deem it unnecessary
to address petitioners other grievances.

WHEREFORE, the instant petition is DENIED and the assailed
CA decision and resolution are AFFIRMED.

Costs against petitioner.

SO ORDERED.

Puno (Chairperson), Sandoval-Gutierrez, Corona and Azcuna,
JJ., concur.

Petition denied, assailed decision and resolution affirmed.

Notes.A corporation is a juridical entity with legal
personality separate and distinct from those acting for and in
its behalf and, in general, from the people comprising it
obligations incurred by the corporation, acting through its
[United Paragon Mining Corporation vs. Court of Appeals, 497
SCRA 638(2006)]

G.R. No. 144880. November 17, 2004.*
PASCUAL AND SANTOS, INC., petitioner, vs. THE MEMBERS OF
THE TRAMO WAKAS NEIGHBORHOOD ASSOCIATION, INC.
represented by DOMINGA MAGNO, respondents.

Rules of Court; Sworn Certification against Forum Shopping;
Section 6 (d) of Rule 43 in relation to Section 2 of Rule 42 of
the Rules of Court mandates that a petition for review shall
contain a sworn certification against forum shopping in which
petitioner shall attest that he has not commenced any other
action involving the same issues in this Court, the Court of
Appeals or different divisions thereof, or any other tribunal or
agency; if there is such other action or proceeding, he must
state status of the same; and if he should thereafter learn
that a similar action or proceeding has been filed or is
pending before this Court, the Court of Appeals, or different
divisions thereof, or any other tribunal or agency, he
undertakes to promptly inform the aforesaid courts and other
tribunal or agency thereof within five days therefrom.
the

_______________

* THIRD DIVISION.

439


439

Pascual and Santos, Inc. vs. The Members of the Tramo
Wakas Neighborhood Association, Inc.

petitioner shall attest that he has not commenced any other
action involving the same issues in this Court, the Court of
Appeals or different divisions thereof, or any other tribunal or
agency; if there is such other action or proceeding, he must
state the status of the same; and if he should thereafter learn
that a similar action or proceeding has been filed or is
pending before this Court, the Court of Appeals, or different
divisions thereof, or any other tribunal or agency, he

Same; Same; The requirement that the petitioner should sign
the certificate of non-forum shopping applies even to
corporations, considering that the mandatory directives of
the Rules of Court make no distinction between natural and
juridical persons.The requirement that the petitioner
should sign the certificate of non-forum shopping applies
even to corporations, considering that the mandatory
directives of the Rules of Court make no distinction between
natural and juridical persons.

Corporation Law; Corporations; Board of Directors; Corporate
Officers; Except for the powers which are expressly conferred
on it by the Corporation Code and those that are implied by
or are incidental to its existence, a corporation has no
powers. It exercises its powers through its board of directors
and/or its duly authorized officers and agents.Except for
the powers which are expressly conferred on it by the
Corporation Code and those that are implied by or are
incidental to its existence, a corporation has no powers. It
exercises its powers through its board of directors and/or its
duly authorized officers and agents. Thus, its power to sue
and be sued in any court is lodged with the board of directors
that exercises its corporate powers. Physical acts, like the
persons duly authorized for the purpose by corporate by-laws
or by a specific act of the board of directors.

Remedial Law; Relaxation of Rules of Court; Corporation Law;
Corporate Authority; This Court has ruled that the
subsequent submission of proof of authority to act on behalf
of a petitioner corporation justifies the relaxation of the Rules
for the purpose of allowing its petition to be given due
course.This Court has ruled that the subsequent submission
of proof of authority to act on behalf of a petitioner
corporation justifies the relaxation of the Rules for the
purpose of allowing its petition to be given due course.

440

440



Same; Same; Equity and Substantial Justice; At all events,
strict adherence to rules of procedure must give way to
considerations of equity and substantial justice where, as in
this case, there is evidence showing that the appeal was filed
on time.At all events, strict adherence to rules of procedure
must give way to considerations of equity and substantial
justice where, as in this case, there is evidence showing that
the appeal was filed on time.

PETITION for review on certiorari of the resolutions of the
Court of Appeals.


Sycip, Salazar, Hernandez and Gatmaitan for petitioner.

Alfonso A. Orioste for respondent.

CARPIO-MORALES, J.:

At bar is a petition for review on certiorari assailing the May
17, 2000 and August 8, 2000 Resolutions1 of the Court of
Appeals (CA) in CA-G.R. No. 57274 which respectively,
dismissed the appeal instituted by petitioner Pascual and San-
tos, Inc. (petitioner) and denied its motion for
reconsideration.

The Members of Tramo Wakas Neighborhood Association,
represented by Dominga Magno (respondents), lodged
before the Presidential Action Center a petition dated
January 12, 1994 praying that ownership over three (3)
parcels of land situated in Barangay San Dionisio, Paraaque,
Metro Manila, identified as Lot Nos. 4087, 4088 and 5003,
Psu-118886, Cad. 229 with an aggregate area of 35,195
square meters be awarded to them. In their petition,
respondents alleged that petitioner claims ownership of the
subject lots which they have openly, peacefully and
continuously occupied since 1957.

The petition was referred to the Land Management Bureau
(LMB) where it was docketed as LMB Case No. 2-96, for
investigation and hearing.

