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G.R. No. L-67626 April 18, 1989

JOSE REMO, JR., petitioner,
vs.
THE HON. INTERMEDIATE APPELLATE COURT and E.B. MARCHA TRANSPORT COMPANY, INC.,
represented by APIFANIO B. MARCHA, respondents.
Orbos, Cabusora, Dumlao & Sta. Ana for petitioner.

GANCAYCO, J .:
A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a
person, the law treats a corporation as though it were a person by process of fiction or by regarding it as
an artificial person distinct and separate from its individual stockholders. 1
However, the corporate fiction or the notion of legal entity may be disregarded when it "is used to defeat
public convenience, justify wrong, protect fraud, or defend crime" in which instances "the law will regard
the corporation as an association of persons, or in case of two corporations, will merge them into one."
The corporate fiction may also be disregarded when it is the "mere alter ego or business conduit of a
person." 2 There are many occasions when this Court pierced the corporate veil because of its use to
protect fraud and to justify wrong. 3 The herein petition for review of a. resolution of the Intermediate
Appellate Court dated February 8, 1984 seeking the reversal thereof and the reinstatement of its earlier
decision dated June 30, 1983 in AC-G.R. No. 68496-R 4 calls for the application of the foregoing
principles.
In the latter part of December, 1977 the board of directors of Akron Customs Brokerage Corporation
(hereinafter referred to as Akron), composed of petitioner Jose Remo, Jr., Ernesto Baares, Feliciano
Coprada, Jemina Coprada, and Dario Punzalan with Lucia Lacaste as Secretary, adopted a resolution
authorizing the purchase of thirteen (13) trucks for use in its business to be paid out of a loan the
corporation may secure from any lending institution. 5
Feliciano Coprada, as President and Chairman of Akron, purchased thirteen trucks from private
respondent on January 25, 1978 for and in consideration of P525,000.00 as evidenced by a deed of
absolute sale. 6 In a side agreement of the same date, the parties agreed on a downpayment in the
amount of P50,000.00 and that the balance of P475,000.00 shall be paid within sixty (60) days from the
date of the execution of the agreement. The parties also agreed that until said balance is fully paid, the
down payment of P50,000.00 shall accrue as rentals of the 13 trucks; and that if Akron fails to pay the
balance within the period of 60 days, then the balance shall constitute as a chattel mortgage lien covering
said cargo trucks and the parties may allow an extension of 30 days and thereafter private respondent
may ask for a revocation of the contract and the reconveyance of all said trucks. 7
The obligation is further secured by a promissory note executed by Coprada in favor of Akron. It is stated
in the promissory note that the balance shall be paid from the proceeds of a loan obtained from the
Development Bank of the Philippines (DBP) within sixty (60) days. 8 After the lapse of 90 days, private
respondent tried to collect from Coprada but the latter promised to pay only upon the release of the DBP
loan. Private respondent sent Coprada a letter of demand dated May 10, 1978. 9 In his reply to the said
letter, Coprada reiterated that he was applying for a loan from the DBP from the proceeds of which
payment of the obligation shall be made. 10
Meanwhile, two of the trucks were sold under a pacto de retro sale to a certain Mr. Bais of the Perpetual
Loans and Savings Bank at Baclaran. The sale was authorized by a board resolution made in a meeting
held on March 15, 1978. 11
2

Upon inquiry, private respondent found that no loan application was ever filed by Akron with DBP. 12
In the meantime, Akron paid rentals of P500.00 a day pursuant to a subsequent agreement, from April 27,
1978 (the end of the 90-day period to pay the balance) to May 31, 1978. Thereafter, no more rental
payments were made.
On June 17, 1978, Coprada wrote private respondent begging for a grace period of until the end of the
month to pay the balance of the purchase price; that he will update the rentals within the week; and in
case he fails, then he will return the 13 units should private respondent elect to get back the
same. 13 Private respondent, through counsel, wrote Akron on August 1, 1978 demanding the return of
the 13 trucks and the payment of P25,000.00 back rentals covering the period from June 1 to August 1,
1978. 14
Again, Coprada wrote private respondent on August 8, 1978 asking for another grace period of up to
August 31, 1978 to pay the balance, stating as well that he is expecting the approval of his loan
application from a certain financing company, and that ten (10) trucks have been returned to Bagbag,
Novaliches. 15 On December 9, 1978, Coprada informed private respondent anew that he had returned
ten (10) trucks to Bagbag and that a resolution was passed by the board of directors confirming the deed
of assignment to private respondent of P475,000 from the proceeds of a loan obtained by Akron from the
State Investment House, Inc. 16
In due time, private respondent filed a compliant for the recovery of P525,000.00 or the return of the 13
trucks with damages against Akron and its officers and directors, Feliciano Coprada, Dario D. Punzalan,
Jemina Coprada, Lucia Lacaste, Wilfredo Layug, Arcadio de la Cruz, Francisco Clave, Vicente Martinez,
Pacifico Dollario and petitioner with the then Court of First Instance of Rizal. Only petitioner answered the
complaint denying any participation in the transaction and alleging that Akron has a distinct corporate
personality. He was, however, declared in default for his failure to attend the pre-trial.
In the meanwhile, petitioner sold all his shares in Akron to Coprada. It also appears that Akron amended
its articles of incorporation thereby changing its name to Akron Transport International, Inc. which
assumed the liability of Akron to private respondent.
After an ex parte reception of the evidence of the private respondent, a decision was rendered on
October 28, 1980, the dispositive part of which reads as follows:
Finding the evidence sufficient to prove the case of the plaintiff, judgment is hereby rendered in favor of
the plaintiff and against the defendants, ordering them jointly and severally to pay;
a the purchase price of the trucks in the amount of P525,000.00 with ... legal rate (of
interest) from the filing of the complaint until the full amount is paid;
b rentals of Bagbag property at P1,000.00 a month from August 1978 until the
premises is cleared of the said trucks;
c attorneys fees of P10,000.00, and
d costs of suit.
The P50,000.00 given as down payment shall pertain as rentals of the trucks from June 1 to August 1,
1978 which is P25,000.00 (see demand letter of Atty. Aniano Exhibit "T") and the remaining P25,000.00
shall be from August 1, 1978 until the trucks are removed totally from the place." 17
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A motion for new trial filed by petitioner was denied so he appealed to the then Intermediate Appellate
Court (IAC) wherein in due course a decision was rendered on June 30, 1 983 setting aside the said
decision as far as petitioner is concemed. However, upon a motion for reconsideration filed by private
respondent dent, the IAC, in a resolution dated February 8,1984, set aside the decision dated June 30,
1983. The appellate court entered another decision affirming the appealed decision of the trial court, with
costs against petitioner.
Hence, this petition for review wherein petitioner raises the following issues:
I. The Intermediate Appellate Court (IAC) erred in disregarding the corporate fiction and
in holding the petitioner personally liable for the obligation of the Corporation which
decision is patently contrary to law and the applicable decision thereon.
II. The Intermediate Appellate Court (IAC) committed grave error of law in its decision by
sanctioning the merger of the personality of the corporation with that of the petitioner
when the latter was held liable for the corporate debts. 18
We reverse.
The environmental facts of this case show that there is no cogent basis to pierce the corporate veil of
Akron and hold petitioner personally liable for its obligation to private respondent. While it is true that in
December, 1977 petitioner was still a member of the board of directors of Akron and that he participated
in the adoption of a resolution authorizing the purchase of 13 trucks for the use in the brokerage business
of Akron to be paid out of a loan to be secured from a lending institution, it does not appear that said
resolution was intended to defraud anyone and more particularly private respondent. It was Coprada,
President and Chairman of Akron, who negotiated with said respondent for the purchase of 13 cargo
trucks on January 25, 1978. It was Coprada who signed a promissory note to guarantee the payment of
the unpaid balance of the purchase price out of the proceeds of a loan he supposedly sought from the
DBP. The word "WE' in the said promissory note must refer to the corporation which Coprada
represented in the execution of the note and not its stockholders or directors. Petitioner did not sign the
said promissory note so he cannot be personally bound thereby.
Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there was
a forthcoming loan from the DBP when it fact there was none, it is Coprada who should account for the
same and not petitioner.
As to the sale through pacto de retro of the two units to a third person by the corporation by virtue of a
board resolution, petitioner asserts that he never signed said resolution. Be that as it may, the sale is not
inherently fraudulent as the 13 units were sold through a deed of absolute sale to Akron so that the
corporation is free to dispose of the same. Of course, it was stipulated that in case of default in payment
to private respondent of the balance of the consideration, a chattel mortgage lien shag be constituted on
the 13 units. Nevertheless, said mortgage is a prior lien as against the pacto de retro sale of the 2 units.
As to the amendment of the articles of incorporation of Akron thereby changing its name to Akron
Transport International, Inc., petitioner alleges that the change of corporate name was in order to include
trucking and container yard operations in its customs brokerage of which private respondent was duly
informed in a letter. 19Indeed, the new corporation confirmed and assumed the obligation of the old
corporation. There is no indication of an attempt on the part of Akron to evade payment of its obligation to
private respondent.
There is the fact that petitioner sold his shares in Akron to Coprada during the pendency of the case.
Since petitioner has no personal obligation to private respondent, it is his inherent right as a stockholder
to dispose of his shares of stock anytime he so desires.
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Mention is also made of the alleged "dumping" of 10 units in the premises of private respondent at
Bagbag, Novaliches which to the mind of the Court does not prove fraud and instead appears to be an
attempt on the part of Akron to attend to its obligations as regards the said trucks. Again petitioner has no
part in this.
If the private respondent is the victim of fraud in this transaction, it has not been clearly shown that
petitioner had any part or participation in the perpetration of the same. Fraud must be established by clear
and convincing evidence. If at all, the principal character on whom fault should be attributed is Feliciano
Coprada, the President of Akron, whom private respondent dealt with personally all through out.
Fortunately, private respondent obtained a judgment against him from the trial court and the said
judgment has long been final and executory.
WHEREFORE, the petition is GRANTED. The questioned resolution of the Intermediate Appellate Court
dated February 8,1984 is hereby set aside and its decision dated June 30,1983 setting aside the decision
of the trial court dated October 28, 1980 insofar as petitioner is concemed is hereby reinstated and
affirmed, without costs.
SO ORDERED.

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[G.R. No. 136448. November 3, 1999]
LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.
D E C I S I O N
PANGANIBAN, J .:
A partnership may be deemed to exist among parties who agree to borrow money to pursue a
business and to divide the profits or losses that may arise therefrom, even if it is shown that they have not
contributed any capital of their own to a "common fund." Their contribution may be in the form of credit or
industry, not necessarily cash or fixed assets. Being partners, they are all liable for debts incurred by or
on behalf of the partnership. The liability for a contract entered into on behalf of an unincorporated
association or ostensible corporation may lie in a person who may not have directly transacted on its
behalf, but reaped benefits from that contract.
The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision
of the Court of Appeals in CA-GR CV 41477,
[1]
which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby affirmed.
[2]

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the
CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September 20,
1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject to the modifications as
hereinafter made by reason of the special and unique facts and circumstances and the proceedings that
transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the Agreement
plus P68,000.00 representing the unpaid price of the floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiffs invoices and computed on their respective
amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19, 1990;
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c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted from
September 20, 1990 (date of attachment) to September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the unpaid price of nets
and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total amount
of P600,045.00, this Court noted that these items were attached to guarantee any judgment that may be
rendered in favor of the plaintiff but, upon agreement of the parties, and, to avoid further deterioration of
the nets during the pendency of this case, it was ordered sold at public auction for not less
than P900,000.00 for which the plaintiff was the sole and winning bidder. The proceeds of the sale paid
for by plaintiff was deposited in court. In effect, the amount of P900,000.00 replaced the attached
property as a guaranty for any judgment that plaintiff may be able to secure in this case with the
ownership and possession of the nets and floats awarded and delivered by the sheriff to plaintiff as the
highest bidder in the public auction sale. It has also been noted that ownership of the nets [was] retained
by the plaintiff until full payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff
attached its own properties. It [was] for this reason also that this Court earlier ordered the attachment
bond filed by plaintiff to guaranty damages to defendants to be cancelled and for the P900,000.00 cash
bidded and paid for by plaintiff to serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the plaintiff may be entitled to in
this case will have to be satisfied from the amount of P900,000.00 as this amount replaced the attached
nets and floats. Considering, however, that the total judgment obligation as computed above would
amount to only P840,216.92, it would be inequitable, unfair and unjust to award the excess to the
defendants who are not entitled to damages and who did not put up a single centavo to raise the amount
of P900,000.00 aside from the fact that they are not the owners of the nets and floats. For this reason,
the defendants are hereby relieved from any and all liabilities arising from the monetary judgment
obligation enumerated above and for plaintiff to retain possession and ownership of the nets and floats
and for the reimbursement of the P900,000.00 deposited by it with the Clerk of Court.
SO ORDERED.
[3]

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a
Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine
Fishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged in a business
venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The total price
of the nets amounted toP532,045. Four hundred pieces of floats worth P68,000 were also sold to the
Corporation.
[4]

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent filed
a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their capacities as general partners, on the
allegation that Ocean Quest Fishing Corporation was a nonexistent corporation as shown by a
Certification from the Securities and Exchange Commission.
[5]
On September 20, 1990, the lower court
issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on
board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting
a reasonable time within which to pay. He also turned over to respondent some of the nets which were in
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his possession. Peter Yao filed an Answer, after which he was deemed to have waived his right to cross-
examine witnesses and to present evidence on his behalf, because of his failure to appear in subsequent
hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and Crossclaim and
moved for the lifting of the Writ of Attachment.
[6]
The trial court maintained the Writ, and upon motion of
private respondent, ordered the sale of the fishing nets at a public auction. Philippine Fishing Gear
Industries won the bidding and deposited with the said court the sales proceeds of P900,000.
[7]

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear
Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were
jointly liable to pay respondent.
[8]

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the three
[9]
in
Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of Malabon, Branch
72, for (a) a declaration of nullity of commercial documents; (b) a reformation of contracts; (c) a
declaration of ownership of fishing boats; (d) an injunction and (e) damages.
[10]
The Compromise
Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the amount
of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be applied as full payment
for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than P5,750,000.00
whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the deficiency
shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter
Yao.
[11]

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations,
but that joint liability could be presumed from the equal distribution of the profit and loss.
[12]

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing
business and may thus be held liable as a such for the fishing nets and floats purchased by and for the
use of the partnership. The appellate court ruled:
The evidence establishes that all the defendants including herein appellant Lim Tong Lim undertook a
partnership for a specific undertaking, that is for commercial fishing x x x. Obviously, the ultimate
undertaking of the defendants was to divide the profits among themselves which is what a partnership
essentially is x x x. By a contract of partnership, two or more persons bind themselves to contribute
money, property or industry to a common fund with the intention of dividing the profits among themselves
(Article 1767, New Civil Code).
[13]

Hence, petitioner brought this recourse before this Court.
[14]

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the
following grounds:
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I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT
THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A
PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN
QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE
COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF
PETITIONER LIMS GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats purchased from
respondent, the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be
deemed to have entered into a partnership.
This Courts Ruling

The Petition is devoid of merit.
First and Second Issues: Existence of a Partnership and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner
controverts the CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He
asserts that the CA based its finding on the Compromise Agreement alone. Furthermore, he disclaims
any direct participation in the purchase of the nets, alleging that the negotiations were conducted by Chua
and Yao only, and that he has not even met the representatives of the respondent company. Petitioner
further argues that he was a lessor, not a partner, of Chua and Yao, for the "Contract of Lease" dated
February 1, 1990, showed that he had merely leased to the two the main asset of the purported
partnership -- the fishing boat F/B Lourdes. The lease was for six months, with a monthly rental
of P37,500 plus 25 percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts
clearly showed that there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the
Civil Code which provides:
Article 1767 - By the contract of partnership, two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed based on the
following factual findings:
[15]

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join
him, while Antonio Chua was already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire two fishing boats,
the FB Lourdes and the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to finance the
venture.
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(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale over these
two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan extended by Jesus
Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry docking and other
expenses for the boats would be shouldered by Chua and Yao;
(6) That because of the unavailability of funds, Jesus Lim again extended a loan to the partnership in
the amount of P1 million secured by a check, because of which, Yao and Chua entrusted the ownership
papers of two other boats, Chuas FB Lady Anne Mel and Yaos FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from
Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their purported
business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by Antonio
Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial documents; (b)
reformation of contracts; (c) declaration of ownership of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed between the parties-
litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to
engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan
secured from Jesus Lim who was petitioners brother. In their Compromise Agreement, they
subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to
divide equally among them the excess or loss. These boats, the purchase and the repair of which were
financed with borrowed money, fell under the term common fund under Article 1767. The contribution to
such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the
parties agreed that any loss or profit from the sale and operation of the boats would be divided equally
among them also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to
that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were obviously
acquired in furtherance of their business. It would have been inconceivable for Lim to involve himself so
much in buying the boat but not in the acquisition of the aforesaid equipment, without which the business
could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership
engaged in the fishing business. They purchased the boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from the sales and operations thereof would be divided
among them.
We stress that under Rule 45, a petition for review like the present case should involve only
questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this Court,
absent any cogent proof that the present action is embraced by one of the exceptions to the rule.
[16]
In
assailing the factual findings of the two lower courts, petitioner effectively goes beyond the bounds of a
petition for review under Rule 45.
Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate courts sole basis for assuming the existence of a partnership
was the Compromise Agreement. He also claims that the settlement was entered into only to end the
10

dispute among them, but not to adjudicate their preexisting rights and obligations. His arguments are
baseless. The Agreement was but an embodiment of the relationship extant among the parties prior to its
execution.
A proper adjudication of claimants rights mandates that courts must review and thoroughly appraise
all relevant facts. Both lower courts have done so and have found, correctly, a preexisting partnership
among the parties. In implying that the lower courts have decided on the basis of one piece of document
alone, petitioner fails to appreciate that the CA and the RTC delved into the history of the document and
explored all the possible consequential combinations in harmony with law, logic and fairness. Verily, the
two lower courts factual findings mentioned above nullified petitioners argument that the existence of a
partnership was based only on the Compromise Agreement.
Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioners argument that he was merely the lessor of the boats to Chua
and Yao, not a partner in the fishing venture. His argument allegedly finds support in the Contract of
Lease and the registration papers showing that he was the owner of the boats, including F/B
Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale
of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the
three of them. No lessor would do what petitioner did. Indeed, his consent to the sale proved that there
was a preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and
Yao, in which debts were undertaken in order to finance the acquisition and the upgrading of the vessels
which would be used in their fishing business. The sale of the boats, as well as the division among the
three of the balance remaining after the payment of their loans, proves beyond cavil that F/B Lourdes,
though registered in his name, was not his own property but an asset of the partnership. It is not
uncommon to register the properties acquired from a loan in the name of the person the lender trusts,
who in this case is the petitioner himself. After all, he is the brother of the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his property to pay a
debt he did not incur, if the relationship among the three of them was merely that of lessor-lessee, instead
of partners.
Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to
Chua and Yao, and not to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred
or arising as a result thereof: Provided however, That when any such ostensible corporation is sued on
any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof
on the ground that there was in fact no corporation.
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Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. The reason behind this doctrine is obvious - an
unincorporated association has no personality and would be incompetent to act and appropriate for itself
the power and attributes of a corporation as provided by law; it cannot create agents or confer authority
on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of law that a person who acts
as an agent without authority or without a principal is himself regarded as the principal, possessed of all
the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts performed as such agent.
[17]

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In
the first instance, an unincorporated association, which represented itself to be a corporation, will be
estopped from denying its corporate capacity in a suit against it by a third person who relied in good faith
on such representation. It cannot allege lack of personality to be sued to evade its responsibility for a
contract it entered into and by virtue of which it received advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated, nonetheless
treated it as a corporation and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case, all those who benefited from the
transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable
for contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for
the nets it sold. The only question here is whether petitioner should be held jointly
[18]
liable with Chua and
Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the ostensible
corporation should be held liable. Since his name does not appear on any of the contracts and since he
never directly transacted with the respondent corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat
which has earlier been proven to be an asset of the partnership. He in fact questions the attachment of
the nets, because the Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does not preclude
the liabilities of the three as contracting parties in representation of it. Clearly, under the law on estoppel,
those acting on behalf of a corporation and those benefited by it, knowing it to be without valid existence,
are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having
reaped the benefits of the contract entered into by persons with whom he previously had an existing
relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of
corporation by estoppel. We reiterate the ruling of the Court in Alonso v. Villamor:
[19]

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art
of movement and position , entraps and destroys the other. It is, rather, a contest in which each
contending party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly
trivial and indecisive all imperfections of form and technicalities of procedure, asks that justice be done
upon the merits. Lawsuits, unlike duels, are not to be won by a rapiers thrust. Technicality, when it
deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves
scant consideration from courts. There should be no vested rights in technicalities.
Third Issue: Validity of Attachment

12

Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We
agree with the Court of Appeals that this issue is now moot and academic. As previously discussed, F/B
Lourdes was an asset of the partnership and that it was placed in the name of petitioner, only to assure
payment of the debt he and his partners owed. The nets and the floats were specifically manufactured
and tailor-made according to their own design, and were bought and used in the fishing venture they
agreed upon. Hence, the issuance of the Writ to assure the payment of the price stipulated in the
invoices is proper. Besides, by specific agreement, ownership of the nets remained with Respondent
Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.