_______________

1 Rollo at pp. 10-20.

441


441


By Decision2 of February 21, 1996, Director Abelardo G.
Palad, Jr. of the LMB found for respondents. The dispositive
portion of the decision reads, quoted verbatim:

WHEREFORE, it is ordered that the claim of Pascual and
Santos, Inc., over Lot 4087, Lot 4088 and Lot 5003, situated at
Brgy. San Dionisio, Paraaque, Metro Manila be, as hereby it
is, dismissed. The individual members of TRAMO WAKAS
NEIGHBORHOOD ASSOCIATION, now represented by
Dominga Magno, if qualified may file appropriate public land
applications over the land they actually possessed and
occupied. An individual survey shall be conducted on the land
at their own expense and after approval of the said survey
the same shall be given due course.

SO ORDERED.3

Its Motion for Reconsideration having been denied by Order
of June 26, 1996, petitioner lodged an appeal before the
Office of the Department of Environment and Natural
Resources (DENR) Secretary, docketed as DENR Case No.
7816.

By Decision4 of November 25, 1997, then DENR Secretary
Victor O. Ramos dismissed the appeal for lack of merit and
affirmed in toto the decision of the Director of the LMB.
Petitioners Motion for Reconsideration of the decision
having been denied by Order5 of May 18, 1998, it filed an
appeal before the Office of the President (OP), docketed as
O.P. Case No. 98-F-8459, which was likewise dismissed for
lack of merit by Decision6 of January 20, 2000. The November
25, 1997 DENR decision was affirmed in toto.

Petitioner received a copy of the OPs dismissal of its appeal
on February 1, 2000,7 following which or on February 16,

_______________

2 Id., at pp. 277-286.

3 Id., at p. 286.

4 Id., at pp. 209-217.

5 Id., at pp. 219-220.

6 Id., at pp. 202-207.

7 Id., at p. 65.

442

442



2000, it filed a Petition for Time8 before the CA for an
additional period of fifteen days or until March 2, 2000 within
which to file its petition for review.

By Resolution9 of February 21, 2000, the CA granted
petitioners Petition for Time, giving it a non-extendible
period of fifteen days from February 16, 2000 or until March
2, 2000 within which to file the petition.

Petitioner subsequently filed its Petition for Review10 dated
March 2, 2000 with the CA, praying that judgment be
rendered (1) reversing and setting aside the January 20, 2000
OP Decision and the November 25, 1997 DENR Decision and
May 18, 1998 Order, and (2) declaring the subject lots as no
longer forming part of the public domain and have been
validly acquired by petitioner; or in the alternative, (1)
allowing it to present additional evidence in support of its
claim to the subject lots, (2) reversing and setting aside the
aforementioned Decisions and Order of the OP and the DENR,
and (3) declaring the subject lots as no longer forming part of
the public domain and have been validly acquired by
petitioner.11

By Resolution of May 17, 2000, the CA dismissed the appeal
due to infirm Verification and Certification of non-forum
shopping and belated filing.

For one, the Verification and Certification of non-forum
shopping was signed merely by Estela Lombos and Anita
Pascual who allege that they are the duly authorized
representatives of petitioner corporation, without showing
any proof whatsoever of such authority.

For another, and importantly, the petition for review was
filed a day after the period petitioner corporation expressly
sought. As indicated in its Petition for Time, petitioner
corporation asked for an additional fifteen (15) days, or until
March 2, 2000, within which

_______________

8 CA Rollo at pp. 1-4.

9 Id., at p. 6.

10 Id., at pp. 16-131.

11 Id., at pp. 36-37.

443


443


to file its petition, which was granted by the Court per
Resolution dated February 21, 2000. However, despite the
foregoing, petitioner corporation filed the same only on
MARCH 3, 2000 as indicated by the date stamped on the
envelope which contains the petition for review.12 (Citations
omitted; underscoring supplied)

On June 14, 2000, petitioner filed a Motion for
Reconsideration13 of the CA May 17, 2000 Resolution,
arguing that there was no showing that the persons acting on
its behalf were not authorized to do so and that its petition
was filed within the additional 15-day period granted by the
CA. Attached to the Motion was a Secretarys Certificate14
dated June 14, 2000 showing that petitioners Board of
Directors approved a Resolution on February 11, 2000
appointing Estela Lombos and Anita Pascual, incumbent
directors of the corporation, as its duly authorized
representatives who may sign all papers, execute all
documents, and do such other acts as may be necessary to
prosecute the petition for review that it would file with the
CA assailing the decision rendered in OP Case No. 98-G-
8459.15

By Resolution of August 23, 2000, the CA denied petitioners
Motion for Reconsideration for lack of merit.

x x x It must be stressed that any person who claims authority
to sign, in behalf of another, the Certificate of Non-Forum
Shopping, as required by the rules, must show sufficient
proof thereof. Bare allegations are not proof, and the
representation of one who acts in behalf of another cannot,
by itself, serve as proof of his authority to act as agent or of
the extent of his authority as agent. Thus, absent such clear
proof, the Court cannot accept at face value, such authority
to sign in behalf of the corporation.

x x x

_______________

12 Rollo at pp. 14-15.

13 Id., at pp. 90-101.

14 Id., at p. 98.

15 Ibid.

444

444



Another perusal of the registry return receipts attached to
the petition for review (Nos. 182, 183 and 184) shows that
copies of the Manifestation and Petition for Review were
served to private respondents (sic) counsel, the Office of the
President, and the Department of Environment and Natural
Resources, on March 2, 2000. However, it does not indicate
therein when the petition for review was filed with the Court.
The registry return receipts (No. 185, 186, 187 and 188) being
referred to by petitioner shows (sic) the date March 2, 2000
only on that numbered 188, and does (sic) not show the
dates on those numbered 185-187. In fact, said receipts do
not even indicate which pertain to the copy filed with the
Court.

Moreover, the Court cannot sustain petitioners supposition
that a post office employee might have stamped the wrong
date, March 3, 2000, without any proof whatsoever of such
error. The date stamped on the envelope which contained
the Manifestation and Petition for Review clearly shows that
the same was filed on March 3, 2000, and petitioner having
failed to rebut the presumption of regularity in the
performance of official functions, the same must prevail.16
(Citations omitted; emphasis in the original; italics supplied)

Petitioner thus filed on September 27, 2000 before this Court
a Petition For Time to file its petition for review.

On October 30, 2000, petitioner filed a Petition for Review on
Certiorari raising the following issues:

I

WHETHER OR NOT THE PERSONS WHO EXECUTED THE
VERIFICATION AND CERTIFICATION OF NON-FORUM
SHOPPING ATTACHED TO PSIS MANIFESTATION/PETITION
FOR REVIEW FILED WITH THE COURT OF APPEALS WERE
AUTHORIZED TO DO SO.

II

WHETHER OR NOT PSIS MANIFESTATION/PETITION FOR
REVIEW WAS FILED WITHIN THE REGLEMENTARY PERIOD.17

_______________

16 Id., at pp. 11-12.

17 Id., at p. 29.

445


445


By Resolution18 of December 6, 2000, this Court denied the
Petition for Review in view of petitioners failure to submit a
valid affidavit of service pursuant to Section 13 of Rule 13 and
Sections 3 and 5 of Rule 45 in relation to Section 5 (d) of Rule
56 of the Rules of Court and attach to the petition a duplicate
original or certified true copy of the assailed CA resolutions
pursuant to Sections 4 (d) and 5 of Rule 45 in relation to
Section 5 (d) of Rule 56 of the Rules of Court.

Petitioner filed a Motion for Reconsideration,19 averring that
it had already attached certified true copies of the assailed
resolutions of the CA in its Petition for Time filed before
this Court on September 27, 2000, and while it was the
affidavit before the CA which was inadvertently attached to
its petition before this Court, the messengerial staff of
petitioners counsel did in fact serve copies of the petition on
counsel for respondents, the DENR, the OP and the court a
quo as evidenced by registry receipts and return cards20
which it attached to its Motion for Reconsideration.

By Resolution21 of March 7, 2001, this Court, finding
petitioners explanation satisfactory, granted the Motion for
Reconsideration and reinstated the petition, now the subject
of this Decision.

The petition is impressed with merit.

the petitioner shall attest that he has not commenced any
other action involving the same issues in this Court, the Court
of Appeals or different divisions thereof, or any other tribunal
or agency; if there is such other action or proceeding, he
must state the status of the same; and if he should thereaf-

_______________

18 Id., at pp. 102-103.

19 Id., at pp. 105-121.

20 Id., at pp. 120, 139 and 140.

21 Id., at p. 142.

446

446



ter learn that a similar action or proceeding has been filed or
is pending before this Court, the Court of Appeals, or
different divisions thereof, or any other tribunal or agency, he

For failure to comply with this mandate, Section 7 of Rule 43
provides:

SEC. 7. Effect of failure to comply with requirements.The
failure of the petitioner to comply with any of the foregoing
requirements regarding the payment of the docket and other
lawful fees, the deposit for costs, proof of service of the
petition, and the contents of and the documents which
should accompany the petition shall be sufficient ground for
the dismissal thereof.

The requirement that the petitioner should sign the
certificate of non-forum shopping applies even to
corporations, considering that the mandatory directives of
the Rules of Court make no distinction between natural and
juridical persons.22

In the case at bar, the CA dismissed the petition before it on
the ground that Lombos and Pascual, the signatories to the
verification and certification on non-forum shopping, failed to
show proof that they were authorized by petitioners board
of directors to file such a petition.

Except for the powers which are expressly conferred on it by
the Corporation Code and those that are implied by or are
incidental to its existence, a corporation has no powers. It
exercises its powers through its board of directors and/or its
duly authorized officers and agents.23 Thus, its power to sue
and be sued in any court is lodged with the board of directors
that exercises its corporate powers.24 Physical acts, like the

_______________

22 Zulueta v. Asia Brewery, 354 SCRA 100, 108 (2001).

23 National Steel Corporation v. Court of Appeals, 388 SCRA
85, 91-92 (2002) (citation omitted), BA Savings Bank v. Sia,
336 SCRA 484, 488 (2000).

24 Shipside Incorporated v. Court of Appeals, 352 SCRA 334,
345 (2001) (citation omitted).

447


447


persons duly authorized for the purpose by corporate by-laws
or by a specific act of the board of directors.25

It is undisputed that when the petition for certiorari was filed
with the CA, there was no proof attached thereto that
Lombos and Pascual were authorized to sign the verification
and non-forum shopping certification. Subsequent to the CAs
dismissal of the petition, however, petitioner filed a motion
for reconsideration to which it attached a certificate issued by
its board secretary stating that on February 11, 2000 or prior
to the filing of the petition, Lombos and Pascual had been
authorized by petitioners board of directors to file the
petition before the CA.