13

[G.R. No. 121143. January 21, 1997]
PURIFICACION G. TABANG, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION and
PAMANA GOLDEN CARE MEDICAL CENTER FOUNDATION, INC., respondents.
D E C I S I O N
REGALADO, J .:
This is a petition for certiorari which seeks to annul the resolution of the National Labor Relations
Commission (NLRC), dated June 26, 1995, affirming in toto the order of the labor arbiter, dated April 26,
1994, which dismissed petitioners complaint for illegal dismissal with money claims for lack of jurisdiction.
The records show that petitioner Purificacion Tabang was a founding member, a member of the
Board of Trustees, and the corporate secretary of private respondent Pamana Golden Care Medical
Center Foundation, Inc., a non-stock corporation engaged in extending medical and surgical services.
On October 30, 1990, the Board of Trustees issued a memorandum appointing petitioner as Medical
Director and Hospital Administrator of private respondents Pamana Golden Care Medical Center in
Calamba, Laguna.
Although the memorandum was silent as to the amount of remuneration for the position, petitioner
claims that she received a monthly retainer fee of five thousand pesos (P5,000.00) from private
respondent, but the payment thereof was allegedly stopped in November, 1991.
As medical director and hospital administrator, petitioner was tasked to run the affairs of the
aforesaid medical center and perform all acts of administration relative to its daily operations.
On May 1, 1993, petitioner was allegedly informed personally by Dr. Ernesto Naval that in a special
meeting held on April 30, 1993, the Board of Trustees passed a resolution relieving her of her position as
Medical Director and Hospital Administrator, and appointing the latter and Dr. Benjamin Donasco as
acting Medical Director and acting Hospital Administrator, respectively. Petitioner averred that she
thereafter received a copy of said board resolution.
On June 6, 1993, petitioner filed a complaint for illegal dismissal and non-payment of wages,
allowances and 13th month pay before the labor arbiter.
Respondent corporation moved for the dismissal of the complaint on the ground of lack of jurisdiction
over the subject matter. It argued that petitioners position as Medical Director and Hospital Administrator
was interlinked with her position as member of the Board of Trustees, hence, her dismissal is an intra-
corporate controversy which falls within the exclusive jurisdiction of the Securities and Exchange
Commission (SEC).
Petitioner opposed the motion to dismiss, contending that her position as Medical Director and
Hospital Administrator was separate and distinct from her position as member of the Board of
Trustees. She claimed that there is no intra-corporate controversy involved since she filed the complaint
in her capacity as Medical Director and Hospital Administrator, or as an employee of private respondent.
On April 26, 1994, the labor arbiter issued an order dismissing the complaint for lack of
jurisdiction. He ruled that the case falls within the jurisdiction of the SEC, pursuant to Section 5 of
Presidential Decree No. 902-A.
[1]

Petitioners motion for reconsideration was treated as an appeal by the labor arbiter who
consequently ordered the elevation of the entire records of the case to public respondent NLRC for
appellate review.
[2]

On appeal, respondent NLRC affirmed the dismissal of the case on the additional ground that the
position of a Medical Director and Hospital Administrator is akin to that of an executive position in a
14

corporate ladder structure, hence, petitioners removal from the said position was an intra-corporate
controversy within the original and exclusive jurisdiction of the SEC.
[3]

Aggrieved by the decision, petitioner filed the instant petition which we find, however, to be without
merit.
We agree with the findings of the NLRC that it is the SEC which has jurisdiction over the case at
bar. The charges against herein private respondent partake of the nature of an intra-corporate
controversy. Similarly, the determination of the rights of petitioner and the concomitant liability of private
respondent arising from her ouster as a medical director and/or hospital administrator, which are
corporate offices, is an intra-corporate controversy subject to the jurisdiction of the SEC.
Contrary to the contention of petitioner, a medical director and a hospital administrator are
considered as corporate officers under the by-laws of respondent corporation. Section 2(i), Article I
thereof states that one of the powers of the Board of Trustees is (t)o appoint a Medical Director,
Comptroller/Administrator, Chiefs of Services and such other officers as it may deem necessary and
prescribe their powers and duties.
[4]

The president, vice-president, secretary and treasurer are commonly regarded as the principal or
executive officers of a corporation, and modern corporation statutes usually designate them as the
officers of the corporation.
[5]
However, other offices are sometimes created by the charter or by-laws of a
corporation, or the board of directors may be empowered under the by-laws of a corporation to create
additional offices as may be necessary.
[6]

It has been held that an office is created by the charter of the corporation and the officer is elected
by the directors or stockholders.
[7]
On the other hand, an employee usually occupies no office and
generally is employed not by action of the directors or stockholders but by the managing officer of the
corporation who also determines the compensation to be paid to such employee.
[8]

In the case at bar, considering that herein petitioner, unlike an ordinary employee, was appointed by
respondent corporations Board of Trustees in its memorandum of October 30, 1990,
[9]
she is deemed an
officer of the corporation. Perforce, Section 5(c) of Presidential Decree No. 902-A, which provides that
the SEC exercises exclusive jurisdiction over controversies in the election or appointment of directors,
trustees, officers or managers of corporations, partnerships or associations, applies in the present
dispute. Accordingly, jurisdiction over the same is vested in the SEC, and not in the Labor Arbiter or the
NLRC.
Moreover, the allegation of petitioner that her being a member of the Board of Trustees was not one
of the considerations for her appointment is belied by the tenor of the memorandum itself. It states: We
hope that you will uphold and promote the mission of our foundation,
[10]
and this cannot be construed
other than in reference to her position or capacity as a corporate trustee.
A corporate officers dismissal is always a corporate act, or an intra-corporate controversy, and the
nature is not altered by the reason or wisdom with which the Board of Directors may have in taking such
action.
[11]
Also, an intra-corporate controversy is one which arises between a stockholder and the
corporation. There is no distinction, qualification, nor any exemption whatsoever. The provision is broad
and covers all kinds of controversies between stockholders and corporations.
[12]

With regard to the amount of P5,000.00 formerly received by herein petitioner every month, the
same cannot be considered as compensation for her services rendered as Medical Director and Hospital
Administrator. The vouchers
[13]
submitted by petitioner show that the said amount was paid to her by
PAMANA, Inc., a stock corporation which is separate and distinct from herein private
respondent. Although the payments were considered advances to Pamana Golden Care, Calamba
branch, there is no evidence to show that the Pamana Golden Care stated in the vouchers refers to
herein respondent Pamana Golden Care Medical Center Foundation, Inc.
Pamana Golden Care is a division of Pamana, Inc., while respondent Pamana Golden Care Medical
Center Foundation, Inc. is a non-stock, non-profit corporation. It is stated in the memorandum of
petitioner that Pamana, Inc. is a stock and profit corporation selling pre-need plan for education, pension
15

and health care. The health care plan is called Pamana Golden Care Plan and the holders are called
Pamana Golden Care Card Holders or, simply, Pamana Members.
[14]

It is an admitted fact that herein petitioner is a retained physician of Pamana, Inc., whose patients
are holders of the Pamana Golden Care Card. In fact, in her complaint
[15]
filed before the Regional Trial
Court of Calamba, herein petitioner is asking, among others, for professional fees and/or retainer fees
earned for her treatment of Pamana Golden Care card holders.
[16]
Thus, at most, said vouchers can only
be considered as proof of payment of retainer fees made by Pamana, Inc. to herein petitioner as a
retained physician of Pamana Golden Care.
Moreover, even assuming that the monthly payment of P5,000.00 was a valid claim against
respondent corporation, this would not operate to effectively remove this case from the jurisdiction of the
SEC. In the case of Cagayan de Oro Coliseum, Inc. vs. Office of the Minister of Labor and Employment,
etc., et al.,
[17]
we ruled that (a)lthough the reliefs sought by Chavez appear to fall under the jurisdiction of
the labor arbiter as they are claims for unpaid salaries and other remunerations for services rendered, a
close scrutiny thereof shows that said claims are actually part of the perquisites of his position in, and
therefore interlinked with, his relations with the corporation. In Dy, et al., vs. NLRC, et al., the Court said:
(t)he question of remuneration involving as it does, a person who is not a mere employee but a
stockholder and officer, an integral part, it might be said, of the corporation, is not a simple labor problem
but a matter that comes within the area of corporate affairs and management and is in fact a corporate
controversy in contemplation of the Corporation Code.
WHEREFORE, the questioned resolution of the NLRC is hereby AFFIRMED, without prejudice to
petitioners taking recourse to and seeking relief through the appropriate remedy in the proper forum.
SO ORDERED.

16

G. R. No. 164317 February 6, 2006
ALFREDO CHING, Petitioner,
vs.
THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-VILLAVERT, JUDGE
EDGARDO SUDIAM of the Regional Trial Court, Manila, Branch 52; RIZAL COMMERCIAL
BANKING CORP. and THE PEOPLE OF THE PHILIPPINES, Respondents.
D E C I S I O N
CALLEJO, SR., J.:
Before the Court is a petition for review on certiorari of the Decision
1
of the Court of Appeals (CA) in CA-
G.R. SP No. 57169 dismissing the petition for certiorari, prohibition and mandamus filed by petitioner
Alfredo Ching, and its Resolution
2
dated June 28, 2004 denying the motion for reconsideration thereof.
Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime in
September to October 1980, PBMI, through petitioner, applied with the Rizal Commercial Banking
Corporation (respondent bank) for the issuance of commercial letters of credit to finance its importation of
assorted goods.
3

Respondent bank approved the application, and irrevocable letters of credit were issued in favor of
petitioner. The goods were purchased and delivered in trust to PBMI. Petitioner signed 13 trust
receipts
4
as surety, acknowledging delivery of the following goods:
T/R
Nos.
Date Granted Maturity Date Principal Description of Goods
1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK" Brand
Synthetic Graphite
Electrode
1853 12-08-80 03-06-81 P198,150.67 3,000 pcs. (15 bundles)
Calorized Lance Pipes
1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired
Refractory Tundish Bricks
1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts for
CCM
1808 11-21-80 02-19-81 P370,332.52 200 pcs. ingot moulds
2042 01-30-81 04-30-81 P469,669.29 High Fired Refractory
Nozzle Bricks
1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite
Electrode [with] tapered
pitch filed nipples
1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15 bundles
calorized lance pipes [)]
1895 12-17-80 03-17-81 P67,652.04 Spare parts for
17

Spectrophotometer
1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot moulds
2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds
2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for
rolling mills
2100 02-10-81 05-12-81 P210,748.00 Spare parts for
Lacolaboratory Equipment
5

Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with authority to sell but
not by way of conditional sale, pledge or otherwise; and in case such goods were sold, to turn over the
proceeds thereof as soon as received, to apply against the relative acceptances and payment of other
indebtedness to respondent bank. In case the goods remained unsold within the specified period, the
goods were to be returned to respondent bank without any need of demand. Thus, said "goods,
manufactured products or proceeds thereof, whether in the form of money or bills, receivables, or
accounts separate and capable of identification" were respondent banks property.
When the trust receipts matured, petitioner failed to return the goods to respondent bank, or to return their
value amounting to P6,940,280.66 despite demands. Thus, the bank filed a criminal complaint for
estafa
6
against petitioner in the Office of the City Prosecutor of Manila.
After the requisite preliminary investigation, the City Prosecutor found probable cause estafa under Article
315, paragraph 1(b) of the Revised Penal Code, in relation to Presidential Decree (P.D.) No. 115,
otherwise known as the Trust Receipts Law. Thirteen (13) Informations were filed against the petitioner
before the Regional Trial Court (RTC) of Manila. The cases were docketed as Criminal Cases No. 86-
42169 to 86-42181, raffled to Branch 31 of said court.
Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The appeal was
dismissed in a Resolution
7
dated March 17, 1987, and petitioner moved for its reconsideration. On
December 23, 1987, the Minister of Justice granted the motion, thus reversing the previous resolution
finding probable cause against petitioner.
8
The City Prosecutor was ordered to move for the withdrawal of
the Informations.
This time, respondent bank filed a motion for reconsideration, which, however, was denied on February
24, 1988.
9
The RTC, for its part, granted the Motion to Quash the Informations filed by petitioner on the
ground that the material allegations therein did not amount to estafa.
10

In the meantime, the Court rendered judgment in Allied Banking Corporation v. Ordoez,
11
holding that
the penal provision of P.D. No. 115 encompasses any act violative of an obligation covered by the trust
receipt; it is not limited to transactions involving goods which are to be sold (retailed), reshipped, stored or
processed as a component of a product ultimately sold. The Court also ruled that "the non-payment of the
amount covered by a trust receipt is an act violative of the obligation of the entrustee to pay."
12

On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against petitioner before
the Office of the City Prosecutor of Manila. The case was docketed as I.S. No. 95B-07614.
Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there was no
probable cause to charge petitioner with violating P.D. No. 115, as petitioners liability was only civil, not
criminal, having signed the trust receipts as surety.
13
Respondent bank appealed the resolution to the
Department of Justice (DOJ) via petition for review, alleging that the City Prosecutor erred in ruling:
18

1. That there is no evidence to show that respondent participated in the misappropriation of the
goods subject of the trust receipts;
2. That the respondent is a mere surety of the trust receipts; and
3. That the liability of the respondent is only civil in nature.
14

On July 13, 1999, the Secretary of Justice issued Resolution No. 250
15
granting the petition and reversing
the assailed resolution of the City Prosecutor. According to the Justice Secretary, the petitioner, as Senior
Vice-President of PBMI, executed the 13 trust receipts and as such, was the one responsible for the
offense. Thus, the execution of said receipts is enough to indict the petitioner as the official responsible
for violation of P.D. No. 115. The Justice Secretary also declared that petitioner could not contend that
P.D. No. 115 covers only goods ultimately destined for sale, as this issue had already been settled in
Allied Banking Corporation v. Ordoez,
16
where the Court ruled that P.D. No. 115 is "not limited to
transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component of a
product ultimately sold but covers failure to turn over the proceeds of the sale of entrusted goods, or to
return said goods if unsold or not otherwise disposed of in accordance with the terms of the trust
receipts."
The Justice Secretary further stated that the respondent bound himself under the terms of the trust
receipts not only as a corporate official of PBMI but also as its surety; hence, he could be proceeded
against in two (2) ways: first, as surety as determined by the Supreme Court in its decision in Rizal
Commercial Banking Corporation v. Court of Appeals;
17
and second, as the corporate official responsible
for the offense under P.D. No. 115, via criminal prosecution. Moreover, P.D. No. 115 explicitly allows the
prosecution of corporate officers "without prejudice to the civil liabilities arising from the criminal offense."
Thus, according to the Justice Secretary, following Rizal Commercial Banking Corporation, the civil
liability imposed is clearly separate and distinct from the criminal liability of the accused under P.D. No.
115.
Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13 Informations
against petitioner for violation of P.D. No. 115 before the RTC of Manila. The cases were docketed as
Criminal Cases No. 99-178596 to 99-178608 and consolidated for trial before Branch 52 of said court.
Petitioner filed a motion for reconsideration, which the Secretary of Justice denied in a Resolution
18
dated
January 17, 2000.
Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing the
resolutions of the Secretary of Justice on the following grounds:
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE ACTING
OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS PROSECUTION
DESPITE THE FACT THAT NO EVIDENCE HAD BEEN PRESENTED TO PROVE HIS
PARTICIPATION IN THE ALLEGED TRANSACTIONS.
2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE ABUSE
OF DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY CONTINUED
PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF TIME INCURRED IN THE
TERMINATION OF THE PRELIMINARY INVESTIGATION THAT SHOULD JUSTIFY THE
DISMISSAL OF THE INSTANT CASE.
3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY PROSECUTOR
ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN EXCESS OF
JURISDICTION WHEN THEY CONTINUED THE PROSECUTION OF THE PETITIONER
DESPITE LACK OF SUFFICIENT BASIS.
19

19

In his petition, petitioner incorporated a certification stating that "as far as this Petition is concerned, no
action or proceeding in the Supreme Court, the Court of Appeals or different divisions thereof, or any
tribunal or agency. It is finally certified that if the affiant should learn that a similar action or proceeding
has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions
thereof, of any other tribunal or agency, it hereby undertakes to notify this Honorable Court within five (5)
days from such notice."
20

In its Comment on the petition, the Office of the Solicitor General alleged that -
A.
THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER
ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED AND
THAT THE ACTS OF PETITIONER FALL WITHIN THE AMBIT OF VIOLATION OF P.D. [No.]
115 IN RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL CODE.
B.
THERE IS NO MERIT IN PETITIONERS CONTENTION THAT EXCESSIVE DELAY HAS
MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE CASE,
JUSTIFYING ITS DISMISSAL.
C.
THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND MANDAMUS
IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION OF THE DEPARTMENT
OF JUSTICE. THE PRESENT PETITION MUST THEREFORE BE DISMISSED.
21

On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on procedural
grounds. On the procedural issue, it ruled that (a) the certification of non-forum shopping executed by
petitioner and incorporated in the petition was defective for failure to comply with the first two of the three-
fold undertakings prescribed in Rule 7, Section 5 of the Revised Rules of Civil Procedure; and (b) the
petition for certiorari, prohibition and mandamus was not the proper remedy of the petitioner.
On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of Justice were
correctly issued for the following reasons: (a) petitioner, being the Senior Vice-President of PBMI and the
signatory to the trust receipts, is criminally liable for violation of P.D. No. 115; (b) the issue raised by the
petitioner, on whether he violated P.D. No. 115 by his actuations, had already been resolved and laid to
rest in Allied Bank Corporation v. Ordoez;
22
and (c) petitioner was estopped from raising the
City Prosecutors delay in the final disposition of the preliminary investigation because he failed to do so
in the DOJ.
Thus, petitioner filed the instant petition, alleging that:
I
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE GROUND
THAT THE CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED THEREIN WAS
DEFECTIVE.
II
20

THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS COMMITTED BY
THE SECRETARY OF JUSTICE IN COMING OUT WITH THE ASSAILED RESOLUTIONS.
23

The Court will delve into and resolve the issues seriatim.
The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He claims that the
rules of procedure should be used to promote, not frustrate, substantial justice. He insists that the Rules
of Court should be construed liberally especially when, as in this case, his substantial rights are adversely
affected; hence, the deficiency in his certification of non-forum shopping should not result in the dismissal
of his petition.
The Office of the Solicitor General (OSG) takes the opposite view, and asserts that indubitably, the
certificate of non-forum shopping incorporated in the petition before the CA is defective because it failed
to disclose essential facts about pending actions concerning similar issues and parties. It asserts that
petitioners failure to comply with the Rules of Court is fatal to his petition. The OSG cited Section 2, Rule
42, as well as the ruling of this Court in Melo v. Court of Appeals.
24

We agree with the ruling of the CA that the certification of non-forum shopping petitioner incorporated in
his petition before the appellate court is defective. The certification reads:
It is further certified that as far as this Petition is concerned, no action or proceeding in the Supreme
Court, the Court of Appeals or different divisions thereof, or any tribunal or agency.
It is finally certified that if the affiant should learn that a similar action or proceeding has been filed or is
pending before the Supreme Court, the Court of Appeals, or different divisions thereof, of any other
tribunal or agency, it hereby undertakes to notify this Honorable Court within five (5) days from such
notice.
25

Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition should be
accompanied by a sworn certification of non-forum shopping, as provided in the third paragraph of
Section 3, Rule 46 of said Rules. The latter provision reads in part:
SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. The petition shall
contain the full names and actual addresses of all the petitioners and respondents, a concise statement of
the matters involved, the factual background of the case and the grounds relied upon for the relief prayed
for.
xxx
The petitioner shall also submit together with the petition a sworn certification that he has not theretofore
commenced any other action involving the same issues in the Supreme 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 the Supreme 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 (5) days therefrom. xxx
Compliance with the certification against forum shopping is separate from and independent of the
avoidance of forum shopping itself. The requirement is mandatory. The failure of the petitioner to comply
with the foregoing requirement shall be sufficient ground for the dismissal of the petition without prejudice,
unless otherwise provided.
26

21

Indubitably, the first paragraph of petitioners certification is incomplete and unintelligible. Petitioner failed
to certify that he "had not heretofore commenced any other action involving the same issues in the
Supreme Court, the Court of Appeals or the different divisions thereof or any other tribunal or agency" as
required by paragraph 4, Section 3, Rule 46 of the Revised Rules of Court.
We agree with petitioners contention that the certification is designed to promote and facilitate the orderly
administration of justice, and therefore, should not be interpreted with absolute literalness. In his works on
the Revised Rules of Civil Procedure, former Supreme Court Justice Florenz Regalado states that, with
respect to the contents of the certification which the pleader may prepare, the rule of substantial
compliance may be availed of.
27
However, there must be a special circumstance or compelling reason
which makes the strict application of the requirement clearly unjustified. The instant petition has not
alleged any such extraneous circumstance. Moreover, as worded, the certification cannot even be
regarded as substantial compliance with the procedural requirement. Thus, the CA was not informed
whether, aside from the petition before it, petitioner had commenced any other action involving the same
issues in other tribunals.
On the merits of the petition, the CA ruled that the petitioner failed to establish that the Secretary of
Justice committed grave abuse of discretion in finding probable cause against the petitioner for violation
of estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to P.D. No. 115. Thus,
the appellate court ratiocinated:
Be that as it may, even on the merits, the arguments advanced in support of the petition are not
persuasive enough to justify the desired conclusion that respondent Secretary of Justice gravely abused
its discretion in coming out with his assailed Resolutions. Petitioner posits that, except for his being the
Senior Vice-President of the PBMI, there is no iota of evidence that he was a participes crimines in
violating the trust receipts sued upon; and that his liability, if at all, is purely civil because he signed the
said trust receipts merely as a xxx surety and not as the entrustee. These assertions are, however, too
dull that they cannot even just dent the findings of the respondent Secretary, viz:
"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:
xxx If the violation or offense is committed by a corporation, partnership, association or other judicial
entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.
"There is no dispute that it was the respondent, who as senior vice-president of PBM, executed the
thirteen (13) trust receipts. As such, the law points to him as the official responsible for the offense. Since
a corporation cannot be proceeded against criminally because it cannot commit crime in which personal
violence or malicious intent is required, criminal action is limited to the corporate agents guilty of an act
amounting to a crime and never against the corporation itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil.
401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus, the execution by respondent of said receipts is enough
to indict him as the official responsible for violation of PD 115.
"Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which are
ultimately destined for sale and not goods, like those imported by PBM, for use in manufacture. This issue
has already been settled in the Allied Banking Corporation case, supra, where he was also a party, when
the Supreme Court ruled that PD 115 is not limited to transactions in goods which are to be sold
(retailed), reshipped, stored or processed as a component or a product ultimately sold but covers failure
to turn over the proceeds of the sale of entrusted goods, or to return said goods if unsold or disposed of in
accordance with the terms of the trust receipts.
"In regard to the other assigned errors, we note that the respondent bound himself under the terms of the
trust receipts not only as a corporate official of PBM but also as its surety. It is evident that these are two
22

(2) capacities which do not exclude the other. Logically, he can be proceeded against in two (2) ways:
first, as surety as determined by the Supreme Court in its decision in RCBC vs. Court of Appeals, 178
SCRA 739; and, secondly, as the corporate official responsible for the offense under PD 115, the present
case is an appropriate remedy under our penal law.
"Moreover, PD 115 explicitly allows the prosecution of corporate officers without prejudice to the civil
liabilities arising from the criminal offense thus, the civil liability imposed on respondent in RCBC vs.
Court of Appeals case is clearly separate and distinct from his criminal liability under PD 115."
28

Petitioner asserts that the appellate courts ruling is erroneous because (a) the transaction between PBMI
and respondent bank is not a trust receipt transaction; (b) he entered into the transaction and was sued in
his capacity as PBMI Senior Vice-President; (c) he never received the goods as an entrustee for PBMI,
hence, could not have committed any dishonesty or abused the confidence of respondent bank; and (d)
PBMI acquired the goods and used the same in operating its machineries and equipment and not for
resale.
The OSG, for its part, submits a contrary view, to wit:
34. Petitioner further claims that he is not a person responsible for the offense allegedly because "[b]eing
charged as the Senior Vice-President of Philippine Blooming Mills (PBM), petitioner cannot be held
criminally liable as the transactions sued upon were clearly entered into in his capacity as an officer of the
corporation" and that [h]e never received the goods as an entrustee for PBM as he never had or took
possession of the goods nor did he commit dishonesty nor "abuse of confidence in transacting with
RCBC." Such argument is bereft of merit.
35. Petitioners being a Senior Vice-President of the Philippine Blooming Mills does not exculpate him
from any liability. Petitioners responsibility as the corporate official of PBM who received the goods in
trust is premised on Section 13 of P.D. No. 115, which provides:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or
as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered
Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If
the violation or offense is committed by a corporation, partnership, association or other juridical entities,
the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from
the criminal offense. (Emphasis supplied)
36. Petitioner having participated in the negotiations for the trust receipts and having received the goods
for PBM, it was inevitable that the petitioner is the proper corporate officer to be proceeded against by
virtue of the PBMs violation of P.D. No. 115.
29

The ruling of the CA is correct.
In Mendoza-Arce v. Office of the Ombudsman (Visayas),
30
this Court held that the acts of a quasi-judicial
officer may be assailed by the aggrieved party via a petition for certiorari and enjoined (a) when
necessary to afford adequate protection to the constitutional rights of the accused; (b) when necessary for
the orderly administration of justice; (c) when the acts of the officer are without or in excess of authority;
(d) where the charges are manifestly false and motivated by the lust for vengeance; and (e) when there is
clearly no prima facie case against the accused.
31
The Court also declared that, if the officer conducting a
preliminary investigation (in that case, the Office of the Ombudsman) acts without or in excess of his
23

authority and resolves to file an Information despite the absence of probable cause, such act may be
nullified by a writ of certiorari.
32

Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure,
33
the Information shall be
prepared by the Investigating Prosecutor against the respondent only if he or she finds probable cause to
hold such respondent for trial. The Investigating Prosecutor acts without or in excess of his authority
under the Rule if the Information is filed against the respondent despite absence of evidence showing
probable cause therefor.
34
If the Secretary of Justice reverses the Resolution of the Investigating
Prosecutor who found no probable cause to hold the respondent for trial, and orders such prosecutor to
file the Information despite the absence of probable cause, the Secretary of Justice acts contrary to law,
without authority and/or in excess of authority. Such resolution may likewise be nullified in a petition for
certiorari under Rule 65 of the Revised Rules of Civil Procedure.
35

A preliminary investigation, designed to secure the respondent against hasty, malicious and oppressive
prosecution, is an inquiry to determine whether (a) a crime has been committed; and (b) whether there is
probable cause to believe that the accused is guilty thereof. It is a means of discovering the person or
persons who may be reasonably charged with a crime. Probable cause need not be based on clear and
convincing evidence of guilt, as the investigating officer acts upon probable cause of reasonable belief.
Probable cause implies probability of guilt and requires more than bare suspicion but less than evidence
which would justify a conviction. A finding of probable cause needs only to rest on evidence showing that
more likely than not, a crime has been committed by the suspect.
36

However, while probable cause should be determined in a summary manner, there is a need to examine
the evidence with care to prevent material damage to a potential accuseds constitutional right to liberty
and the guarantees of freedom and fair play
37
and to protect the State from the burden of unnecessary
expenses in prosecuting alleged offenses and holding trials arising from false, fraudulent or groundless
charges.
38

In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse of discretion
in issuing the assailed resolutions. Indeed, he acted in accord with law and the evidence.
Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:
Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of
this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and
another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latters execution and delivery to the entruster of a
signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated
goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the
following:
1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture
or process the goods with the purpose of ultimate sale; Provided, That, in the case of goods
delivered under trust receipt for the purpose of manufacturing or processing before its ultimate
sale, the entruster shall retain its title over the goods whether in its original or processed form
until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load,
unload, ship or otherwise deal with them in a manner preliminary or necessary to their sale; or
24

2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them to a
principal; or c) to effect the consummation of some transactions involving delivery to a depository
or register; or d) to effect their presentation, collection or renewal.
The sale of goods, documents or instruments by a person in the business of selling goods, documents or
instruments for profit who, at the outset of the transaction, has, as against the buyer, general property
rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining
title or other interest as security for the payment of the purchase price, does not constitute a trust receipt
transaction and is outside the purview and coverage of this Decree.
An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt
transaction, and any successor in interest of such person for the purpose of payment specified in the trust
receipt agreement.
39
The entrustee is obliged to: (1) hold the goods, documents or instruments in trust for
the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust
receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the
extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for
their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds
thereof whether in money or whatever form, separate and capable of identification as property of the
entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the
entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions
of the decree.
40

The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments
released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as
appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale,
and to the enforcement of all other rights conferred on him in the trust receipt; provided, such are not
contrary to the provisions of the document.
41

In the case at bar, the transaction between petitioner and respondent bank falls under the trust receipt
transactions envisaged in P.D. No. 115. Respondent bank imported the goods and entrusted the same to
PBMI under the trust receipts signed by petitioner, as entrustee, with the bank as entruster. The
agreement was as follows:
And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK as its
property with liberty to sell the same within ____days from the date of the execution of this Trust Receipt
and for the Banks account, but without authority to make any other disposition whatsoever of the said
goods or any part thereof (or the proceeds) either by way of conditional sale, pledge or otherwise.
I/we agree to keep the said goods insured to their full value against loss from fire, theft, pilferage or other
casualties as directed by the BANK, the sum insured to be payable in case of loss to the BANK, with the
understanding that the BANK is, not to be chargeable with the storage premium or insurance or any other
expenses incurred on said goods.
In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the BANK, to
apply against the relative acceptances (as described above) and for the payment of any other
indebtedness of mine/ours to the BANK. In case of non-sale within the period specified herein, I/we agree
to return the goods under this Trust Receipt to the BANK without any need of demand.
I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the form of
money or bills, receivables, or accounts separate and capable of identification as property of the BANK.
42

It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of public
policy, the failure of person to turn over the proceeds of the sale of the goods covered by a trust receipt or
to return said goods, if not sold, is a public nuisance to be abated by the imposition of penal sanctions.
43

25

The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions involving
goods procured as a component of a product ultimately sold has been resolved in the affirmative in Allied
Banking Corporation v. Ordoez.
44
The law applies to goods used by the entrustee in the operation of its
machineries and equipment. The non-payment of the amount covered by the trust receipts or the non-
return of the goods covered by the receipts, if not sold or otherwise not disposed of, violate the
entrustees obligation to pay the amount or to return the goods to the entruster.
In Colinares v. Court of Appeals,
45
the Court declared that there are two possible situations in a trust
receipt transaction. The first is covered by the provision which refers to money received under the
obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second is
covered by the provision which refers to merchandise received under the obligation to return it
(devolvera) to the owner.
46
Thus, failure of the entrustee to turn over the proceeds of the sale of the
goods covered by the trust receipts to the entruster or to return said goods if they were not disposed of in
accordance with the terms of the trust receipt is a crime under P.D. No. 115, without need of proving
intent to defraud. The law punishes dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of the entruster, regardless of whether the latter is the owner or not. A mere failure
to deliver the proceeds of the sale of the goods, if not sold, constitutes a criminal offense that causes
prejudice, not only to another, but more to the public interest.
47

The Court rules that although petitioner signed the trust receipts merely as Senior Vice-President of PBMI
and had no physical possession of the goods, he cannot avoid prosecution for violation of P.D. No. 115.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or
as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered
Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal
Code.1wphi1 If the violation or offense is committed by a corporation, partnership, association or other
juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without prejudice to the civil
liabilities arising from the criminal offense.
The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph 1(b),
Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It may be committed by a
corporation or other juridical entity or by natural persons. However, the penalty for the crime is
imprisonment for the periods provided in said Article 315, which reads:
ARTICLE 315. Swindling (estafa). Any person who shall defraud another by any of the means
mentioned hereinbelow shall be punished by:
1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum
period, if the amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos; and if
such amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed in
its maximum period, adding one year for each additional 10,000 pesos; but the total penalty
which may be imposed shall not exceed twenty years. In such cases, and in connection with the
accessory penalties which may be imposed and for the purpose of the other provisions of this
Code, the penalty shall be termed prision mayor or reclusion temporal, as the case may be;
2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of the
fraud is over 6,000 pesos but does not exceed 12,000 pesos;
26

3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum
period, if such amount is over 200 pesos but does not exceed 6,000 pesos; and
4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200 pesos,
provided that in the four cases mentioned, the fraud be committed by any of the following means; xxx
Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or
other officers or persons responsible for the offense, without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or other officials or employees responsible for the offense.
The rationale is that such officers or employees are vested with the authority and responsibility to devise
means necessary to ensure compliance with the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in the violations of the law.
48

If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or
other officers thereof responsible for the offense shall be charged and penalized for the crime, precisely
because of the nature of the crime and the penalty therefor. A corporation cannot be arrested and
imprisoned; hence, cannot be penalized for a crime punishable by imprisonment.
49
However, a
corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the
statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if found
guilty, may be fined.
50

A crime is the doing of that which the penal code forbids to be done, or omitting to do what it commands.
A necessary part of the definition of every crime is the designation of the author of the crime upon whom
the penalty is to be inflicted. When a criminal statute designates an act of a corporation or a crime and
prescribes punishment therefor, it creates a criminal offense which, otherwise, would not exist and such
can be committed only by the corporation. But when a penal statute does not expressly apply to
corporations, it does not create an offense for which a corporation may be punished. On the other hand, if
the State, by statute, defines a crime that may be committed by a corporation but prescribes the penalty
therefor to be suffered by the officers, directors, or employees of such corporation or other persons
responsible for the offense, only such individuals will suffer such penalty.
51
Corporate officers or
employees, through whose act, default or omission the corporation commits a crime, are themselves
individually guilty of the crime.
52

The principle applies whether or not the crime requires the consciousness of wrongdoing. It applies to
those corporate agents who themselves commit the crime and to those, who, by virtue of their managerial
positions or other similar relation to the corporation, could be deemed responsible for its commission, if by
virtue of their relationship to the corporation, they had the power to prevent the act.
53
Moreover, all parties
active in promoting a crime, whether agents or not, are principals.
54
Whether such officers or employees
are benefited by their delictual acts is not a touchstone of their criminal liability. Benefit is not an operative
fact.
In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the cloak of the
separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a corporate officer
cannot protect himself behind a corporation where he is the actual, present and efficient actor.
55

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the
petitioner.
SO ORDERED.

27

G.R. No. 195580 April 21, 2014
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT,
INC., and MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
D E C I S I O N
VELASCO, JR., J .:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and Mining
Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc.
(McArthur), which seeks to reverse the October 1, 2010 Decision
1
and the February 15, 2011 Resolution
of the Court of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic
corporation organized and existing under Philippine laws, took interest in mining and exploring certain
areas of the province of Palawan. After inquiring with the Department of Environment and Natural
Resources (DENR), it learned that the areas where it wanted to undertake exploration and mining
activities where already covered by Mineral Production Sharing Agreement (MPSA) applications of
petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an
application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau (MGB),
Region IV-B, Office of the Department of Environment and Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in
Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which includes an
area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and EP were then
transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to petitioner
McArthur.
2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia
Louise Mining & Development Corporation (PLMDC) which previously filed an application for an MPSA
with the MGB, Region IV-B, DENR on January 6, 1992. Through the said application, the DENR issued
MPSA-IV-1-12 covering an area of 3.277 hectares in barangays Calategas and San Isidro, Municipality of
Narra, Palawan. Subsequently, PLMDC conveyed, transferred and/or assigned its rights and interests
over the MPSA application in favor of Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-
154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality
of Narra, Province of Palawan. SMMI subsequently conveyed, transferred and assigned its rights and
interest over the said MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate
petitions for the denial of petitioners applications for MPSA designated as AMA-IVB-153, AMA-IVB-154
and MPSA IV-1-12.
In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are
owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont
28

reasoned that since MBMI is a considerable stockholder of petitioners, it was the driving force behind
petitioners filing of the MPSAs over the areas covered by applications since it knows that it can only
participate in mining activities through corporations which are deemed Filipino citizens. Redmont argued
that given that petitioners capital stocks were mostly owned by MBMI, they were likewise disqualified
from engaging in mining activities through MPSAs, which are reserved only for Filipino citizens.
In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of Republic Act
No. (RA) 7942 or the Philippine Mining Act of 1995 which provided:
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in
singular or plural, shall mean:
x x x x
(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a corporation,
partnership, association, or cooperative organized or authorized for the purpose of engaging in mining,
with technical and financial capability to undertake mineral resources development and duly registered in
accordance with law at least sixty per cent (60%) of the capital of which is owned by citizens of the
Philippines: Provided, That a legally organized foreign-owned corporation shall be deemed a qualified
person for purposes of granting an exploration permit, financial or technical assistance agreement or
mineral processing permit.
Additionally, they stated that their nationality as applicants is immaterial because they also applied for
Financial or Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for McArthur,
AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to foreign-owned corporations.
Nevertheless, they claimed that the issue on nationality should not be raised since McArthur, Tesoro and
Narra are in fact Philippine Nationals as 60% of their capital is owned by citizens of the Philippines. They
asserted that though MBMI owns 40% of the shares of PLMC (which owns 5,997 shares of Narra),
3
40%
of the shares of MMC (which owns 5,997 shares of McArthur)
4
and 40% of the shares of SLMC (which, in
turn, owns 5,997 shares of Tesoro),
5
the shares of MBMI will not make it the owner of at least 60% of the
capital stock of each of petitioners. They added that the best tool used in determining the nationality of a
corporation is the "control test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991.
They also claimed that the POA of DENR did not have jurisdiction over the issues in Redmonts petition
since they are not enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no
personality to sue them because it has no pending claim or application over the areas applied for by
petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs. It
held:
[I]t is clearly established that respondents are not qualified applicants to engage in mining activities. On
the other hand, [Redmont] having filed its own applications for an EPA over the areas earlier covered by
the MPSA application of respondents may be considered if and when they are qualified under the law.
The violation of the requirements for the issuance and/or grant of permits over mining areas is clearly
established thus, there is reason to believe that the cancellation and/or revocation of permits already
issued under the premises is in order and open the areas covered to other qualified applicants.
x x x x
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining and
Development, Inc., and Narra Nickel Mining and Development Corp. as, DISQUALIFIED for being
considered as Foreign Corporations. Their Mineral Production Sharing Agreement (MPSA) are hereby x x
x DECLARED NULL AND VOID.
6

29

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a 100%
Canadian company and declared their MPSAs null and void. In the same Resolution, it gave due course
to Redmonts EPAs. Thereafter, on February 7, 2008, the POA issued an Order
7
denying the Motion for
Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of
Appeal
8
and Memorandum of Appeal
9
with the Mines Adjudication Board (MAB) while Narra separately
filed its Notice of Appeal
10
and Memorandum of Appeal.
11