This Court has ruled that the subsequent submission of proof
of authority to act on behalf of a petitioner corporation
justifies the relaxation of the Rules for the purpose of
allowing its petition to be given due course.26

Thus, in Shipside Incorporated v. Court of Appeals,27 this
Court held:

x x x Moreover, in Loyola, Roadway and Uy, the Court
excused non-compliance with the requirement as to the
certificate of non-forum shopping. With more reason should
we allow the instant petition since petitioner herein did
submit a certification on non-forum shopping, failing only to
show proof that the signatory was authorized to do so. That
petitioner subsequently submitted a secretarys certificate
attesting that Balbin was authorized to file an action on
behalf of petitioner likewise mitigates this oversight.

It must also be kept in mind that while the requirement of the
certificate of non-forum shopping is mandatory, nonetheless
the

_______________

25 Firme v. Bukal Enterprises and Development Corporation,
414 SCRA 190, 209 (2003) (citation omitted).

26 Novelty Philippines, Inc. v. Court of Appeals, 411 SCRA
211, 219 (2003) (citation omitted), National Steel Corporation
v. Court of Appeals, 388 SCRA 84, 92 (2002), BA Savings Bank
v. Sia, 336 SCRA 484, 489 (2000).

27 352 SCRA 334 (2001).

448

448



requirements must not be interpreted too literally and thus
defeat the objective of preventing the undesirable practice of
forum shopping.28

As for the timeliness of the filing of its petition for review
before the CA, petitioner maintains in the affirmative.

Sections 3 and 12 of Rule 13 of the Rules of Court provide:

SEC. 3. Manner of filing.The filing of pleadings,
appearances, motions, notices, orders, judgments and all
other papers shall be made by presenting the original copies
thereof, plainly indicated as such, personally to the clerk of
court or by sending them by registered mail. In the first case,
the clerk of court shall endorse on the pleading the date and
hour of filing. In the second case, the date of the mailing of
motions, pleadings, or any other papers or payments or
deposits, as shown by the post office stamp on the envelope
or the registry receipt, shall be considered as the date of their
filing, payment, or deposit in court. The envelope shall be
attached to the record of the case.

SEC. 12. Proof of filing.The filing of a pleading or paper shall
be proved by its existence in the record of the case. If it is not
in the record, but is claimed to have been filed personally, the
filing shall be proved by the written or stamped
acknowledgment of its filing by the clerk of court on a copy of
the same; if filed by registered mail, by the registry receipt
and by the affidavit of the person who did the mailing,
containing a full statement of the date and place of
depositing the mail in the post office in a sealed envelope
addressed to the court, with postage fully prepaid, and with
instructions to the postmaster to return the mail to the
sender after ten (10) days if not delivered.

Registry Receipt Nos. 185-188 covering the envelopes bearing
the copies of the petition which were sent to the CA indicate
that such copies were filed by registered mail at the Domestic
Airport Post Office (DAPO) on March 2, 2000.29

_______________

28 Id., at pp. 346-347.

29 Rollo at p. 87.

449


449


The Affidavit of Service30 filed by the person who did the
mailing of the petition in behalf of petitioner states that such
petition was filed by registered mail by depositing seven
copies thereof in four separate sealed envelopes and mailing
the same to the Clerk of Court of the CA through the DAPO on
March 2, 2000. The affidavit likewise states that on even
date, the petition was served on counsel for respondents, the
DENR and the OP by depositing copies of the same in sealed
envelopes and mailing them to said parties respective
addresses through the DAPO.

And in the Certification31 dated October 26, 2000 issued by
Postmaster Cesar A. Felicitas of the DAPO, he states that the
registered mail matter covered by Registry Receipt Nos. 185-
188 addressed to the Clerk of Court of the CA was posted at
their office for mailing on March 2, 2000, but that it was
dispatched to the CMEC on March 3, 2000 for proper
disposition. This could very well explain why the latter date
was stamped on the envelope received by the CA containing
the petition.

At all events, strict adherence to rules of procedure must give
way to considerations of equity and substantial justice where,
as in this case, there is evidence showing that the appeal was
filed on time.32

WHEREFORE, the petition is GRANTED. The Resolutions dated
May 17, 2000 and August 23, 2000 of the Court of Appeals
are SET ASIDE. The case, CA-G.R. SP No. 57274, is

_______________

30 Id., at p. 40.

31 Id., at p. 89.

32 South Villa Chinese Restaurant v. National Labor Relations
Commission, 250 SCRA 246 (1995).

450

450


Rigor vs. People

REMANDED to the appellate court which is hereby directed to
give due course to the appeal of petitioner.

No costs.

SO ORDERED.

Panganiban (Chairman), Sandoval-Gutierrez and Garcia, JJ.,
concur.

Corona, J., On Leave.

Petition granted, assailed resolutions set aside. [Pascual and
Santos, Inc. vs. The Members of the Tramo Wakas
Neighborhood Association, Inc., 442 SCRA 438(2004)]

G.R. No. 145901. December 15, 2005.*
EASYCALL COMMUNICATIONS PHILS., INC., petitioner, vs.
EDWARD KING, respondent.