In their respective memorandum, petitioners emphasized that they are qualified persons under the law.
Also, through a letter, they informed the MAB that they had their individual MPSA applications converted
to FTAAs. McArthurs FTAA was denominated as AFTA-IVB-09
12
on May 2007, while Tesoros MPSA
application was converted to AFTA-IVB-08
13
on May 28, 2007, and Narras FTAA was converted to
AFTA-IVB-07
14
on March 30, 2006.
Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint
15
with
the Securities and Exchange Commission (SEC), seeking the revocation of the certificates for registration
of petitioners on the ground that they are foreign-owned or controlled corporations engaged in mining in
violation of Philippine laws. Thereafter, Redmont filed on September 1, 2008 a Manifestation and Motion
to Suspend Proceeding before the MAB praying for the suspension of the proceedings on the appeals
filed by McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City,
Branch 92 (RTC) a Complaint
16
for injunction with application for issuance of a temporary restraining
order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 08-63379. Redmont prayed
for the deferral of the MAB proceedings pending the resolution of the Complaint before the SEC.
But before the RTC can resolve Redmonts Complaint and applications for injunctive reliefs, the MAB
issued an Order on September 10, 2008, finding the appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and SETS
ASIDE the Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B (MIMAROPA)
in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07 February 2008 denying
the Motions for Reconsideration of the Appellants. The Petition filed by Redmont Consolidated Mines
Corporation on 02 January 2007 is hereby ordered DISMISSED.
17

Belatedly, on September 16, 2008, the RTC issued an Order
18
granting Redmonts application for a TRO
and setting the case for hearing the prayer for the issuance of a writ of preliminary injunction on
September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration
19
of the September 10,
2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for Reconsideration
20
on
September 29, 2008.
Before the MAB could resolve Redmonts Motion for Reconsideration and Supplemental Motion for
Reconsideration, Redmont filed before the RTC a Supplemental Complaint
21
in Civil Case No. 08-63379.
On October 6, 2008, the RTC issued an Order
22
granting the issuance of a writ of preliminary injunction
enjoining the MAB from finally disposing of the appeals of petitioners and from resolving Redmonts
Motion for Reconsideration and Supplement Motion for Reconsideration of the MABs September 10,
2008 Resolution.
30

On July 1, 2009, however, the MAB issued a second Order denying Redmonts Motion for
Reconsideration and Supplemental Motion for Reconsideration and resolving the appeals filed by
petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the MAB.
On October 1, 2010, the CA rendered a Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10, 2008
and July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The findings of the Panel
of Arbitrators of the Department of Environment and Natural Resources that respondents McArthur,
Tesoro and Narra are foreign corporations is upheld and, therefore, the rejection of their applications for
Mineral Product Sharing Agreement should be recommended to the Secretary of the DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or Technical
Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA, the matter for its
rejection or approval is left for determination by the Secretary of the DENR and the President of the
Republic of the Philippines.
SO ORDERED.
23

In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by
petitioners.
After a careful review of the records, the CA found that there was doubt as to the nationality of petitioners
when it realized that petitioners had a common major investor, MBMI, a corporation composed of 100%
Canadians. Pursuant to the first sentence of paragraph 7 of Department of Justice (DOJ) Opinion No.
020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the
Constitution and other laws pertaining to the exploitation of natural resources, the CA used the
"grandfather rule" to determine the nationality of petitioners. It provided:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such percentage
shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a
corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say,
50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino
citizens, only 50,000 shares shall be recorded as belonging to aliens.
24
(emphasis supplied)
In determining the nationality of petitioners, the CA looked into their corporate structures and their
corresponding common shareholders. Using the grandfather rule, the CA discovered that MBMI in effect
owned majority of the common stocks of the petitioners as well as at least 60% equity interest of other
majority shareholders of petitioners through joint venture agreements. The CA found that through a "web
of corporate layering, it is clear that one common controlling investor in all mining corporations involved x
x x is MBMI."
25
Thus, it concluded that petitioners McArthur, Tesoro and Narra are also in partnership
with, or privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA
applications suspicious in nature and, as a consequence, it recommended the rejection of petitioners
MPSA applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the POA has
jurisdiction over them and that it also has the power to determine the of nationality of petitioners as a
prerequisite of the Constitution prior the conferring of rights to "co-production, joint venture or production-
31

sharing agreements" of the state to mining rights. However, it also stated that the POAs jurisdiction is
limited only to the resolution of the dispute and not on the approval or rejection of the MPSAs. It stipulated
that only the Secretary of the DENR is vested with the power to approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which considered
petitioners McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA determined that the
POAs declaration that the MPSAs of McArthur, Tesoro and Narra are void is highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a petition
dated May 7, 2010 seeking the cancellation of petitioners FTAAs. The OP rendered a Decision
26
on April
6, 2011, wherein it canceled and revoked petitioners FTAAs for violating and circumventing the
"Constitution x x x[,] the Small Scale Mining Law and Environmental Compliance Certificate as well as
Sections 3 and 8 of the Foreign Investment Act and E.O. 584."
27
The OP, in affirming the cancellation of
the issued FTAAs, agreed with Redmont stating that petitioners committed violations against the
abovementioned laws and failed to submit evidence to negate them. The Decision further quoted the
December 14, 2007 Order of the POA focusing on the alleged misrepresentation and claims made by
petitioners of being domestic or Filipino corporations and the admitted continued mining operation of
PMDC using their locally secured Small Scale Mining Permit inside the area earlier applied for an MPSA
application which was eventually transferred to Narra. It also agreed with the POAs estimation that the
filing of the FTAA applications by petitioners is a clear admission that they are "not capable of conducting
a large scale mining operation and that they need the financial and technical assistance of a foreign entity
in their operation, that is why they sought the participation of MBMI Resources, Inc."
28
The Decision
further quoted:
The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate
the violations and lack of qualification of the respondent corporations to engage in mining. The filing of the
FTAA application conversion which is allowed foreign corporation of the earlier MPSA is an admission
that indeed the respondent is not Filipino but rather of foreign nationality who is disqualified under the
laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in their head office in
Canada suggest that they are conducting operation only through their local counterparts.
29

The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution
30
dated July
6, 2011. Petitioners then filed a Petition for Review on Certiorari of the OPs Decision and Resolution with
the CA, docketed as CA-G.R. SP No. 120409. In the CA Decision dated February 29, 2012, the CA
affirmed the Decision and Resolution of the OP. Thereafter, petitioners appealed the same CA decision to
this Court which is now pending with a different division.
Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put forth
the following errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that the
subject matter of the controversy, the MPSA Applications, have already been converted into
FTAA applications and that the same have already been granted.
II.
The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering
that the Panel of Arbitrators has no jurisdiction to determine the nationality of Narra, Tesoro and
McArthur.
III.
32

The Court of Appeals erred when it did not dismiss the case on account of Redmonts willful
forum shopping.
IV.
The Court of Appeals ruling that Narra, Tesoro and McArthur are foreign corporations based on
the "Grandfather Rule" is contrary to law, particularly the express mandate of the Foreign
Investments Act of 1991, as amended, and the FIA Rules.
V.
The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.
VI.
The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into
FTAA Applications were of "suspicious nature" as the same is based on mere conjectures and
surmises without any shred of evidence to show the same.
31

We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.
Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable controversy
by virtue of supervening events, so that a declaration thereon would be of no practical use or
value."
32
Thus, the courts "generally decline jurisdiction over the case or dismiss it on the ground of
mootness."
33

The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue of
"mootness" will not deter the courts from trying a case when there is a valid reason to do so. In David v.
Macapagal-Arroyo (David), the Court provided four instances where courts can decide an otherwise moot
case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and paramount public interest is involved;
3.) When constitutional issue raised requires formulation of controlling principles to guide the
bench, the bar, and the public; and
4.) The case is capable of repetition yet evading review.
34

All of the exceptions stated above are present in the instant case. We of this Court note that a grave
violation of the Constitution, specifically Section 2 of Article XII, is being committed by a foreign
corporation right under our countrys nose through a myriad of corporate layering under different,
allegedly, Filipino corporations. The intricate corporate layering utilized by the Canadian company, MBMI,
is of exceptional character and involves paramount public interest since it undeniably affects the
exploitation of our Countrys natural resources. The corresponding actions of petitioners during the
lifetime and existence of the instant case raise questions as what principle is to be applied to cases with
similar issues. No definite ruling on such principle has been pronounced by the Court; hence, the
33

disposition of the issues or errors in the instant case will serve as a guide "to the bench, the bar and the
public."
35
Finally, the instant case is capable of repetition yet evading review, since the Canadian
company, MBMI, can keep on utilizing dummy Filipino corporations through various schemes of corporate
layering and conversion of applications to skirt the constitutional prohibition against foreign mining in
Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error presented by petitioners since both
involve the conversion of MPSA applications to FTAA applications. Petitioners propound that the CA
erred in ruling against them since the questioned MPSA applications were already converted into FTAA
applications; thus, the issue on the prohibition relating to MPSA applications of foreign mining
corporations is academic. Also, petitioners would want us to correct the CAs finding which deemed the
aforementioned conversions of applications as suspicious in nature, since it is based on mere conjectures
and surmises and not supported with evidence.
We disagree.
The CAs analysis of the actions of petitioners after the case was filed against them by respondent is on
point. The changing of applications by petitioners from one type to another just because a case was filed
against them, in truth, would raise not a few sceptics eyebrows. What is the reason for such conversion?
Did the said conversion not stem from the case challenging their citizenship and to have the case
dismissed against them for being "moot"? It is quite obvious that it is petitioners strategy to have the case
dismissed against them for being "moot."
Consider the history of this case and how petitioners responded to every action done by the court or
appropriate government agency: on January 2, 2007, Redmont filed three separate petitions for denial of
the MPSA applications of petitioners before the POA. On June 15, 2007, petitioners filed a conversion of
their MPSA applications to FTAAs. The POA, in its December 14, 2007 Resolution, observed this suspect
change of applications while the case was pending before it and held:
The filing of the Financial or Technical Assistance Agreement application is a clear admission that the
respondents are not capable of conducting a large scale mining operation and that they need the financial
and technical assistance of a foreign entity in their operation that is why they sought the participation of
MBMI Resources, Inc. The participation of MBMI in the corporation only proves the fact that it is the
Canadian company that will provide the finances and the resources to operate the mining areas for the
greater benefit and interest of the same and not the Filipino stockholders who only have a less substantial
financial stake in the corporation.
x x x x
x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage in mining.
The filing of the FTAA application conversion which is allowed foreign corporation of the earlier MPSA is
an admission that indeed the respondent is not Filipino but rather of foreign nationality who is disqualified
under the laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in their head
office in Canada suggest that they are conducting operation only through their local counterparts.
36

On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and
setting aside the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision, the CA
upheld the findings of the POA of the DENR that the herein petitioners are in fact foreign corporations
thus a recommendation of the rejection of their MPSA applications were recommended to the Secretary
of the DENR. With respect to the FTAA applications or conversion of the MPSA applications to FTAAs,
34

the CA deferred the matter for the determination of the Secretary of the DENR and the President of the
Republic of the Philippines.
37

In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of the
petition asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed and issued in
their favor FTAA No. 05-2010-IVB, which rendered the petition moot and academic. However, the CA, in
a Resolution dated February 15, 2011 denied their motion for being a mere "rehash of their claims and
defenses."
38
Standing firm on its Decision, the CA affirmed the ruling that petitioners are, in fact, foreign
corporations. On April 5, 2011, petitioners elevated the case to us via a Petition for Review on Certiorari
under Rule 45, questioning the Decision of the CA. Interestingly, the OP rendered a Decision dated April
6, 2011, a day after this petition for review was filed, cancelling and revoking the FTAAs, quoting the
Order of the POA and stating that petitioners are foreign corporations since they needed the financial
strength of MBMI, Inc. in order to conduct large scale mining operations. The OP Decision also based the
cancellation on the misrepresentation of facts and the violation of the "Small Scale Mining Law and
Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O.
584."
39
On July 6, 2011, the OP issued a Resolution, denying the Motion for Reconsideration filed by the
petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of the
OPs Decision and Resolution. In their Reply, petitioners chose to ignore the OP Decision and continued
to reuse their old arguments claiming that they were granted FTAAs and, thus, the case was moot.
Petitioners filed a Manifestation and Submission dated October 19, 2012,
40
wherein they asserted that the
present petition is moot since, in a remarkable turn of events, MBMI was able to sell/assign all its
shares/interest in the "holding companies" to DMCI Mining Corporation (DMCI), a Filipino corporation
and, in effect, making their respective corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have this case dismissed for being "moot."
Their final act, wherein MBMI was able to allegedly sell/assign all its shares and interest in the petitioner
"holding companies" to DMCI, only proves that they were in fact not Filipino corporations from the start.
The recent divesting of interest by MBMI will not change the stand of this Court with respect to the
nationality of petitioners prior the suspicious change in their corporate structures. The new documents
filed by petitioners are factual evidence that this Court has no power to verify.
The only thing clear and proved in this Court is the fact that the OP declared that petitioner corporations
have violated several mining laws and made misrepresentations and falsehood in their applications for
FTAA which lead to the revocation of the said FTAAs, demonstrating that petitioners are not beyond
going against or around the law using shifty actions and strategies. Thus, in this instance, we can say that
their claim of mootness is moot in itself because their defense of conversion of MPSAs to FTAAs has
been discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners nationality, whether Filipino or foreign.
In their previous petitions, they had been adamant in insisting that they were Filipino corporations, until
they submitted their Manifestation and Submission dated October 19, 2012 where they stated the alleged
change of corporate ownership to reflect their Filipino ownership. Thus, there is a need to determine the
nationality of petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test
and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC
Rules which implemented the requirement of the Constitution and other laws pertaining to the controlling
interests in enterprises engaged in the exploitation of natural resources owned by Filipino citizens,
provides:
35

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such percentage
shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a
corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say,
50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino
citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be
recorded as belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of
Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the second part of
the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be
counted as Philippine nationality," pertains to the stricter, more stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the application of the
"control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments Act
(FIA), rather than using the stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA
provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by the citizens of the Philippines; a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is
wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue
to the benefit of Philippine nationals: Provided, That were a corporation and its non-Filipino stockholders
own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent
(60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned
and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of
Directors, in order that the corporation shall be considered a Philippine national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition
of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further claim that the
grandfather rule "has been abandoned and is no longer the applicable rule."
41
They also opined that the
last portion of Sec. 3 of the FIA admits the application of a "corporate layering" scheme of corporations.
Petitioners claim that the clear and unambiguous wordings of the statute preclude the court from
construing it and prevent the courts use of discretion in applying the law. They said that the plain, literal
meaning of the statute meant the application of the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners that the
grandfather rule has already been abandoned must be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces
of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are
owned by the State. With the exception of agricultural lands, all other natural resources shall not be
alienated. The exploration, development, and utilization of natural resources shall be under the full control
and supervision of the State. The State may directly undertake such activities, or it may enter into co-
36

production, joint venture or production-sharing agreements with Filipino citizens, or corporations or
associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may
be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under
such terms and conditions as may be provided by law.
x x x x
The President may enter into agreements with Foreign-owned corporations involving either technical or
financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and
other mineral oils according to the general terms and conditions provided by law, based on real
contributions to the economic growth and general welfare of the country. In such agreements, the State
shall promote the development and use of local scientific and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements
for the exploration, development, and utilization of natural resources with entities who are deemed Filipino
due to 60 percent ownership of capital is pertinent to this case, since the issues are centered on the
utilization of our countrys natural resources or specifically, mining. Thus, there is a need to ascertain the
nationality of petitioners since, as the Constitution so provides, such agreements are only allowed
corporations or associations "at least 60 percent of such capital is owned by such citizens." The
deliberations in the Records of the 1986 Constitutional Commission shed light on how a citizenship of a
corporation will be determined:
Mr. BENNAGEN: Did I hear right that the Chairmans interpretation of an independent national economy
is freedom from undue foreign control? What is the meaning of undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and the
welfare of the Filipino in the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply freedom
from foreign control? I think that is the meaning of independence, because as phrased, it still allows for
foreign control.
MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the 60/40
possibility in the cultivation of natural resources, 40 percent involves some control; not total control, but
some control.
MR. BENNAGEN: In any case, I think in due time we will propose some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
x x x x
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity;
namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
37

MR. NOLLEDO: In teaching law, we are always faced with the question: Where do we base the equity
requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital
stock of a corporation? Will the Committee please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP Law
Center who provided us with a draft. The phrase that is contained here which we adopted from the UP
draft is 60 percent of the voting stock.
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with 60-40
percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
MR. VILLEGAS: Yes.
42
(emphasis supplied)
It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases
where corporate layering is present.
Elementary in statutory construction is when there is conflict between the Constitution and a statute, the
Constitution will prevail. In this instance, specifically pertaining to the provisions under Art. XII of the
Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no place of application. As
decreed by the honorable framers of our Constitution, the grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation
for purposes, among others, of determining compliance with nationality requirements (the Investee
Corporation). Such manner of computation is necessary since the shares in the Investee Corporation
may be owned both by individual stockholders (Investing Individuals) and by corporations and
partnerships (Investing Corporation). The said rules thus provide for the determination of nationality
depending on the ownership of the Investee Corporation and, in certain instances, the Investing
Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee
Corporation. The first case is the liberal rule, later coined by the SEC as the Control Test in its 30 May
1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states,
(s)hares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality. Under the liberal Control Test, there is no
need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing
Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said
Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the
38

corporation or partnership is less than 60%, only the number of shares corresponding to such percentage
shall be counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule Proper, the
combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e.,
"grandfathered") to determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing
Corporation and added to the shares directly owned in the Investee Corporation x x x.
x x x x
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of
the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases
where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino
stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or
the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in
doubt, the Grandfather Rule will not apply. (emphasis supplied)
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of
the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails and persists in the
corporate ownership of petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino equity
ownership of petitioners Narra, McArthur and Tesoro, since their common investor, the 100% Canadian
corporationMBMI, funded them. However, petitioners also claim that there is "doubt" only when the
stockholdings of Filipinos are less than 60%.
43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to
convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made an example
of an instance where "doubt" as to the ownership of the corporation exists. It would be ludicrous to limit
the application of the said word only to the instances where the stockholdings of non-Filipino stockholders
are more than 40% of the total stockholdings in a corporation. The corporations interested in
circumventing our laws would clearly strive to have "60% Filipino Ownership" at face value. It would be
senseless for these applying corporations to state in their respective articles of incorporation that they
have less than 60% Filipino stockholders since the applications will be denied instantly. Thus, various
corporate schemes and layerings are utilized to circumvent the application of the Constitution.
Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to
circumvent the law, creating a cloud of doubt in the Courts mind. To determine, therefore, the actual
participation, direct or indirect, of MBMI, the grandfather rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI in each of petitioners corporate
structure, they have to be "grandfathered."
As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its
application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided into
10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed to by the following:
44

Name Nationality Number of
Shares
Amount
Subscribed
Amount Paid
Madridejos Mining
Corporation
Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
39

Inc.
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B.
Esguerra
Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
(emphasis supplied)
Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and
composition as McArthur. In fact, it would seem that MBMI is also a major investor and "controls"
45
MBMI
and also, similar nominal shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L.
Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):
Madridejos Mining Corporation
Name Nationality Number of
Shares
Amount
Subscribed
Amount Paid
Olympic Mines &
Development
Corp.
Filipino 6,663 PhP 6,663,000.00 PhP 0
MBMI
Resources,
Inc.
Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B.
Esguerra
Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Emmanuel G.
Hernando
Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T.
Mason
American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00
(emphasis supplied)
40

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to
the number of shares they subscribed to in the corporation, which is quite absurd since Olympic is the
major stockholder in MMC. MBMIs 2006 Annual Report sheds light on why Olympic failed to pay any
amount with respect to the number of shares it subscribed to. It states that Olympic entered into joint
venture agreements with several Philippine companies, wherein it holds directly and indirectly a 60%
effective equity interest in the Olympic Properties.
46
Quoting the said Annual report:
On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic")
entered into a series of agreements including a Property Purchase and Development Agreement (the
Transaction Documents) with respect to three nickel laterite properties in Palawan, Philippines (the
"Olympic Properties"). The Transaction Documents effectively establish a joint venture between the
Company and Olympic for purposes of developing the Olympic Properties. The Company holds directly
and indirectly an initial 60% interest in the joint venture. Under certain circumstances and upon achieving
certain milestones, the Company may earn up to a 100% interest, subject to a 2.5% net revenue
royalty.
47
(emphasis supplied)
Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering
was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or more
equity interest in McArthur, making the latter a foreign corporation.
Tesoro Mining and Development, Inc.
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP
10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share, as demonstrated
below:
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]
Name Nationality Number of
Shares
Amount
Subscribed
Amount Paid
Sara Marie
Mining, Inc.
Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
MBMI
Resources, Inc.
Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B.
Esguerra
Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A.
Agcaoili
Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
41

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
(emphasis supplied)
Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the
corporate structure of petitioner McArthur, down to the last centavo. All the other shareholders are the
same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number
of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same. Delving deeper, we scrutinize
SMMIs corporate structure:
Sara Marie Mining, Inc.
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]
Name Nationality Number of
Shares
Amount
Subscribed
Amount Paid
Olympic Mines &
Development
Corp.
Filipino 6,663 PhP 6,663,000.00 PhP 0
MBMI Resources,
Inc.
Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B.
Esguerra
Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Emmanuel G.
Hernando
Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00
(emphasis supplied)
42

After subsequently studying SMMIs corporate structure, it is not farfetched for us to spot the glaring
similarity between SMMI and MMCs corporate structure. Again, the presence of identical stockholders,
namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell.
The figures under the headings "Nationality," "Number of Shares," "Amount Subscribed," and "Amount
Paid" are exactly the same except for the amount paid by MBMI which now reflects the amount of two
million seven hundred ninety four thousand pesos (PhP 2,794,000). Oddly, the total value of the amount
paid is two million eight hundred nine thousand nine hundred pesos (PhP 2,809,900).
Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympics participation in SMMIs
corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in
Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in
the exploitation, utilization and development of our natural resources.
Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDCs MPSA
application, whose corporate structures arrangement is similar to that of the first two petitioners
discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is divided into ten
thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share, shown as follows:
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]
Name Nationality Number of
Shares
Amount
Subscribed
Amount Paid
Patricia Louise
Mining &
Development
Corp.
Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00
MBMI
Resources, Inc.
Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00
Higinio C.
Mendoza, Jr.
Filipino 1 PhP 1,000.00 PhP 1,000.00
Henry E.
Fernandez
Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A.
Agcaoili
Filipino 1 PhP 1,000.00 PhP 1,000.00
Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00
43

Bocalan
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Robert L.
McCurdy
American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00
(emphasis supplied)
Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this
corporate structure.
Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine PLMDCs corporate structure:
Name Nationality Number of
Shares
Amount
Subscribed
Amount Paid
Palawan Alpha South Resources
Development Corporation
Filipino 6,596 PhP
6,596,000.00
PhP 0
MBMI Resources,
Inc.
Canadian 3,396 PhP
3,396,000.00
PhP
2,796,000.00
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP
10,000,000.00
PhP
2,708,174.60
(emphasis
supplied)
Yet again, the usual players in petitioners corporate structures are present. Similarly, the amount of
money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources and
Development Corp. (PASRDC), is zero.
44

Studying MBMIs Summary of Significant Accounting Policies dated October 31, 2005 explains the reason
behind the intricate corporate layering that MBMI immersed itself in:
JOINT VENTURES The Companys ownership interests in various mining ventures engaged in the
acquisition, exploration and development of mineral properties in the Philippines is described as follows:
(a) Olympic Group
The Philippine companies holding the Olympic Property, and the ownership and interests therein, are as
follows:
Olympic- Philippines (the "Olympic Group")
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an effective
equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders agreement, the Company
exercises joint control over the companies in the Olympic Group.
(b) Alpha Group
The Philippine companies holding the Alpha Property, and the ownership interests therein, are as follows:
Alpha- Philippines (the "Alpha Group")
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and indirectly an effective equity interest in
the Alpha Property of 60.4%. Pursuant to a shareholders agreement, the Company exercises joint control
over the companies in the Alpha Group.
48
(emphasis supplied)
Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra
are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests.
Such conclusion is derived from grandfathering petitioners corporate owners, namely: MMI, SMMI and
PLMDC. Going further and adding to the picture, MBMIs Summary of Significant Accounting Policies
statement regarding the "joint venture" agreements that it entered into with the "Olympic" and "Alpha"
groupsinvolves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the "layered"
corporations boils down to MBMI, Olympic or corporations under the "Alpha" group wherein MBMI has
joint venture agreements with, practically exercising majority control over the corporations mentioned. In
effect, whether looking at the capital structure or the underlying relationships between and among the
corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60% or more of
their capital stocks or equity interests are owned by MBMI.
Application of the res inter alios acta rule
Petitioners question the CAs use of the exception of the res inter alios acta or the "admission by co-
partner or agent" rule and "admission by privies" under the Rules of Court in the instant case, by pointing
45

out that statements made by MBMI should not be admitted in this case since it is not a party to the case
and that it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party within
the scope of his authority and during the existence of the partnership or agency, may be given in
evidence against such party after the partnership or agency is shown by evidence other than such act or
declaration itself. The same rule applies to the act or declaration of a joint owner, joint debtor, or other
person jointly interested with the party.
Sec. 31. Admission by privies.- Where one derives title to property from another, the act, declaration, or
omission of the latter, while holding the title, in relation to the property, is evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership relation
must be shown, and that proof of the fact must be made by evidence other than the admission
itself."
49
Thus, petitioners assert that the CA erred in finding that a partnership relationship exists between
them and MBMI because, in fact, no such partnership exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by entering
into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They challenged the
conclusion of the CA which pertains to the close characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that before this particular
partnership can be formed, it should have been formally reduced into writing since the capital involved is
more than three thousand pesos (PhP 3,000). Being that there is no evidence of written agreement to
form a partnership between petitioners and MBMI, no partnership was created.
We disagree.
A partnership is defined as two or more persons who bind themselves to contribute money, property, or
industry to a common fund with the intention of dividing the profits among themselves.
50
On the other
hand, joint ventures have been deemed to be "akin" to partnerships since it is difficult to distinguish
between joint ventures and partnerships. Thus:
[T]he relations of the parties to a joint venture and the nature of their association are so similar and
closely akin to a partnership that it is ordinarily held that their rights, duties, and liabilities are to be tested
by rules which are closely analogous to and substantially the same, if not exactly the same, as those
which govern partnership. In fact, it has been said that the trend in the law has been to blur the
distinctions between a partnership and a joint venture, very little law being found applicable to one that
does not apply to the other.
51

Though some claim that partnerships and joint ventures are totally different animals, there are very few
rules that differentiate one from the other; thus, joint ventures are deemed "akin" or similar to a
partnership. In fact, in joint venture agreements, rules and legal incidents governing partnerships are
applied.
52

Accordingly, culled from the incidents and records of this case, it can be assumed that the relationships
entered between and among petitioners and MBMI are no simple "joint venture agreements." As a rule,
corporations are prohibited from entering into partnership agreements; consequently, corporations enter
46

into joint venture agreements with other corporations or partnerships for certain transactions in order to
form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was
executed to circumvent the legal prohibition against corporations entering into partnerships, then the
relationship created should be deemed as "partnerships," and the laws on partnership should be applied.
Thus, a joint venture agreement between and among corporations may be seen as similar to partnerships
since the elements of partnership are present.
Considering that the relationships found between petitioners and MBMI are considered to be
partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.
Panel of Arbitrators jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The POA
has jurisdiction to settle disputes over rights to mining areas which definitely involve the petitions filed by
Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by filing its petition against
petitioners, is asserting the right of Filipinos over mining areas in the Philippines against alleged foreign-
owned mining corporations. Such claim constitutes a "dispute" found in Sec. 77 of RA 7942:
Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall
have exclusive and original jurisdiction to hear and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:
53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or opposition
to an application for mineral agreement. The POA therefore has the jurisdiction to resolve any adverse
claim, protest, or opposition to a pending application for a mineral agreement filed with the concerned
Regional Office of the MGB. This is clear from Secs. 38 and 41 of the DENR AO 96-40, which provide:
Sec. 38.
x x x x
Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the
authorized officer(s) of the concerned office(s) shall issue a certification(s) that the
publication/posting/radio announcement have been complied with. Any adverse claim, protest, opposition
shall be filed directly, within thirty (30) calendar days from the last date of publication/posting/radio
announcement, with the concerned Regional Office or through any concerned PENRO or CENRO for
filing in the concerned Regional Office for purposes of its resolution by the Panel of Arbitrators pursuant
to the provisions of this Act and these implementing rules and regulations. Upon final resolution of any
adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a certification to that
effect within five (5) working days from the date of finality of resolution thereof. Where there is no adverse
claim, protest or opposition, the Panel of Arbitrators shall likewise issue a Certification to that effect within
five working days therefrom.
x x x x
47

No Mineral Agreement shall be approved unless the requirements under this Section are fully complied
with and any adverse claim/protest/opposition is finally resolved by the Panel of Arbitrators.
Sec. 41.
x x x x
Within fifteen (15) working days form the receipt of the Certification issued by the Panel of Arbitrators as
provided in Section 38 hereof, the concerned Regional Director shall initially evaluate the Mineral
Agreement applications in areas outside Mineral reservations. He/She shall thereafter endorse his/her
findings to the Bureau for further evaluation by the Director within fifteen (15) working days from receipt of
forwarded documents. Thereafter, the Director shall endorse the same to the secretary for
consideration/approval within fifteen working days from receipt of such endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15) working
days from receipt of the Certification issued by the Panel of Arbitrators as provided for in Section 38
hereof, the same shall be evaluated and endorsed by the Director to the Secretary for
consideration/approval within fifteen days from receipt of such endorsement. (emphasis supplied)
It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas"
under Sec. 77(a) specifically refer only to those disputes relative to the applications for a mineral
agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is
further elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28,
43 and 57 above, any adverse claim, protest or opposition specified in said sections may also be filed
directly with the Panel of Arbitrators within the concerned periods for filing such claim, protest or
opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-
x x x x
The Regional Director or concerned Regional Director shall also cause the posting of the application on
the bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and
municipality(ies), copy furnished the barangays where the proposed contract area is located once a week
for two (2) consecutive weeks in a language generally understood in the locality. After forty-five (45) days
from the last date of publication/posting has been made and no adverse claim, protest or opposition was
filed within the said forty-five (45) days, the concerned offices shall issue a certification that
publication/posting has been made and that no adverse claim, protest or opposition of whatever nature
has been filed. On the other hand, if there be any adverse claim, protest or opposition, the same shall be
filed within forty-five (45) days from the last date of publication/posting, with the Regional Offices
concerned, or through the Departments Community Environment and Natural Resources Officers
(CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional
Office for resolution of the Panel of Arbitrators. However previously published valid and subsisting mining
claims are exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully complied
with and any opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of
Arbitrators. (Emphasis supplied.)
48

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas"
under Sec. 77(a) specifically refer only to those disputes relative to the applications for a mineral
agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is
further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28,
43 and 57 above, any adverse claim, protest or opposition specified in said sections may also be filed
directly with the Panel of Arbitrators within the concerned periods for filing such claim, protest or
opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.-
x x x x
The Regional Director or concerned Regional Director shall also cause the posting of the application on
the bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and
municipality(ies), copy furnished the barangays where the proposed contract area is located once a week
for two (2) consecutive weeks in a language generally understood in the locality. After forty-five (45) days
from the last date of publication/posting has been made and no adverse claim, protest or opposition was
filed within the said forty-five (45) days, the concerned offices shall issue a certification that
publication/posting has been made and that no adverse claim, protest or opposition of whatever nature
has been filed. On the other hand, if there be any adverse claim, protest or opposition, the same shall be
filed within forty-five (45) days from the last date of publication/posting, with the Regional offices
concerned, or through the Departments Community Environment and Natural Resources Officers
(CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional
Office for resolution of the Panel of Arbitrators. However, previously published valid and subsisting mining
claims are exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully complied
with and any opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of
Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the POA to resolve any adverse claim, opposition,
or protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to adverse claims,
conflicts and oppositions relating to applications for the grant of mineral rights.
POAs jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions and it
has no authority to approve or reject said applications. Such power is vested in the DENR Secretary upon
recommendation of the MGB Director. Clearly, POAs jurisdiction over "disputes involving rights to mining
areas" has nothing to do with the cancellation of existing mineral agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve disputes
over MPSA applications subject of Redmonts petitions. However, said jurisdiction does not include either
the approval or rejection of the MPSA applications, which is vested only upon the Secretary of the DENR.
Thus, the finding of the POA, with respect to the rejection of petitioners MPSA applications being that
they are foreign corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the POA,
that has jurisdiction over the MPSA applications of petitioners.
This postulation is incorrect.
49

It is basic that the jurisdiction of the court is determined by the statute in force at the time of the
commencement of the action.
54

Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.Regional Trial Courts shall exercise exclusive original jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.
x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the
panel shall have exclusive and original jurisdiction to hear and decide the following:
(c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights to
mining areas. One such dispute is an MPSA application to which an adverse claim, protest or opposition
is filed by another interested applicant.1wphi1 In the case at bar, the dispute arose or originated from
MPSA applications where petitioners are asserting their rights to mining areas subject of their respective
MPSA applications. Since respondent filed 3 separate petitions for the denial of said applications, then a
controversy has developed between the parties and it is POAs jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the DENR
Regional Office or any concerned DENRE or CENRO are MPSA applications. Thus POA has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary
jurisdiction. Euro-med Laboratories v. Province of Batangas
55
elucidates:
The doctrine of primary jurisdiction holds that if a case is such that its determination requires the
expertise, specialized training and knowledge of an administrative body, relief must first be obtained in an
administrative proceeding before resort to the courts is had even if the matter may well be within their
proper jurisdiction.
Whatever may be the decision of the POA will eventually reach the court system via a resort to the CA
and to this Court as a last recourse.
Selling of MBMIs shares to DMCI
As stated before, petitioners Manifestation and Submission dated October 19, 2012 would want us to
declare the instant petition moot and academic due to the transfer and conveyance of all the
shareholdings and interests of MBMI to DMCI, a corporation duly organized and existing under Philippine
laws and is at least 60% Philippine-owned.
56
Petitioners reasoned that they now cannot be considered as
foreign-owned; the transfer of their shares supposedly cured the "defect" of their previous nationality.
They claimed that their current FTAA contract with the State should stand since "even wholly-owned
foreign corporations can enter into an FTAA with the State."
57
Petitioners stress that there should no
50

longer be any issue left as regards their qualification to enter into FTAA contracts since they are qualified
to engage in mining activities in the Philippines. Thus, whether the "grandfather rule" or the "control test"
is used, the nationalities of petitioners cannot be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said fact
should be disregarded. The manifestation can no longer be considered by us since it is being tackled in
G.R. No. 202877 pending before this Court.1wphi1 Thus, the question of whether petitioners, allegedly a
Philippine-owned corporation due to the sale of MBMI's shareholdings to DMCI, are allowed to enter into
FTAAs with the State is a non-issue in this case.
In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the
exploration, development and utilization of the natural resources of the Philippines. When in the mind of
the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40
Filipino-equity ownership in the corporation, then it may apply the "grandfather rule."
WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals
Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby AFFIRMED.
SO ORDERED.

51

CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR RELATIONS COMMISSION,
(First Division); and Norberto Marabe, Rodolfo Raquel, Cristobal Riego, Manuel Gillego,
Palcronio Giducos, Pedro Aboigar, Norberto Comendador, Rogello Salut, Emilio Garcia,
Jr., Mariano Rio, Paulina Basea, Aifredo Albera, Paquito Salut, Domingo Guarino, Romeo
Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand
Torres, Felipe Basilan, and Ruben Robalos, respondents.
D E C I S I O N
HERMOSISIMA, JR., J .:
The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just
but the alter ego of a person or of another corporation. Where badges of fraud exist; where public
convenience is defeated; where a wrong is sought to be justified thereby, the corporate fiction or the
notion of legal entity should come to naught. The law in these instances will regard the corporation as a
mere association of persons and, in case of two corporations, merge them into one.
Thus, where a sister corporation is used as a shield to evade a corporations subsidiary liability for
damages, the corporation may not be heard to say that it has a personality separate and distinct from the
other corporation. The piercing of the corporate veil comes into play.
This special civil action ostensibly raises the question of whether the National Labor Relations
Commission committed grave abuse of discretion when it issued a break-open order to the sheriff to be
enforced against personal property found in the premises of petitioners sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road,
Valenzuela, Metro Manila, is engaged in the construction business. Private respondents were employed
by said company as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual written notices of termination of
employment by petitioner, effective on November 30, 1981. It was stated in the individual notices that
their contracts of employment had expired and the project in which they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of the termination of private
respondents employment, the project in which they were hired had not yet been finished and
completed. Petitioner had to engage the services of sub-contractors whose workers performed the
functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-
payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment
1
ordering petitioner to reinstate private
respondents and to pay them back wages equivalent to one year or three hundred working days.
On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for
reconsideration filed by petitioner on the ground that the said decision had already become final and
executory.
2

On October 16, 1986, the NLRC Research and Information Department made the finding that private
respondents backwages amounted to P199,800.00.
3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the
Decision, dated December 19, 1984. The writ was partially satisfied through garnishment of sums from
petitioners debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of
P81,385.34. Said amount was turned over to the cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff
to collect from herein petitioner the sum of P117,414.76, representing the balance of the judgment award,
and to reinstate private respondents to their former positions.
52

On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution
on petitioner through the security guard on duty but the service was refused on the ground that petitioner
no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second
alias writ of execution.
The said writ had not been enforced by the special sheriff because, as stated in his progress report,
dated November 2, 1989:
1. All the employees inside petitioners premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed
that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the properties he had levied
upon.
4

The said special sheriff recommended that a break-open order be issued to enable him to enter
petitioners premises so that he could proceed with the public auction sale of the aforesaid personal
properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter
alleging that the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc.
(HPPI) of which he is the Vice-President.
On November 23, 1989, private respondents filed a Motion for Issuance of a Break-Open Order,
alleging that HPPI and petitioner corporation were owned by the same incorporator! stockholders. They
also alleged that petitioner temporarily suspended its business operations in order to evade its legal
obligations to them and that private respondents were willing to post an indemnity bond to answer for any
damages which petitioner and HPPI may suffer because of the issuance of the break-open order.
In support of their claim against HPPI, private respondents presented duly certified copies of the
General Informations Sheet, dated May 15, 1987, submitted by petitioner to the Securities and Exchange
Commission (SEC) and the General Information Sheet, dated May 15, 1987, submitted by HPPI to the
Securities and Exchange Commission.
The General Information Sheet submitted by the petitioner1 revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
HPPI P6,999,500.00
Antonio W. Lim 2,900,000.00
Dennis S. Cuyegkeng 300.00
Elisa C. Lim 100,000.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
53

2. Board of Directors
Antonio W. Lim Chairman
Dennis S. Cuyegkeng Member
Elisa C. Lim Member
Teodulo R. Dino Member
Virgilio O. Casino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa 0. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road
Valenzuela, Metro Manila.
5

On the other hand, the General Information Sheet of HPPI revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
Antonio W. Lim P400,000.00
Elisa C. Lim 57,700.00
AWL Trading 455,000.00
Dennis S. Cuyegkeng 40,100.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
54

Elisa C. Lim Member
Dennis S. Cuyegkeng Member
Virgilio O. Casino Member
Teodulo R. Dino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa O. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.
6