Remedial Law; Jurisdictions; Securities and Exchange
Commission; National Labor Relations Commission; Under
Section 5 of PD 902-A, the law applicable at the time this
controversy arose, the Securities and Exchange Commission,
not the National Labor Relations Commission had original and
exclusive jurisdiction over cases involving the removal of
corporate officers; But it had to be first established that the
person removed or dismissed was a corporate officer before
the removal or dismissal could properly fall within the
jurisdiction of the Securities and Exchange Commission and
not the National Labor Relations Commission.Under
Section 5 of PD 902A, the law applicable at the time this
controversy arose, the SEC, not the NLRC, had original and
exclusive jurisdiction over cases involving the removal of
corporate officers. Section 5(c) of PD 902-A applied to a
corporate officers dismissal for his dismissal was a corporate
act and/or an intra-corporate controversy. However, it had to
be first established that the person removed or dismissed
was a corporate officer before the removal or dismissal could
properly fall within the jurisdiction of the SEC and not the
NLRC. Here, aside from its bare allegation, petitioner failed to
show that respondent was in fact a corporate officer.

Same; Same; Same; Same; Under Section 25 of the
Corporation Code, the corporate officers are the president,
secretary, treasurer and such other officers as may be
provided for in the by-laws.Corporate officers in the
context of PD 902-A are those officers of a corporation who
are given that character either by the Corporation Code or by
the corporations by-laws. Under Section 25 of the
Corporation Code, the corporate officers are the president,
secretary, treasurer and such other officers as may be
provided for in the by-laws.

Same; Same; Same; Same; Respondent was an employee not
a corporate officer; Court of Appeals is correct in ruling that
jurisdiction over the case was properly with the National
Labor Relations

_______________

* THIRD DIVISION.

103

VOL. 478, DECEMBER 15, 2005

103

Easycall Communications Phils., Inc. vs. King

Commission, not the Securities and Exchange Commission.
An office is created by the charter of the corporation and
the officer is elected by the directors or stockholders. On the
other hand, an employee occupies no office and generally is
employed not by the action of the directors or stockholders
but by the managing officer of the corporation who also
determines the compensation to be paid to such employee.
In this case, respondent was appointed vice president for
nationwide expansion by Malonzo, petitioners general
manager, not by the board of directors of petitioner. It was
also Malonzo who determined the compensation package of
respondent. Thus, respondent was an employee, not a
corporate officer. The CA was therefore correct in ruling
that jurisdiction over the case was properly with the NLRC,
not the SEC.

Labor Law; Dismissals; Loss of Confidence; While loss of
confidence is a valid ground for dismissing an employee, it
should not be simulated; To be a valid ground for an
employees dismissal, loss of trust and confidence must be
based on a willful breach and founded on clearly established
facts.While loss of confidence is a valid ground for
dismissing an employee, it should not be simulated. It must
not be indiscriminately used as a shield by the employer
against a claim that the dismissal of an employee was
arbitrary. To be a valid ground for an employees dismissal,
loss of trust and confidence must be based on a willful breach
and founded on clearly established facts. A breach is willful if
it is done intentionally, knowingly and purposely, without
justifiable excuse, as distinguished from an act done
carelessly, thoughtlessly, heedlessly or inadvertently. Thus, a
willful breach cannot be a breach resulting from mere
carelessness.

Same; Same; Same; Grounds cited by petitioner were not
sufficient to support a claim of loss of confidence as a ground
for dismissal.The grounds cited by petitioner, i.e.,
respondents alleged poor sales performance and the
allegedly excessive time he spent in the field, were not
sufficient to support a claim of loss of confidence as a ground
for dismissal.

Same; Same; Same; The promotion of an employee negates
the employers claim that it has lost its trust and confidence
in the employee.The promotion of an employee negates
the employers claim that it has lost its trust and confidence
in the employee. Hence,

104

104



petitioners claim of loss of confidence crumbles in the light
of respondents promotion not only to assistant vice-
president but to the even higher position of vice- president.

Same; Same; Due Process; The twin requirements of notice
and hearing constitute the essential elements of due
process.The twin requirements of notice and hearing
constitute the essential elements of due process. The law
requires the employer to furnish the employee sought to be
dismissed with two written notices before termination of
employment can be legally effected: (1) a written notice
apprising the employee of the particular acts or omissions for
which his dismissal is sought in order to afford him an
opportunity to be heard and to defend himself with the
assistance of counsel, if he desires, and (2) a subsequent
notice informing the employee of the employers decision to
dismiss him. This procedure is mandatory and its absence
taints the dismissal with illegality.

Same; Same; Same; The series of dialogues and consultations
between petitioners management and respondent could not
validly substitute for the actual observance of notice and
hearing.In this case, respondent was served with one
notice onlythe notice of his termination. The series of
dialogues between petitioners management and respondent
was not enough as it failed to show that the latter was
apprised of the cause of his dismissal. These dialogues or
consultations could not validly substitute for the actual
observance of notice and hearing.



Filomeno A. Arteche III and Amer I. Macapundag for
petitioner.

Romero, Valdecantos & Valencia Law Office for private
respondent.

105


105


CORONA, J.:

This petition for review on certiorari under Rule 45 of the
Rules of Court assails the February 10, 2000 decision1 and
November 8, 2000 resolution of the Court of Appeals (CA) in
CA-G.R. SP No. 53510. The assailed decision nullified the
November 27, 1998 decision and April 29, 1999 resolution of
the National Labor Relations Commission (NLRC) and entered
a new one declaring that the respondent Edward King was
illegally dismissed and awarding him backwages, separation
pay and attorneys fees.

Petitioner Easycall Communications Phils., Inc. was a
domestic corporation primarily engaged in the business of
message handling. On May 20, 1992, petitioner, through its
gen-eral manager, Roberto B. Malonzo, hired the services of
respondent as assistant to the general manager. He was given
the responsibility of ensuring that the expansion plans
outside Metro Manila and Metro Cebu were achieved at the
soonest possible time.