On February 1, 1990, HPPI filed an Opposition to private respondents motion for issuance of a
break-open order, contending that HPPI is a corporation which is separate and distinct from petitioner.
HPPI also alleged that the two corporations are engaged in two different kinds of businesses, i.e., HPPI is
a manufacturing firm while petitioner was then engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents motion for
break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of
the Labor Arbiter, issued a break-open order and directed private respondents to file a bond. Thereafter,
it directed the sheriff to proceed with the auction sale of the properties already levied upon. It dismissed
the third-party claim for lack of merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution,
dated December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution
of its decision despite a third-party claim on the levied property. Petitioner further contends, that the
doctrine of piercing the corporate veil should not have been applied, in this case, in the absence of any
showing that it created HPPI in order to evade its liability to private respondents. It also contends that
HPPI is engaged in the manufacture and sale of steel, concrete and iron pipes, a business which is
distinct and separate from petitioners construction business. Hence, it is of no consequence that
petitioner and HPPI shared the same premises, the same President and the same set of officers and
subscribers.
7

We find petitioners contention to be unmeritorious.
It is a fundamental principle of corporation law that a corporation is an entity separate and distinct
from its stockholders and from other corporations to which it may be connected.
8
But, this separate and
distinct personality of a corporation is merely a fiction created by law for convenience and to promote
justice.
9
So, when the notion of separate juridical personality is used to defeat public convenience, justify
wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws,
10
this separate
55

personality of the corporation may be disregarded or the veil of corporate fiction pierced.
11
This is true
likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another
corporation.
12

The conditions under which the juridical entity may be disregarded vary according to the peculiar
facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly,
there are some probative factors of identity that will justify the application of the doctrine of piercing the
corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.
13

The SEC en banc explained the instrumentality rule which the courts have applied in disregarding
the separate juridical personality of corporations as follows:
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a
mere instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may
be disregarded. The control necessary to invoke the rule is not majority or even complete stock control
but such domination of finances, policies and practices that the controlled corporation has, so to speak,
no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind
that the control must be shown to have been exercised at the time the acts complained of took
place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for
which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of finances but
of policy and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained
of.
The absence of any one of these elements prevents piercing the corporate veil. in applying the
instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendants relationship to that operation.
14

Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a
sham or a subterfuge is purely one of fact.
15

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations
on April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission on May 15,
1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand,
56

HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating that its
office address is at 355 Maysan Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casino as the corporate secretary of both
corporations. It would also not be amiss to note that both corporations had the same president, the same
board of directors, the same corporate officers, and substantially the same subscribers.
From the foregoing, it appears that, among other things, the respondent (herein petitioner) and the third-
party claimant shared the same address and/or premises. Under this circumstances, (sic) it cannot be
said that the property levied upon by the sheriff were not of respondents.
16

Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of backwages and to bar their reinstatement to their former positions. HPPI is obviously a
business conduit of petitioner corporation and its emergence was skillfully orchestrated to avoid the
financial liability that already attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial Relations
17
where we had the
occasion to rule:
Respondent courts findings that indeed the Claparols Steel and Nail Plant, which ceased operation
of June 30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the next day, July 1,
1957, up to December 7, 1962, when the latter finally ceased to operate, were not disputed by petitioner.
it is very clear that the latter corporation was a continuation and successor of the first entity x x x. Both
predecessors and successor were owned and controlled by petitioner Eduardo Claparols and there was
no break in the succession and continuity of the same business. This avoiding-the-liability scheme is
very patent, considering that 90% of the subscribed shares of stock of the Claparols Steel Corporation
(the second corporation) was owned by respondent x x x Claparols himself, and all the assets of the
dissolved Claparols Steel and Nail Plant were turned over to the emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose
veil in the present case could, and should, be pierced as it was deliberately and maliciously designed to
evade its financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the
execution, private respondents had no other recourse but to apply for a break-open order after the third-
party claim of HPPI was dismissed for lack of merit by the NLRC. This is in consonance with Section 3,
Rule VII of the NLRC Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his representative
entry to the place where the property subject of execution is located or kept, the judgment creditor may
apply to the Commission or Labor Arbiter concerned for a break-open order.
Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing
were complied with. Petitioner and the third-party claimant were given the opportunity to submit evidence
in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open
order issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies
supported by substantial evidence are binding on this Court and are entitled to great respect, in the
absence of showing of grave abuse of a discretion.
18


57

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23,
1992 and December 3, 1992, are AFFIRMED.
SO ORDERED.

58

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T.
ONG, and JULIE ONG ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU, MOLY YU
GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, INTRALAND
RESOURCES DEVELOPMENT CORP., MASAGANA TELAMART, INC., REGISTER OF
DEEDS OF PASAY CITY, and the SECURITIES AND EXCHANGE
COMMISSION, respondents.
[G.R. No. 144629. April 8, 2003]
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU,
LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENT CORP., petitioners, vs.
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG,
WILLIE T. ONG, and JULIA ONG ALONZO, respondents.
R E S O L U T I O N
CORONA, J .:
Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner movants Ong
Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo (the
Ongs); (2) motion for partial reconsideration, dated March 15, 2002, of petitioner movant Willie Ong
seeking a reversal of this Courts Decision,
[1]
dated February 1, 2002, in G.R. Nos. 144476 and 144629
affirming with modification the decision
[2]
of the Court of Appeals, dated October 5, 1999, which in turn
upheld, likewise with modification, the decision of the SEC en banc,dated September 11, 1998; and (3)
motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See
Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and
incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which was
owned by the Tius, encountered dire financial difficulties. It was heavily indebted to the Philippine
National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the two lots where the
mall was being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T.
Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription Agreement they
entered into, the Ongs and the Tius agreed to maintain equal shareholdings in FLADC: the Ongs were to
subscribe to 1,000,000 shares at a par value ofP100.00 each while the Tius were to subscribe to an
additional 549,800 shares at P100.00 each in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-President and the
Treasurer plus five directors while the Ongs were entitled to nominate the President, the Secretary and
six directors (including the chairman) to the board of directors of FLADC. Moreover, the Ongs were given
the right to manage and operate the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock
while the Tius committed to contribute to FLADC a four-storey building and two parcels of land
respectively valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million
(for 49,800 shares) to cover their additional 549,800 stock subscription therein. The Ongs paid in
another P70 million
[3]
to FLADC and P20 million to the Tius over and above their P100 million investment,
the total sum of which (P190 million) was used to settle the P190 million mortgage indebtedness of
FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was shortlived because
the Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement. The Tius accused the Ongs
59

of (1) refusing to credit to them the FLADC shares covering their real property contributions; (2)
preventing David S. Tiu and Cely Y. Tiu from assuming the positions of and performing their duties as
Vice-President and Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume the positions
and perform the duties of Vice-President and Treasurer, respectively, but the Ongs prevented them from
doing so. Furthermore, the Ongs refused to provide them the space for their executive offices as Vice-
President and Treasurer. Finally, and most serious of all, the Ongs refused to give them the shares
corresponding to their property contributions of a four-story building, a 1,902.30 square-meter lot and a
151 square-meter lot. Hence, they felt they were justified in setting aside their Pre-Subscription
Agreement with the Ongs who allegedly refused to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the positions of
Vice-President and Treasurer of FLADC but that it was they who refused to comply with the corporate
duties assigned to them. It was the contention of the Ongs that they wanted the Tius to sign the checks
of the corporation and undertake their management duties but that the Tius shied away from helping them
manage the corporation. On the issue of office space, the Ongs pointed out that the Tius did in fact
already have existing executive offices in the mall since they owned it 100% before the Ongs came
in. What the Tius really wanted were new offices which were anyway subsequently provided to them. On
the most important issue of their alleged failure to credit the Tius with the FLADC shares commensurate
to the Tius property contributions, the Ongs asserted that, although the Tius executed a deed of
assignment for the 1,902.30 square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690
for capital gains tax and documentary stamp tax. Without the payment thereof, the SEC would not
approve the valuation of the Tius property contribution (as opposed to cash contribution). This, in turn,
would make it impossible to secure a new Transfer Certificate of Title (TCT) over the property in FLADCs
name. In any event, it was easy for the Tius to simply pay the said transfer taxes and, after the new TCT
was issued in FLADCs name, they could then be given the corresponding shares of stocks. On the 151
square-meter property, the Tius never executed a deed of assignment in favor of FLADC. The Tius
initially claimed that they could not as yet surrender the TCT because it was still being reconstituted by
the Lichaucos from whom the Tius bought it. The Ongs later on discovered that FLADC had in reality
owned the property all along, even before their Pre-Subscription Agreement was executed in 1994. This
meant that the 151 square-meter property was at that time already the corporate property of FLADC for
which the Tius were not entitled to the issuance of new shares of stock.
The controversy finally came to a head when this case was commenced
[4]
by the Tius on February
27, 1996 at the Securities and Exchange Commission (SEC), seeking confirmation of their rescission of
the Pre-Subscription Agreement. After hearing, the SEC, through then Hearing Officer Rolando G.
Andaya, Jr., issued a decision on May 19, 1997 confirming the rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-Subscription
Agreement, and consequently ordering:
(a) The cancellation of the 1,000,000 shares subscription of the individual defendants in
FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants representing the
return of their contribution for 1,000,000 shares of FLADC;
( c) The plaintiffs to submit with (sic) the Securities and Exchange Commission amended
articles of incorporation of FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066 (formerly
15587), 135325 and 134204 and any other title or deed in the name of FLADC, failing in
which said titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to cancel
the annotation of the Pre-Subscription Agreement dated 15 August 1994 on TCT No.
134066 (formerly 15587);
60

(f) The individual defendants, individually and collectively, their agents and representatives, to
desist from exercising or performing any and all acts pertaining to stockholder, director or
officer of FLADC or in any manner intervene in the management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to FLADC interest payment in the
amount of P8,866,669.00 and all interest payments as well as any payments on principal
received from the P70,000,000.00 inexistent loan, plus the legal rate of interest thereon from
the date of their receipt of such payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00 representing
his loan from said defendants plus legal interest from the date of receipt of such amount.
SO ORDERED.
[5]

On motion of both parties, the above decision was partially reconsidered but only insofar as the
Ongs P70 million was declared not as a premium on capital stock but an advance (loan) by the Ongs to
FLADC and that the imposition of interest on it was correct.
[6]

Both parties appealed
[7]
to the SEC en banc which rendered a decision on September 11, 1998,
affirming the May 19, 1997 decision of the Hearing Officer. The SEC en banc confirmed the rescission of
the Pre-Subscription Agreement but reverted to classifying the P70 million paid by the Ongs as premium
on capital and not as a loan or advance to FLADC, hence, not entitled to earn interest.
[8]

On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:
WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange Commission
En Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the Pre-Subscription
Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the following MODIFICATIONS:
1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development
Corporation in accordance with the following cash and property contributions of the
parties therein.
(a) Ong Group P100,000,000.00 cash contribution for one (1) million shares in First
Landlink Asia Development Corporation at a par value of P100.00 per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for 450,200 shares in First Landlink
Asia Development Corporation at a par value of P100.00 per share;
2) A four-storey building described in Transfer Certificate of Title No. 15587 in the
name of Intraland Resources and Development Corporation valued at
P20,000,000.00 for 200,000 shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;
3) A 1,902.30 square-meter parcel of land covered by Transfer Certificate of Title
No. 15587 in the name of Masagana Telamart, Inc. valued at P30,000,000.00 for
300,000 shares in First Landlink Asia Development Corporation at a par value of
P100.00 per share.
2) Whatever remains of the assets of the First Landlink Asia Development Corporation and
the management thereof is (sic) hereby ordered transferred to the Tiu Group.
61

3) First Landlink Asia Development Corporation is hereby ordered to pay the amount of
P70,000,000.00 that was advanced to it by the Ong Group upon the finality of this
decision. Should the former incur in delay in the payment thereof, it shall pay the legal
interest thereon pursuant to Article 2209 of the New Civil Code.
4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned them by the
Ongs upon the finality of this decision. Should the former incur in delay in the payment
thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil
Code.
SO ORDERED.
[9]

An interesting sidelight of the CA decision was its description of the rescission made by the Tius as
the height of ingratitude and as pulling a fast one on the Ongs. The CA moreover found the Tius guilty
of withholding FLADC funds from the Ongs and diverting corporate income to their own MATTERCO
account.
[10]
These were findings later on affirmed in our own February 1, 2002 Decision which is the
subject of the instant motion for reconsideration.
[11]

But there was also a strange aspect of the CA decision. The CA concluded that both the Ongs and
the Tius were in pari delicto (which would not have legally entitled them to rescission) but, for practical
considerations, that is, their inability to work together, it was best to separate the two groups by
rescinding the Pre-Subscription Agreement, returning the original investment of the Ongs and awarding
practically everything else to the Tius.
Their motions for reconsideration having been denied, both parties filed separate petitions for review
before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued that the Tius
may not properly avail of rescission under Article 1191 of the Civil Code considering that the Pre-
Subscription Agreement did not provide for reciprocity of obligations; that the rights over the subject
matter of the rescission (capital assets and properties) had been acquired by a third party (FLADC); that
they did not commit a substantial and fundamental breach of their agreement since they did not prevent
the Tius from assuming the positions of Vice-President and Treasurer of FLADC, and that the failure to
credit the 300,000 shares corresponding to the 1,902.30 square-meter property covered by TCT No.
134066 (formerly 15587) was due to the refusal of the Tius to pay the required transfer taxes to secure
the approval of the SEC for the property contribution and, thereafter, the issuance of title in FLADCs
name. They also argued that the liquidation of FLADC may not legally be ordered by the appellate court
even for so called practical considerations or even to prevent further squabbles and numerous
litigations, since the same are not valid grounds under the Corporation Code. Moreover, the Ongs
bewailed the failure of the CA to grant interest on their P70 million and P20 million advances to FLADC
and David S. Tiu, respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the other hand,
contended that the rescission should have been limited to the restitution of the parties respective
investments and not the liquidation of FLADC based on the erroneous perception by the court that: the
Masagana Citimall was threatened with incompletion since FLADC was in financial distress; that the
Tius invited the Ongs to invest in FLADC to settle its P190 million loan from PNB; that they violated the
Pre-Subscription Agreement when it was the Lichaucos and not the Tius who executed the deed of
assignment over the 151 square-meter property commensurate to 49,800 shares in FLADC thereby
failing to pay the price for the said shares; that they did not turn over to the Ongs the entire amount of
FLADC funds; that they were diverting rentals from lease contracts due to FLADC to their own
MATTERCO account; that the P70 million paid by the Ongs was an advance and not a premium on
capital; and that, by rescinding the Pre-Subscription Agreement, they wanted to wrestle away the
management of the mall and prevent the Ongs from enjoying the profits of their P190 million investment
in FLADC.
62

On February 1, 2002, this Court promulgated its Decision (the subject of the instant motions),
affirming the assailed decision of the Court of Appeals but with the following modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve percent
(12%) per annum to be computed from the time of judicial demand which is from April 23,
1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent (10%)
per annum to be computed from the date of the FLADC Board Resolution which is June 19,
1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their property contribution,
specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated their respective obligations
under the Pre-Subscription Agreement. The Ongs prevented the Tius from assuming the positions of
Vice-President and Treasurer of the corporation. On the other hand, the Decision established that the
Tius failed to turn over FLADC funds to the Ongs and that the Tius diverted rentals due to FLADC to their
MATTERCO account. Consequently, it held that rescission was not possible since both parties were
in pari delicto. However, this Court agreed with the Court of Appeals that the remedy of specific
performance, as espoused by the Ongs, was not practical and sound either and would only lead to further
squabbles and numerous litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of Execution on
the grounds that: (a) the SEC order had become executory as early as September 11, 1998 pursuant to
Sections 1 and 12, Rule 43 of the Rules of Court; (b) any further delay would be injurious to the rights of
the Tius since the case had been pending for more than six years; and (c) the SEC no longer had quasi-
judicial jurisdiction under RA 8799 (Securities Regulation Code). The Ongs filed their opposition,
contending that the Decision dated February 1, 2002 was not yet final and executory; that no good
reason existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the SEC
retained jurisdiction over pending cases involving intra-corporate disputes already submitted for final
resolution upon the effectivity of the said law.
Aside from their opposition to the Tius Motion for Issuance of Writ of Execution, the Ongs filed their
own Motion for Reconsideration; Alternatively, Motion for Modification (of the February 1, 2002 Decision)
on March 15, 2002, raising two main points: (a) that specific performance and not rescission was the
proper remedy under the premises; and (b) that, assuming rescission to be proper, the subject decision of
this Court should be modified to entitle movants to their proportionate share in the mall.
On their first point (specific performance and not rescission was the proper remedy), movants Ong
argue that their alleged breach of the Pre-Subscription Agreement was, at most, casual which did not
justify the rescission of the contract. They stress that providing appropriate offices for David S. Tiu and
Cely Y. Tiu as Vice-President and Treasurer, respectively, had no bearing on their obligations under the
Pre-Subscription Agreement since the said obligation (to provide executive offices) pertained to FLADC
itself. Such obligation arose from the relations between the said officers and the corporation and not any
of the individual parties such as the Ongs. Likewise, the alleged failure of the Ongs to credit shares of
stock in favor of the Tius for their property contributions also pertained to the corporation and not to the
Ongs. Just the same, it could not be done in view of the Tius refusal to pay the necessary transfer taxes
which in turn resulted in the inability to secure SEC approval for the property contributions and the
issuance of a new TCT in the name of FLADC.
Besides, according to the Ongs, the principal objective of both parties in entering into the Pre-
Subscription Agreement in 1994 was to raise the P190 million desperately needed for the payment of
FLADCs loan to PNB. Hence, in this light, the alleged failure to provide office space for the two corporate
officers was no more than an inconsequential infringement. For rescission to be justified, the law requires
that the breach of contract should be so substantial or fundamental as to defeat the primary objective of
the parties in making the agreement. At any rate, the Ongs claim that it was the Tius who were guilty of
fundamental violations in failing to remit funds due to FLADC and diverting the same to their MATTERCO
account.
63

The Ongs also allege that, in view of the findings of the Court that both parties were guilty of violating
the Pre-Subscription Agreement, neither of them could resort to rescission under the principle of pari
delicto. In addition, since the cash and other contributions now sought to be returned already belong to
FLADC, an innocent third party, said remedy may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs should be given their
proportionate share of the mall), movants Ong vehemently take exception to the second item in the
dispositive portion of the questioned Decision insofar as it decreed that whatever remains of the assets of
FLADC and the management thereof (after liquidation) shall be transferred to the Tius. They point out that
the mall itself, which would have been foreclosed by PNB if not for their timely investment of P190 million
in 1994 and which is now worth about P1 billion mainly because of their efforts, should be included in any
partition and distribution. They (the Ongs) should not merely be given interest on their capital
investments. The said portion of our Decision, according to them, amounted to the unjust enrichment of
the Tius and ran contrary to our own pronouncement that the act of the Tius in unilaterally rescinding the
agreement was the height of ingratitude and an attempt to pull a fast one as it would prevent the Ongs
from enjoying the fruits of their P190 million investment in FLADC. It also contravenes this Courts
assurance in the questioned Decision that the Ongs and Tius will have a bountiful return of their
respective investments derived from the profits of the corporation.
Willie Ong filed a separate Motion for Partial Reconsideration dated March 8, 2002, pointing out
that there was no violation of the Pre-Subscription Agreement on the part of the Ongs; that, after more
than seven years since the mall began its operations, rescission had become not only impractical but
would also adversely affect the rights of innocent parties; and that it would behighly inequitable and unfair
to simply return the P100 million investment of the Ongs and give the remaining assets now amounting to
about P1 billion to the Tius.
The Tius, in their opposition to the Ongs motion for reconsideration, counter that the arguments
therein are a mere re-hash of the contentions in the Ongs petition for review and previous motion for
reconsideration of the Court of Appeals decision. The Tius compare the arguments in said pleadings to
prove that the Ongs do not raise new issues, and, based on well-settled jurisprudence,
[12]
the Ongs
present motion is therefore pro-forma and did not prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral arguments on the
respective positions of the parties. On February 27, 2003, Dr. Willie Ong and the rest of the movants Ong
filed their respective memoranda. On February 28, 2003, the Tius submitted their memorandum.
We grant the Ongs motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for reconsideration.
In Philippine Consumers Foundation, Inc. vs. National Telecommunications Commission,
[13]
this Court,
through then Chief Justice Felix V. Makasiar, said that its members may and do change their minds, after
a re-study of the facts and the law, illuminated by a mutual exchange of views.
[14]
After a thorough re-
examination of the case, we find that our Decision of February 1, 2002 overlooked certain aspects which,
if not corrected, will cause extreme and irreparable damage and prejudice to the Ongs, FLADC and its
creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be blindly applied to
meritorious motions for reconsideration. As long as the same adequately raises a valid ground
[15]
(i.e., the
decision or final order is contrary to law), this Court has to evaluate the merits of the arguments to prevent
an unjust decision from attaining finality. In Security Bank and Trust Company vs. Cuenca,
[16]
we ruled
that a motion for reconsideration is not pro-forma for the reason alone that it reiterates the arguments
earlier passed upon and rejected by the appellate court. We explained there that a movant may raise the
same arguments, if only to convince this Court that its ruling was erroneous. Moreover, the rule (that a
motion is pro-forma if it only repeats the arguments in the previous pleadings) will not apply if said
arguments were not squarely passed upon and answered in the decision sought to be reconsidered. In
the case at bar, no ruling was made on some of the petitioner Ongs arguments. For instance, no clear
ruling was made on why an order distributing corporate assets and property to the stockholders would not
violate the statutory preconditions for corporate dissolution or decrease of authorized capital stock. Thus,
64

it would serve the ends of justice to entertain the subject motion for reconsideration since some important
issues therein, although mere repetitions, were not considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the Pre-Subscription
Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000 shares with the Tius
owning 450,200 shares representing the paid-up capital. When the Tius invited the Ongs to invest in
FLADC as stockholders, an increase of the authorized capital stock became necessary to give each
group equal (50-50) shareholdings as agreed upon in the Pre-Subscription Agreement. The authorized
capital stock was thus increased from 500,000 shares to 2,000,000 shares with a par value of P100 each,
with the Ongs subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their
450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract was the
1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these were unissued shares, the
parties Pre-Subscription Agreement was in fact a subscription contract as defined under Section 60, Title
VII of the Corporation Code:
Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be
formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that
the parties refer to it as a purchase or some other contract (Italics supplied).
A subscription contract necessarily involves the corporation as one of the contracting parties since
the subject matter of the transaction is property owned by the corporation its shares of stock. Thus, the
subscription contract (denominated by the parties as a Pre-Subscription Agreement) whereby the Ongs
invested P100 million for 1,000,000 shares of stock was, from the viewpoint of the law, one between the
Ongs and FLADC, not between the Ongs and the Tius. Otherwise stated, the Tius did not contract in
their personal capacities with the Ongs since they were not selling any of their own shares to them. It
was FLADC that did.
Considering therefore that the real contracting parties to the subscription agreement were FLADC
and the Ongs alone, a civil case for rescission on the ground of breach of contract filed by the Tius in their
personal capacities will not prosper. Assuming it had valid reasons to do so, only FLADC (and certainly
not the Tius) had the legal personality to file suit rescinding the subscription agreement with the Ongs
inasmuch as it was the real party in interest therein. Article 1311 of the Civil Code provides that
contracts take effect only between the parties, their assigns and heirs Therefore, a party who has not
taken part in the transaction cannot sue or be sued for performance or for cancellation thereof, unless he
shows that he has a real interest affected thereby.
[17]

In their February 28, 2003 Memorandum, the Tius claim that there are two contracts embodied in the
Pre-Subscription Agreement: a shareholders agreement between the Tius and the Ongs defining and
governing their relationship and a subscription contract between the Tius, the Ongs and FLADC regarding
the subscription of the parties to the corporation. They point out that these two component parts form one
whole agreement and that their terms and conditions are intrinsically related and dependent on each
other. Thus, the breach of the shareholders agreement, which was allegedly the consideration for the
subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their previous pleadings
until after the oral arguments on January 29, 2003, we find this argument too strained for comfort. It is
obviously intended to remedy and cover up the Tius lack of legal personality to rescind an agreement in
which they were personally not parties-in-interest. Assuming arguendo that there were two sub-
agreements embodied in the Pre-Subscription Agreement, this Court fails to see how the shareholders
agreement between the Ongs and Tius can, within the bounds of reason, be interpreted as the
consideration of the subscription contract between FLADC and the Ongs. There was nothing in the Pre-
Subscription Agreement even remotely suggesting such alleged interdependence. Be that as it may,
however, the Tius are nevertheless not the proper parties to raise this point because they were not
parties to the subscription contract between FLADC and the Ongs. Thus, they are not in a position to
claim that the shareholders agreement between them and the Ongs was what induced FLADC and the
65

Ongs to enter into the subscription contract. It is the Ongs alone who can say that. Though FLADC was
represented by the Tius in the subscription contract, FLADC had a separate juridical personality from the
Tius. The case before us does not warrant piercing the veil of corporate fiction since there is no proof that
the corporation is being used as a cloak or cover for fraud or illegality, or to work injustice.
[18]

The Tius also argue that, since the Ongs represent FLADC as its management, breach by the Ongs
is breach by FLADC. This must also fail because such an argument disregards the separate juridical
personality of FLADC.
The Tius allege that they were prevented from participating in the management of the corporation.
There is evidence that the Ongs did prevent the rightfully elected Treasurer, Cely Tiu, from exercising her
function as such. The records show that the President, Wilson Ong, supervised the collection and receipt
of rentals in the Masagana Citimall;
[19]
that he ordered the same to be deposited in the bank;
[20]
and that
he held on to the cash and properties of the corporation.
[21]
Section 25 of the Corporation Code prohibits
the President from acting concurrently as Treasurer of the corporation. The rationale behind the provision
is to ensure the effective monitoring of each officers separate functions.
However, although the Tius were adversely affected by the Ongs unwillingness to let them assume
their positions, rescission due to breach of contract is definitely the wrong remedy for their personal
grievances. The Corporation Code, SEC rules and even the Rules of Court provide for appropriate
and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is
certainly not one of them, specially if the party asking for it has no legal personality to do so and the
requirements of the law therefor have not been met. A contrary doctrine will tread on extremely
dangerous ground because it will allow just any stockholder, for just about any real or imagined offense,
to demand rescission of his subscription and call for the distribution of some part of the corporate assets
to him without complying with the requirements of the Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary remedy of
rescission of the subject agreement based on a less than substantial breach of subscription contract. Not
only are they not parties to the subscription contract between the Ongs and FLADC; they also have other
available and effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue
for rescission based on breach of contract, said action will nevertheless still not prosper since rescission
will violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property
under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs.
Rivera,
[22]
provides that subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims.
[23]
This doctrine is the underlying principle
in the procedure for the distribution of capital assets, embodied in the Corporation Code, which allows the
distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to
reduce the authorized capital stock,
[24]
(2) purchase of redeemable shares by the corporation, regardless
of the existence of unrestricted retained earnings,
[25]
and (3) dissolution and eventual liquidation of the
corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire
its own shares
[26]
and in Section 122 on the prohibition against the distribution of corporate assets and
property unless the stringent requirements therefor are complied with.
[27]

The distribution of corporate assets

and property cannot be made to depend on the whims and
caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the
earnest desire of the court a quo to prevent further squabbles and future litigations unless the
indispensable conditions and procedures for the protection of corporate creditors are followed. Otherwise,
the corporate peace laudably hoped for by the court will remain nothing but a dream because this time,
it will be the creditors turn to engage in squabbles and litigations should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby violating the Trust
66

Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is not one of the
instances when distribution of capital assets and property of the corporation is allowed.
Contrary to the Tius allegation, rescission will, in the final analysis, result in the premature liquidation
of the corporation without the benefit of prior dissolution in accordance with Sections 117, 118, 119 and
120 of the Corporation Code.
[28]
The Tius maintain that rescinding the subscription contract is not
synonymous to corporate liquidation because all rescission will entail would be the simple restoration of
the status quo ante and a return to the two groups of their cash and property contributions. We wish it
were that simple. Very noticeable is the fact that the Tius do not explain why rescission in the instant
case will not effectively result in liquidation. The Tius merely refer in cavalier fashion to the end-result of
rescission (which incidentally is 100% favorable to them) but turn a blind eye to its unfair, inequitable and
disastrous effect on the corporation, its creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission of the agreement will
not result in an unauthorized liquidation of the corporation because their case is actually a petition to
decrease capital stock pursuant to Section 38 of the Corporation Code. Section 122 of the law provides
that (e)xcept by decrease of capital stock, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and liabilities. The Tius claim that their
case for rescission, being a petition to decrease capital stock, does not violate the liquidation procedures
under our laws. All that needs to be done, according to them, is for this Court to order (1) FLADC to file
with the SEC a petition to issue a certificate of decrease of capital stock and (2) the SEC to approve said
decrease. This new argument has no merit.
The Tius case for rescission cannot validly be deemed a petition to decrease capital stock because
such action never complied with the formal requirements for decrease of capital stock under Section 33 of
the Corporation Code. No majority vote of the board of directors was ever taken. Neither was there any
stockholders meeting at which the approval of stockholders owning at least two-thirds of the outstanding
capital stock was secured. There was no revised treasurers affidavit and no proof that said decrease will
not prejudice the creditors rights. On the contrary, all their pleadings contained were alleged acts of
violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation to compel
FLADC to file at the SEC a petition for the issuance of a certificate of decrease of stock. Decreasing a
corporations authorized capital stock is an amendment of the Articles of Incorporation. It is a decision
that only the stockholders and the directors can make, considering that they are the contracting parties
thereto. In this case, the Tius are actually not just asking for a review of the legality and fairness of a
corporate decision. They want this Court to make a corporate decision for FLADC. We decline to
intervene and order corporate structural changes not voluntarily agreed upon by its stockholders and
directors.
Truth to tell, a judicial order to decrease capital stock without the assent of FLADCs directors and
stockholders is a violation of the business judgment rule which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon the corporation
and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to
wanton destruction to the rights of the minority, as when plaintiffs aver that the defendants (members of
the board), have concluded a transaction among themselves as will result in serious injury to the plaintiffs
stockholders.
[29]

The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed author in
corporate law, thus:
Courts and other tribunals are wont to override the business judgment of the board mainly because,
courts are not in the business of business, and the laissez faire rule or the free enterprise system
prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave
business to the businessmen; especially so, when courts are ill-equipped to make business decisions.
67

More importantly, the social contract in the corporate family to decide the course of the corporate
business has been vested in the board and not with courts.
[30]

Apparently, the Tius do not realize the illegal consequences of seeking rescission and control of the
corporation to the exclusion of the Ongs. Such an act infringes on the law on reduction of capital stock.
Ordering the return and distribution of the Ongs capital contribution without dissolving the corporation or
decreasing its authorized capital stock is not only against the law but is also prejudicial to corporate
creditors who enjoy absolute priority of payment over and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not difficult to understand. If
rescission is denied, will injustice be inflicted on any of the parties? The answer is no because the
financial interests of both the Tius and the Ongs will remain intact and safe within FLADC. On the other
hand, if rescission is granted, will any of the parties suffer an injustice? Definitely yes because the Ongs
will find themselves out in the streets with nothing but the money they had in 1994 while the Tius will not
only enjoy a windfall estimated to be anywhere from P450 million to P900 million
[31]
but will also take over
an extremely profitable business without much effort at all.
Another very important point follows. The Court of Appeals and, later on, our Decision dated
February 1, 2002, stated that both groups were in pari delicto, meaning, that both the Tius and the Ongs
committed breaches of the Pre-Subscription Agreement. This may be true to a certain extent but, judging
from the comparative gravity of the acts separately committed by each group, we find that the Ongs acts
were relatively tame vis--vis those committed by the Tius in not surrendering FLADC funds to the
corporation and diverting corporate income to their own MATTERCO account. The Ongs were right in not
issuing to the Tius the shares corresponding to the four-story building and the 1,902.30 square-meter lot
because no title for it could be issued in FLADCs name, owing to the Tius refusal to pay the transfer
taxes. And as far as the 151 square-meter lot was concerned, why should FLADC issue additional
shares to the Tius for property already owned by the corporation and which, in the final analysis, was
already factored into the shareholdings of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to pull a fast one
on the Ongs because that was where the problem precisely started. It is clear that, when the finances of
FLADC improved considerably after the equity infusion of the Ongs, the Tius started planning to take over
the corporation again and exclude the Ongs from it. It appears that the Tius refusal to pay transfer taxes
might not have really been at all unintentional because, by failing to pay that relatively small amount
which they could easily afford, the Tius should have expected that they were not going to be given the
corresponding shares. It was, from every angle, the perfect excuse for blackballing the Ongs. In other
words, the Tius created a problem then used that same problem as their pretext for showing their
partners the door. In the process, they stood to be rewarded with a bonanza of anywhere between P450
million to P900 million in assets (from an investment of only P45 million which was nearly foreclosed by
PNB), to the extreme and irreparable damage of the Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that the Masagana Citimall would not
be what it has become today were it not for the timely infusion of P190 million by the Ongs in
1994. There are no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they originally invested in said mall. If only for
this and the fact that this Resolution can truly pave the way for both groups to enjoy the fruits of their
investments assuming good faith and honest intentions we cannot allow the rescission of the
subject subscription agreement. The Ongs shortcomings were far from serious and certainly less than
substantial; they were in fact remediable and correctable under the law. It would be totally against all
rules of justice, fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners Ong Yong,
Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie Ong Alonzo and the motion
for partial reconsideration, dated March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The
Petition for Confirmation of the Rescission of the Pre-Subscription Agreement docketed as SEC Case No.
02-96-5269 is hereby DISMISSED for lack of merit. The unilateral rescission by the Tius of the subject
Pre-Subscription Agreement, dated August 15, 1994, is hereby declared as null and void.
68

The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners David S. Tiu,
Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby
DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with modification the
decision of the Court of Appeals, dated October 5, 1999, and the SEC en banc, dated September 11,
1998, is hereby REVERSED.
Costs against the petitioner Tius.
SO ORDERED.

69

HYATT ELEVATORS AND G.R. No. 161026
ESCALATORS CORPORATION,
Petitioner, Present:

Panganiban, J .,
Chairman,
Sandoval-Gutierrez,
- versus - Corona,
Carpio Morales, and
Garcia, J J


GOLDSTAR ELEVATORS, Promulgated:
PHILS., INC.,
*

Respondent. October 24, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION


PANGANIBAN, J .:


ell established in our jurisprudence is the rule that the residence of a corporation is the place where
its principal office is located, as stated in its Articles of Incorporation.

The Case

Before us is a Petition for Review
[1]
on Certiorari, under Rule 45 of the Rules of Court,
assailing the June 26, 2003 Decision
[2]
and the November 27, 2003 Resolution
[3]
of the Court of Appeals
(CA) in CA-GR SP No. 74319. The decretal portion of the Decision reads as follows:

WHEREFORE, in view of the foregoing, the assailed Orders dated May 27,
2002 and October 1, 2002 of the RTC, Branch 213, Mandaluyong City in Civil Case No.
99-600, are hereby SET ASIDE. The said case is hereby ordered DISMISSED on the
ground of improper venue.
[4]




The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts

The relevant facts of the case are summarized by the CA in this wise:

Petitioner [herein Respondent] Goldstar Elevator Philippines, Inc. (GOLDSTAR
for brevity) is a domestic corporation primarily engaged in the business of marketing,
distributing, selling, importing, installing, and maintaining elevators and escalators, with
address at 6
th
Floor, Jacinta II Building, 64 EDSA, Guadalupe, Makati City.

On the other hand, private respondent [herein petitioner] Hyatt Elevators and
Escalators Company (HYATT for brevity) is a domestic corporation similarly engaged in
the business of selling, installing and maintaining/servicing elevators, escalators and
parking equipment, with address at the 6
th
Floor, Dao I Condominium, Salcedo St.,
Legaspi Village, Makati, as stated in its Articles of Incorporation.

W
70

On February 23, 1999, HYATT filed a Complaint for unfair trade practices and
damages under Articles 19, 20 and 21 of the Civil Code of the Philippines against LG
Industrial Systems Co. Ltd. (LGISC) and LG International Corporation (LGIC), alleging
among others, that: in 1988, it was appointed by LGIC and LGISC as the exclusive
distributor of LG elevators and escalators in the Philippines under a Distributorship
Agreement; x x x LGISC, in the latter part of 1996, made a proposal to change the
exclusive distributorship agency to that of a joint venture partnership; while it looked
forward to a healthy and fruitful negotiation for a joint venture, however, the various
meetings it had with LGISC and LGIC, through the latters representatives, were
conducted in utmost bad faith and with malevolent intentions; in the middle of the
negotiations, in order to put pressures upon it, LGISC and LGIC terminated the Exclusive
Distributorship Agreement; x x x [A]s a consequence, [HYATT]
sufferedP120,000,000.00 as actual damages, representing loss of earnings and business
opportunities, P20,000,000.00 as damages for its reputation and goodwill,P1,000,000.00
as and by way of exemplary damages, and P500,000.00 as and by way of attorneys
fees.

On March 17, 1999, LGISC and LGIC filed a Motion to Dismiss raising the
following grounds: (1) lack of jurisdiction over the persons of defendants, summons not
having been served on its resident agent; (2) improper venue; and (3) failure to state a
cause of action. The [trial] court denied the said motion in an Order dated January 7,
2000.

On March 6, 2000, LGISC and LGIC filed an Answer with Compulsory
Counterclaim ex abundante cautela. Thereafter, they filed a Motion for Reconsideration
and to Expunge Complaint which was denied.

On December 4, 2000, HYATT filed a motion for leave of court to amend the
complaint, alleging that subsequent to the filing of the complaint, it learned that LGISC
transferred all its organization, assets and goodwill, as a consequence of a joint venture
agreement with Otis Elevator Company of the USA, to LG Otis Elevator Company (LG
OTIS, for brevity). Thus, LGISC was to be substituted or changed to LG OTIS, its
successor-in-interest. Likewise, the motion averred that x x x GOLDSTAR was being
utilized by LG OTIS and LGIC in perpetrating their unlawful and unjustified acts against
HYATT. Consequently, in order to afford complete relief, GOLDSTAR was to be
additionally impleaded as a party-defendant. Hence, in the Amended Complaint, HYATT
impleaded x x x GOLDSTAR as a party-defendant, and all references to LGISC were
correspondingly replaced with LG OTIS.

On December 18, 2000, LG OTIS (LGISC) and LGIC filed their opposition to
HYATTs motion to amend the complaint. It argued that: (1) the inclusion of GOLDSTAR
as party-defendant would lead to a change in the theory of the case since the latter took
no part in the negotiations which led to the alleged unfair trade practices subject of the
case; and (b) HYATTs move to amend the complaint at that time was dilatory,
considering that HYATT was aware of the existence of GOLDSTAR for almost two years
before it sought its inclusion as party-defendant.

On January 8, 2001, the [trial] court admitted the Amended Complaint. LG OTIS
(LGISC) and LGIC filed a motion for reconsideration thereto but was similarly rebuffed on
October 4, 2001.

On April 12, 2002, x x x GOLDSTAR filed a Motion to Dismiss the amended
complaint, raising the following grounds: (1) the venue was improperly laid, as neither
HYATT nor defendants reside in Mandaluyong City, where the original case was filed;
and (2) failure to state a cause of action against [respondent], since the amended
complaint fails to allege with certainty what specific ultimate acts x x x Goldstar
71

performed in violation of x x x Hyatts rights. In the Order dated May 27, 2002, which is
the main subject of the present petition, the [trial] court denied the motion to dismiss,
ratiocinating as follows:

Upon perusal of the factual and legal arguments raised by the
movants-defendants, the court finds that these are substantially the
same issues posed by the then defendant LG Industrial System Co.
particularly the matter dealing [with] the issues of improper venue, failure
to state cause of action as well as this courts lack of jurisdiction. Under
the circumstances obtaining, the court resolves to rule that the complaint
sufficiently states a cause of action and that the venue is properly laid. It
is significant to note that in the amended complaint, the same allegations
are adopted as in the original complaint with respect to the Goldstar
Philippines to enable this court to adjudicate a complete determination or
settlement of the claim subject of the action it appearing preliminarily as
sufficiently alleged in the plaintiffs pleading that said Goldstar Elevator
Philippines Inc., is being managed and operated by the same Korean
officers of defendants LG-OTIS Elevator Company and LG International
Corporation.