In an August 14, 1992 memorandum, Mr. R.T. Casas,
respondents immediate superior, recommended his
promotion to assistant vice president for nationwide
expansion. On December 22, 1992, respondent was
appointed to the even higher position of vice president for
nationwide expansion. Respondents promotion was based
on his performance during the six months preceding his
appointment. As vice president for nationwide expansion, he
became responsible for the sales and rentals of pager units in
petitioners expansion areas. He was also in charge of
coordinating with the dealers in these areas.

Sometime in March 1993, Malonzo reviewed the sales
performance of respondent. He also scrutinized the status of

_______________

1 Penned by Associate Justice Elvi John S. Asuncion and
concurred in by Associate Justices Buenaventura J. Guerrero
and Hilarion L. Aquino of the Eighth Division of the Court of
Appeals.

106

106



petitioners Nationwide Expansion Program (NEP) which was
under respondents responsibility. He found that
respondents actual sales for the period October 1992March
1993 was 78% of his sales commitment and 70% of his sales
target.

Malonzo also checked the frequency and duration of the
provincial sales development visits made by respondent for
the same period to expansion areas under his jurisdiction. He
discovered that the latter spent around 40% of the total
number of working days for that period in the field.

The management then confronted respondent regarding his
sales performance and provincial sales development visits. A
series of dialogues between petitioners management and
respondent ensued.

On April 16, 1993, Rockwell Gohu, petitioners deputy general
manager, talked to respondent to discuss his sales
performance. In the course of the conversation, Gohu
informed respondent that Malonzo wanted his resignation.
This prompted respondent to write a memorandum to
Malonzo. In his memorandum, he inquired whether Malonzo
really wanted him to resign. He emphasized that his work
performance had yet to be evaluated. He also stated that,
based on the approved budget for fiscal year ending in June
1993, he was within the budget and targets set forth by
petitioner. He further declared that he had no intention of
resigning from his position.

On April 19, 1993, respondent received a notice of
termination signed by Malonzo. The notice informed him of
the termination of his employment with petitioner effective
April 30, 1993. In particular, the relevant portion of the notice
read:

This is to inform you that management is no longer
confident that you are the right manager for the position you
are occupying. Our series of discussions on the various
aspects of your functions

107


107


with you did not convince us that it is to the best interest of
Easy Call to retain your services. x x x2 (Emphasis supplied)

Aggrieved, the respondent filed a complaint for illegal
dismissal with the NLRC. It was docketed as NLRC Case No.
00-04-02913-93.

In his June 24, 1997 decision, the labor arbiter found that the
termination of respondents employment on the ground of
loss of confidence was valid. Consequently, the labor arbiter
dismissed the complaint for lack of merit.

On appeal, the NLRC affirmed the decision of the labor arbiter
in its November 27, 1998 decision, with the modification that
petitioner was ordered to indemnify respondent in the
amount of P10,000 for violating respondents right to due
process. Respondent filed a partial motion for
reconsideration praying that the NLRC reverse its ruling
insofar as it declared that he was validly dismissed for cause.
The NLRC, however, denied the motion for lack of merit in a
April 29, 1999 resolution. The NLRC also dismissed the
complaint for lack of jurisdiction.

Respondent filed a petition for certiorari with the CA. The CA
granted the petition and ruled that the NLRC erred in holding
that it lacked jurisdiction over the case. The CA also ruled that
the dismissal of respondent was illegal for having been done
without cause and in violation of his right to due process.

Petitioner moved for a reconsideration of the CA decision but
the motion was denied in the CAs November 8, 2000
resolution. Hence, this petition.

Petitioner now raises the following errors:

I.

THE HONORABLE COURT OF APPEALS COMMITTED GRAVE
ABUSE OF DISCRETION WHEN IT SUBSTITUTED ITS OWN

_______________

2 CA Decision, Rollo, p. 27.

108

108



FINDINGS TO THAT OF THE NLRC IN VIOLATION OF THE RULE
THAT REGULAR COURTS SHOULD ACCORD GREAT RESPECT
TO FINDINGS OF ADMINISTRATIVE AGENCIES CONSIDERING
THAT THERE IS SUBSTANTIAL EVIDENCE TO SUPPORT THE
SIMILAR FINDINGS OF BOTH THE LABOR ARBITER AND THE
COMMISSIONERS OF NLRC.

II.

FURTHERMORE, GLARING IS THE FACT THAT THE HONORABLE
COURT OF APPEALS SIMPLY DISREGARDED THE SUBSTANTIAL
EVIDENCE ON RECORD WHICH INDISPUTABLY SHOWED THAT
RESPONDENT WAS TOTALLY REMISS IN HIS DUTIES AS VICE
PRESIDENT FOR NATIONWIDE EXPANSION.

III.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN
IT FAILED TO CONSIDER THAT BEING A CORPORATE OFFICER,
THE NLRC HAS NO JURISDICTION OVER THE SUBJECT UNDER
PD 902-A.3

We shall rule first on the issue of jurisdiction as it is decisive.
If the NLRC had no jurisdiction, then it would be unnecessary
to consider the validity of respondents dismissal.

Petitioner argues that since respondent was a corporate
officer, the NLRC had no jurisdiction over the subject matter
under PD 902-A. In support of its contention, petitioner
invokes Paguio v. NLRC4 where we held that the removal of a
corporate officer, whether elected or appointed, is an
intracorporate controversy over which the NLRC has no
jurisdiction. The petitioner also cites our ruling in de Rossi v.
NLRC5 to the effect that the SEC, not the NLRC, has original
and exclusive jurisdiction over cases involving the removal of
corporate officers.

_______________

3 Rollo, p. 10.

4 323 Phil. 203; 253 SCRA 166 (1996).

5 373 Phil. 17; 314 SCRA 245 (1999).

109


109


Under Section 5 of PD 902-A, the law applicable at the time
this controversy arose,6 the SEC, not the NLRC, had original
and exclusive jurisdiction over cases involving the removal of
corporate officers. Section 5(c) of PD 902-A applied to a
corporate officers dismissal for his dismissal was a corporate
act and/or an intra-corporate controversy.7

However, it had to be first established that the person
removed or dismissed was a corporate officer before the
removal or dismissal could properly fall within the jurisdiction
of the SEC and not the NLRC. Here, aside from its bare
allegation, petitioner failed to show that respondent was in
fact a corporate officer.

Corporate officers in the context of PD 902-A are those
officers of a corporation who are given that character either
by the Corporation Code or by the corporations by-laws.8
Under Section 25 of the Corporation Code, the corporate
officers are the president, secretary, treasurer and such
other officers as may be provided for in the by-laws.

_______________

6 Section 5 of PD 902 has been amended by the enactment of
RA 8799, otherwise known as the Securities Regulations
Code, in 2000. In particular, Section 5.2 of RA 8799 provides:

The *SEC+s jurisdiction over all cases enumerated under
Section 5 of Presidential Decree No. 902-A is hereby
transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court: Provided that the Supreme
Court in the exercise of its authority may designate the
Regional Trial Court branches that shall exercise jurisdiction
over these cases. The [SEC] shall retain jurisdiction over
pending cases involving intra-corporate disputes submitted
for final resolution which should be resolved within one (1)
year from the enactment of this Code. The [SEC] shall retain
jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until
finally disposed.

7 Velarde v. Lopez, Inc., G.R. No. 153886, 14 January 2004,
419 SCRA 422; Ongkingco v. National Labor Relations
Commission, 337 Phil. 299; 273 SCRA 613 (1997).

8 Gurrea v. Lezama, 103 Phil. 553 (1958).

110

110



A careful look at de Rossi (as well as the line of cases involving
the removal of corporate officers where we held that it was
the SEC and not the NLRC which had jurisdiction9) will show
that the person whose removal was the subject of the
controversy was a corporate officer whose position was
provided for in the by-laws. That is not by any means the case
here.

The burden of proof is on the party who makes the
allegation.10 Here, petitioner merely alleged that respondent
was a corporate officer. However, it failed to prove that its
by-laws provided for the office of vice president for
nationwide expansion. Since petitioner failed to satisfy the
burden of proof that was required of it, we cannot sanction
its claim that respondent was a corporate officer whose
removal was cognizable by the SEC under PD 902-A and not
by the NLRC under the Labor Code.

An office is created by the charter of the corporation and
the officer is elected by the directors or stockholders.11 On
the other hand, an employee occupies no office and generally
is employed not by the action of the directors or stockholders
but by the managing officer of the corporation who also
determines the compensation to be paid to such
employee.12

_______________

9 Philippine School of Business Administration v. Leao, 212
Phil. 716; 127 SCRA 778 (1984); Dy v. National Labor Relations
Commission, 229 Phil. 234; 145 SCRA 211 (1986); Cagayan de
Oro Coliseum v. Office of the Minister of Labor and
Employment, G.R. No. 71589, 17 December 1990, 192 SCRA
315; Lozon v. National Labor Relations Commission, 310 Phil.
1; 240 SCRA 1 (1995); Espino v. National Labor Relations
Commission, 310 Phil. 60; 240 SCRA 52 (1995); Tabang v.
National Labor Relations Commission, 334 Phil. 424; 266
SCRA 471 (1997); Ongkingco v. National Labor Relations
Commission, supra.

10 Rufina Patis Factory v. Alusitain, G.R. No. 146202, 14 July
2004, 434 SCRA 418; Stolt-Nielsen Marine Services, Inc. v.
National Labor Relations Commission, 360 Phil. 881; 300
SCRA 713 (1998).

11 Tabang v. National Labor Relations Commission, supra.

12 Id.

111


111


In this case, respondent was appointed vice president for
nationwide expansion by Malonzo, petitioners general
manager, not by the board of directors of petitioner. It was
also Malonzo who determined the compensation package of
respondent. Thus, respondent was an employee, not a
corporate officer. The CA was therefore correct in ruling
that jurisdiction over the case was properly with the NLRC,
not the SEC.

We now proceed to the substantive issue of the validity of
the dismissal of respondent.

While loss of confidence is a valid ground for dismissing an
employee, it should not be simulated.13 It must not be
indiscriminately used as a shield by the employer against a
claim that the dismissal of an employee was arbitrary.14

To be a valid ground for an employees dismissal, loss of trust
and confidence must be based on a willful breach and
founded on clearly established facts.15 A breach is willful if it
is done intentionally, knowingly and purposely, without
justifiable excuse, as distinguished from an act done
carelessly, thoughtlessly, heedlessly or inadvertently.16 Thus,
a willful breach cannot be a breach resulting from mere
carelessness.

In this case, the labor arbiters finding, affirmed by the NLRC,
was that the sales record of respondent and the time he
spent in the field were clear indications of complainants

_______________

13 Pepsi-Cola Bottling Co. v. National Labor Relations
Commission, G.R. No. 101900, 23 June 1992, 210 SCRA 277;
General Bank and Trust Co. v. Court of Appeals, 220 Phil. 243;
135 SCRA 569 (1985).

14 Sulpicio Lines, Inc. v. Gulde, 427 Phil. 805; 377 SCRA 525
(2002).

15 Asia Pacific Chartering (Phils.), Inc. v. Farolan, 441 Phil.
776; 393 SCRA 454 (2002); National Bookstore, Inc. v. Court
of Appeals, 428 Phil. 235; 378 SCRA 194 (2002).

16 Id.

112

112



inefficiency and/or negligence.17 Inefficiency implies
negligence, incompetence, ignorance and carelessness.18
Negligence is the want or lack of care required by the
circumstances.19

The grounds cited by petitioner, i.e., respondents alleged
poor sales performance and the allegedly excessive time he
spent in the field, were not sufficient to support a claim of
loss of confidence as a ground for dismissal.

Furthermore, the alleged loss of confidence was not founded
on clearly established facts.20 First, petitioner included the
sales performance of respondent for the period covering
October 1992 to December 1992 in arriving at the conclusion
that his sales record was dismal. However, as the CA correctly
pointed out, petitioner previously recognized that
respondents performance for that period was not merely
satisfactory but more than extra-ordinary that it merited
his promotion not only to the position of assistant vice
president, to which he was recommended by his supervisor,
but to the even higher position of vice president.21 This self-
contradictory position of petitioner negates its claim of loss
of confidence in respondent.

Moreover, the promotion of an employee negates the
employers claim that it has lost its trust and confidence in
the

_______________

17 Rollo, p. 104; Decision dated June 24, 1997 in NLRC Case
No. 00-04-02913-93, p. 8.

18 Cuaresma v. Enriquez, A.M. No. MTJ-91-608, 20
September 1995, 248 SCRA 454; Suroza v. Honrado, 196 Phil.
514; 110 SCRA 388 (1981).

19 Cruz v. Gangan, 443 Phil. 856; 395 SCRA 711 (2003) citing
Valenzuela v. Court of Appeals, 323 Phil. 374; 253 SCRA 303
(1996).

20 While the general rule is that the Courts jurisdiction in a
petition for review is limited to reviewing errors of law
allegedly committed by the appellate court, this rule admits
of exceptions. This case falls under one of the exceptions
the findings of fact of the CA are contrary to that of the labor
arbiter and the NLRC.

21 Rollo, p. 30, CA decision dated February 10, 2000, p. 5.

113


113


employee.22 Hence, petitioners claim of loss of confidence
crumbles in the light of respondents promotion not only to
assistant vice-president but to the even higher position of
vice-president.

Second, the sales record of respondent for the period
October 1992December 1992 was recognized as so
exemplary that it merited his promotion. Later, however, this
very same record was suddenly deemed poor and dismal to
justify loss of confidence. Thus, petitioner interpreted one
and the same sales record as proof of respondents
simultaneous efficiency and inefficiency. This could only
mean that there was no sufficient standard with which to
measure the performance of respondent, an indication of the
arbitrariness of petitioner.

Finally, during the hearing of this case before the labor
arbiter, Malonzo stated that the percentage of the time spent
by respondent in his sales area was actually not below
par.23 This admission of petitioners general manager only
proves all the more the lack of sufficient standard for
determining respondents performance.

The lack of just cause in respondents dismissal was
aggravated by the absence of due process.

The twin requirements of notice and hearing constitute the
essential elements of due process. The law requires the
employer to furnish the employee sought to be dismissed
with two written notices before termination of employment
can be legally effected: (1) a written notice apprising the
employee of the particular acts or omissions for which his
dismissal is sought in order to afford him an opportunity to
be heard and to defend himself with the assistance of
counsel, if he desires, and (2) a subsequent notice informing
the employee of the

_______________

22 Norkis Distributors, Inc. v. National Labor Relations
Commission, 316 Phil. 634; 246 SCRA 525 (1995).

23 Rollo, pp. 153 and 221; Comment, p. 9 and Memorandum,
p. 13 both citing TSN of July 28, 1995, pp. 11-13.

114

114



employers decision to dismiss him.24 This procedure is
mandatory and its absence taints the dismissal with
illegality.25

In this case, respondent was served with one notice only
the notice of his termination. The series of dialogues between
petitioners management and respondent was not enough as
it failed to show that the latter was apprised of the cause of
his dismissal.26 These dialogues or consultations could not
validly substitute for the actual observance of notice and
hearing.27

WHEREFORE, the petition is hereby DENIED. The February 10,
2000 decision and November 8, 2000 resolution of the Court
of Appeals in CA-G.R. SP No. 53510 are AFFIRMED.

Costs against the petitioner.

SO ORDERED.

Panganiban (Chairman), Sandoval-Gutierrez, Carpio-
Morales and Garcia, JJ., concur.

Petition denied, judgment and resolution affirmed.

Note.The twin requirements of notice and hearing must be
complied before a valid dismissal can take place. (Anflo
Management and Investment Corporation vs. Bolanio, 390
SCRA 473 [2002])

[Easycall Communications Phils., Inc. vs. King, 478 SCRA
102(2005)]

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No. L-19550. June 19, 1967.

HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS

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