On June 11, 2002, [Respondent] GOLDSTAR filed a motion for reconsideration
thereto. On June 18, 2002, without waiving the grounds it raised in its motion to dismiss,
[it] also filed an Answer Ad Cautelam. On October 1, 2002, [its] motion for
reconsideration was denied.

From the aforesaid Order denying x x x Goldstars motion for reconsideration, it
filed the x x x petition for certiorari [before the CA] alleging grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of the [trial] court in issuing the
assailed Orders dated May 27, 2002 and October 1, 2002.
[5]





Ruling of the Court of Appeals

The CA ruled that the trial court had committed palpable error amounting to grave abuse of
discretion when the latter denied respondents Motion to Dismiss. The appellate court held that the venue
was clearly improper, because none of the litigants resided in Mandaluyong City, where the case was
filed.

According to the appellate court, since Makati was the principal place of business of both
respondent and petitioner, as stated in the latters Articles of Incorporation, that place was controlling for
purposes of determining the proper venue. The fact that petitioner had abandoned its principal office in
Makati years prior to the filing of the original case did not affect the venue where personal actions could
be commenced and tried.

Hence, this Petition.
[6]




The Issue



In its Memorandum, petitioner submits this sole issue for our consideration:

72

Whether or not the Court of Appeals, in reversing the ruling of the Regional Trial
Court, erred as a matter of law and jurisprudence, as well as committed grave abuse of
discretion, in holding that in the light of the peculiar facts of this case, venue was
improper[.]
[7]



This Courts Ruling

The Petition has no merit.



Sole Issue:
Venue

The resolution of this case rests upon a proper understanding of Section 2 of Rule 4 of the 1997
Revised Rules of Court:

Sec. 2. Venue of personal actions. All other actions may be commenced and
tried where the plaintiff or any of the principal plaintiff resides, or where the defendant or
any of the principal defendant resides, or in the case of a non-resident defendant where
he may be found, at the election of the plaintiff.


Since both parties to this case are corporations, there is a need to clarify the meaning of
residence. The law recognizes two types of persons: (1) natural and (2) juridical. Corporations come
under the latter in accordance with Article 44(3) of the Civil Code.
[8]


Residence is the permanent home -- the place to which, whenever absent for business or
pleasure, one intends to return.
[9]
Residence is vital when dealing with venue.
[10]
A corporation, however,
has no residence in the same sense in which this term is applied to a natural person. This is precisely the
reason why the Court in Young Auto Supply Company v. Court of Appeals
[11]
ruled that for practical
purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is
located as stated in the articles of incorporation.
[12]
Even before this ruling, it has already been
established that the residence of a corporation is the place where its principal office is established.
[13]


This Court has also definitively ruled that for purposes of venue, the term residence is
synonymous with domicile.
[14]
Correspondingly, the Civil Code provides:

Art. 51. When the law creating or recognizing them, or any other provision does
not fix the domicile of juridical persons, the same shall be understood to be the place
where their legal representation is established or where they exercise their principal
functions.
[15]



It now becomes apparent that the residence or domicile of a juridical person is fixed by the law
creating or recognizing it. Under Section 14(3) of the Corporation Code, the place where the principal
office of the corporation is to be located is one of the required contents of the articles of incorporation,
which shall be filed with the Securities and Exchange Commission (SEC).

In the present case, there is no question as to the residence of respondent. What needs to be
examined is that of petitioner. Admittedly,
[16]
the latters principal place of business is Makati, as indicated
in its Articles of Incorporation. Since the principal place of business of a corporation determines its
residence or domicile, then the place indicated in petitioners articles of incorporation becomes controlling
in determining the venue for this case.

73

Petitioner argues that the Rules of Court do not provide that when the plaintiff is a corporation,
the complaint should be filed in the location of its principal office as indicated in its articles of
incorporation.
[17]
Jurisprudence has, however, settled that the place where the principal office of a
corporation is located, as stated in the articles, indeed establishes its residence.
[18]
This ruling is
important in determining the venue of an action by or against a corporation,
[19]
as in the present case.

Without merit is the argument of petitioner that the locality stated in its Articles of Incorporation
does not conclusively indicate that its principal office is still in the same place. We agree with the
appellate court in its observation that the requirement to state in the articles the place where the principal
office of the corporation is to be located is not a meaningless requirement. That proviso would be
rendered nugatory if corporations were to be allowed to simply disregard what is expressly stated in their
Articles of Incorporation.
[20]


Inconclusive are the bare allegations of petitioner that it had closed its Makati office and relocated
to Mandaluyong City, and that respondent was well aware of those
circumstances. Assuming arguendo that they transacted business with each other in the Mandaluyong
office of petitioner, the fact remains that, in law, the latters residence was still the place indicated in its
Articles of Incorporation. Further unacceptable is its faulty reasoning that the ground for the CAs
dismissal of its Complaint was its failure to amend its Articles of Incorporation so as to reflect its actual
and present principal office. The appellate court was clear enough in its ruling that the Complaint was
dismissed because the venue had been improperly laid, not because of the failure of petitioner to amend
the latters Articles of Incorporation.

Indeed, it is a legal truism that the rules on the venue of personal actions are fixed for the
convenience of the plaintiffs and their witnesses. Equally settled, however, is the principle that choosing
the venue of an action is not left to a plaintiffs caprice; the matter is regulated by the Rules of
Court.
[21]
Allowing petitioners arguments may lead precisely to what this Court was trying to avoid
in Young Auto Supply Company v. CA:
[22]
the creation of confusion and untold inconveniences to party
litigants. Thus enunciated the CA:

x x x. To insist that the proper venue is the actual principal office and not that
stated in its Articles of Incorporation would indeed create confusion and work untold
inconvenience. Enterprising litigants may, out of some ulterior motives, easily circumvent
the rules on venue by the simple expedient of closing old offices and opening new ones
in another place that they may find well to suit their needs.
[23]




We find it necessary to remind party litigants, especially corporations, as follows:

The rules on venue, like the other procedural rules, are designed to insure a just
and orderly administration of justice or the impartial and evenhanded determination of
every action and proceeding. Obviously, this objective will not be attained if the plaintiff is
given unrestricted freedom to choose the court where he may file his complaint or
petition.

The choice of venue should not be left to the plaintiffs whim or caprice. He may
be impelled by some ulterior motivation in choosing to file a case in a particular court
even if not allowed by the rules on venue.
[24]



WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and
Resolution AFFIRMED. Costs against petitioner.
SO ORDERED.

74

G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO,
ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and
EDUARDO R. VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J .:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary
injunction, arose out of two cases filed by petitioner with the Securities and Exchange Commission, as
follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for a
preliminary injunction" against the majority of the members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr.,
Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas,
Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents amended
by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted
on March 13, 1961, when the outstanding capital stock of respondent corporation was only
P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled
30,127,047 with a total par value of P301,270,430.00. It was contended that according to section 22 of
the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal
or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation,
which 2/3 should have been computed on the basis of the capitalization at the time of the amendment.
Since the amendment was based on the 1961 authorization, petitioner contended that the Board acted
without authority and in usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised
in 1962 and 1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of Directors had changed
since the authority was given in 1961, there being six (6) new directors.
75

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

As additional causes of action, it was alleged that corporations have no inherent power to disqualify a
stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that
Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into
contracts (specifically a management contract) with respondent corporation, which was allowed because
the questioned amendment gave the Board itself the prerogative of determining whether they or other
persons are engaged in competitive or antagonistic business; that the portion of the amended bylaws
which states that in determining whether or not a person is engaged in competitive business, the Board
may consider such factors as business and family relationship, is unreasonable and oppressive and,
therefore, void; and that the portion of the amended by-laws which requires that "all nominations for
election of directors ... shall be submitted in writing to the Board of Directors at least five (5) working days
before the date of the Annual Meeting" is likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing
thereof be cancelled, and that individual respondents be made to pay damages, in specified amounts, to
petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange
Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary
of respondent corporation refused to allow him to inspect its records despite request made by petitioner
for production of certain documents enumerated in the request, and that respondent corporation had
been attempting to suppress information from its stockholders despite a negative reply by the SEC to its
query regarding their authority to do so. Among the documents requested to be copied were (a) minutes
of the stockholder's meeting field on March 13, 1961, (b) copy of the management contract between San
Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San Miguel
International, Inc.; (d) authority of the stockholders to invest the funds of respondent corporation in San
Miguel International, Inc.; and (e) lists of salaries, allowances, bonuses, and other compensation, if any,
received by Andres M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents, alleging,
among others that the motion has no legal basis; that the demand is not based on good faith; that the
motion is premature since the materiality or relevance of the evidence sought cannot be determined until
the issues are joined, that it fails to show good cause and constitutes continued harrasment, and that
some of the information sought are not part of the records of the corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel Corporation, Enrique Conde,
Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial allegations
therein and stating, by way of affirmative defenses that "the action taken by the Board of Directors on
September 18, 1976 resulting in the ... amendments is valid and legal because the power to "amend,
modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961 and long prior thereto
has never been revoked of SMC"; that contrary to petitioner's claim, "the vote requirement for a valid
delegation of the power to amend, repeal or adopt new by-laws is determined in relation to the total
subscribed capital stock at the time the delegation of said power is made, not when the Board opts to
exercise said delegated power"; that petitioner has not availed of his intra-corporate remedy for the
nullification of the amendment, which is to secure its repeal by vote of the stockholders representing a
majority of the subscribed capital stock at any regular or special meeting, as provided in Article VIII,
section I of the by-laws and section 22 of the Corporation law, hence the, petition is premature; that
petitioner is estopped from questioning the amendments on the ground of lack of authority of the Board.
since he failed, to object to other amendments made on the basis of the same 1961 authorization: that
76

the power of the corporation to amend its by-laws is broad, subject only to the condition that the by-laws
adopted should not be respondent corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective measures to minimize or eliminate
situations where its directors might be tempted to put their personal interests over t I hat of the
corporation; that the questioned amended by-laws is a matter of internal policy and the judgment of the
board should not be interfered with: That the by-laws, as amended, are valid and binding and are
intended to prevent the possibility of violation of criminal and civil laws prohibiting combinations in
restraint of trade; and that the petition states no cause of action. It was, therefore, prayed that the petition
be dismissed and that petitioner be ordered to pay damages and attorney's fees to respondents. The
application for writ of preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying the
material averments thereof and stating, as part of their affirmative defenses, that in August 1972, the
Universal Robina Corporation (Robina), a corporation engaged in business competitive to that of
respondent corporation, began acquiring shares therein. until September 1976 when its total holding
amounted to 622,987 shares: that in October 1972, the Consolidated Foods Corporation (CFC) likewise
began acquiring shares in respondent (corporation. until its total holdings amounted to P543,959.00 in
September 1976; that on January 12, 1976, petitioner, who is president and controlling shareholder of
Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent corporation,
and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the stockholder "in his effort to secure for himself and in
representation of Robina and CFC interests, a seat in the Board of Directors of SMC", that in the
stockholders' meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure
a seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive business
and his securing a seat would have subjected respondent corporation to grave disadvantages; that
"petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting; that
thereafter the Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and
attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection of
documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture,
respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors and
they accordingly filed their oppositions-intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for production
and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as follows:
Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and photographing, by
or on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the
stockholders' meeting of the respondent San Miguel Corporation held on March 13, 1961,
which are in the possession, custody and control of the said corporation, it appearing that
the same is material and relevant to the issues involved in the main case. Accordingly,
the respondents should allow petitioner-movant entry in the principal office of the
respondent Corporation, San Miguel Corporation on January 14, 1977, at 9:30 o'clock in
the morning for purposes of enforcing the rights herein granted; it being understood that
the inspection, copying and photographing of the said documents shall be undertaken
under the direct and strict supervision of this Commission. Provided, however, that other
documents and/or papers not heretofore included are not covered by this Order and any
inspection thereof shall require the prior permission of this Commission;
77

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 insofar as the first cause of action is concerned, for the
alleged reason that by calling a special stockholders' meeting for the aforesaid purpose, private
respondents admitted the invalidity of the amendments of September 18, 1976. The motion for summary
judgment was opposed by private respondents. Pending action on the motion, petitioner filed an "Urgent
Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of
petitioner's application for the issuance of a preliminary injunction and/or petitioner's motion for summary
judgment, a temporary restraining order be issued, restraining respondents from holding the special
stockholder's meeting as scheduled. This motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for issuance of
temporary restraining order. After receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14, 1977,
petitioner filed a consolidated motion for contempt and for nullification of the special stockholders'
meeting.
A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed by
petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the time of the
filing of the instant petition, the said motion had not yet been scheduled for hearing. Likewise, the motion
for reconsideration of the order granting in part and denying in part petitioner's motion for production of
record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation had been scheduled for
May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that he intended to run
for the position of director of respondent corporation. Thereafter, respondents filed a Manifestation with
respondent Commission, submitting a Resolution of the Board of Directors of respondent corporation
disqualifying and precluding petitioner from being a candidate for director unless he could submit
evidence on May 3, 1977 that he does not come within the disqualifications specified in the amendment
to the by-laws, subject matter of SEC Case No. 1375. By reason thereof, petitioner filed a manifestation
and motion to resolve pending incidents in the case and to issue a writ of injunction, alleging that private
78

respondents were seeking to nullify and render ineffectual the exercise of jurisdiction by the respondent
Commission, to petitioner's irreparable damage and prejudice, Allegedly despite a subsequent
Manifestation to prod respondent Commission to act, petitioner was not heard prior to the date of the
stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act
hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has been investing
corporate funds in other corporations and businesses outside of the primary purpose clause of the
corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent Commission,
on January 20, 1977, a petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M.
Soriano, as well as the respondent corporation declared guilty of such violation, and ordered to account
for such investments and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated
motion to strike and to declare individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February 4,
1977, the commission acted thereon only on April 25, 1977, when it denied respondents' motion to
dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on April
29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof, the
following:
6. Re-affirmation of the authorization to the Board of Directors by the stockholders at the
meeting on March 20, 1972 to invest corporate funds in other companies or businesses
or for purposes other than the main purpose for which the Corporation has been
organized, and ratification of the investments thereafter made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the
issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of the
Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on May 3, 1977,
the date set for the second hearing of the case on the merits. Respondent Commission, however,
cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after
the scheduled annual stockholders' meeting. For the purpose of urging the Commission to act, petitioner
filed an urgent manifestation on May 3, 1977, but this notwithstanding, no action has been taken up to the
date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that
respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch on the
motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon his rights as
stockholder of respondent corporation, and that respondent are acting oppressively against petitioner, in
gross derogation of petitioner's rights to property and due process. He prayed that this Court direct
respondent SEC to act on collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from
disqualifying or preventing petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or from
Making effective the amended by-laws of respondent corporation, until further orders from this Court or
until the Securities and Ex-change Commission acts on the matters complained of in the instant petition.
79

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had been
issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner copies of the
following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for reconsideration,
with its supplement, of the order of the Commission denying in part petitioner's motion for production of
documents, petitioner's motion for reconsideration of the order denying the issuance of a temporary
restraining order denying the issuance of a temporary restraining order, and petitioner's consolidated
motion to declare respondents in contempt and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of
respondent corporation but stating that he should not sit as such if elected, until such time that the
Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6 of the
Agenda for the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for reconsideration
of the order of respondent Commission denying petitioner's motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with
indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable
damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's right to due process
when it decided en banc an issue not raised before it and still pending before one of its Commissioners,
and without hearing petitioner thereon despite petitioner's request to have the same calendared for
hearing , and (3) that the respondents acted oppressively against the petitioner in violation of his rights as
a stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and
that respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative to
San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment,
alleging that the petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive and antagonistic to
that of respondent San Miguel Corporation, it appearing that the owns and controls a greater portion of
his SMC stock thru the Universal Robina Corporation and the Consolidated Foods Corporation, which
corporations are engaged in business directly and substantially competing with the allied businesses of
respondent SMC and of corporations in which SMC has substantial investments. Further, when CFC and
Robina had accumulated investments. Further, when CFC and Robina had accumulated shares in SMC,
the Board of Directors of SMC realized the clear and present danger that competitors or antagonistic
parties may be elected directors and thereby have easy and direct access to SMC's business and trade
secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear and
present danger that business competitors, if allowed to become directors, will illegally and unfairly utilize
their direct access to its business secrets and plans for their own private gain to the irreparable prejudice
of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that membership of a
competitor in the Board of Directors is a blatant disregard of no less that the Constitution and pertinent
laws against combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve and
protect itself by excluding competitors and antogonistic parties, under the law of self-preservation, and it
should be allowed a wide latitude in the selection of means to preserve itself;
80

(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente lite the
amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on May 3,
1977. The instant petition being dated May 4, 1977, it is apparent that respondent Commission was not
given a chance to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot and academic because
respondent Commission has acted on the pending incidents, complained of. It was, therefore, prayed that
the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition has
become moot and academic for the reason, among others that the acts of private respondent sought to
be enjoined have reference to the annual meeting of the stockholders of respondent San Miguel
Corporation, which was held on may 10, 1977; that in said meeting, in compliance with the order of
respondent Commission, petitioner was allowed to run and be voted for as director; and that in the same
meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed. Further it was averred
that the questions and issues raised by petitioner are pending in the Securities and Exchange
Commission which has acquired jurisdiction over the case, and no hearing on the merits has been had;
hence the elevation of these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable questions
for the determination of this Court because (1) the respondent Commission acted without circumspection,
unfairly and oppresively against petitioner, warranting the intervention of this Court; (2) a derivative suit,
such as the instant case, is not rendered academic by the act of a majority of stockholders, such that the
discussion, ratification and confirmation of Item 6 of the Agenda of the annual stockholders' meeting of
May 10, 1977 did not render the case moot; that the amendment to the bylaws which specifically bars
petitioner from being a director is void since it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after
receiving a copy of the restraining order issued by this Court and noting that the restraining order did not
foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No.
1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation, took
into consideration an urgent manifestation filed with the Commission by petitioner on May 3, 1977 which
prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The reason given for
denial of deferment was that "such action is within the authority of the corporation as well as falling within
the sphere of stockholders' right to know, deliberate upon and/or to express their wishes regarding
disposition of corporate funds considering that their investments are the ones directly affected." It was
alleged that the main petition has, therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary
injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due
process, and "that all possible questions on the facts now pending before the respondent Commission are
now before this Honorable Court which has the authority and the competence to act on them as it may
see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a
competitor from nomination or election to the Board of Directors are valid and reasonable;
81

(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel
Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item 6
of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of the
investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2 of the
Corporation Law.
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", citingGayong v. Gayos.
3
To the same effect is the prayer of San Miguel Corporation that
this Court resolve on the merits the validity of its amended by laws and the rights and obligations of the
parties thereunder, otherwise "the time spent and effort exerted by the parties concerned and, more
importantly, by this Honorable Court, would have been for naught because the main question will come
back to this Honorable Court for final resolution." Respondent Eduardo R. Visaya submits a similar
appeal.
It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing
and decision of the issues involved, invoking the latter's primary jurisdiction to hear and decide case
involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire
controversy in a single proceeding, leaving nor root or branch to bear the seeds of future litigation.
4
Thus,
in Francisco v. City of Davao,
5
this Court resolved to decide the case on the merits instead of remanding
it to the trial court for further proceedings since the ends of justice would not be subserved by the remand
of the case. In Republic v. Security Credit and Acceptance Corporation, et al.,
6
this Court, finding that the
main issue is one of law, resolved to decide the case on the merits "because public interest demands an
early disposition of the case", and in Republic v. Central Surety and Insurance Company,
7
this Court
denied remand of the third-party complaint to the trial court for further proceedings, citing precedent
where this Court, in similar situations resolved to decide the cases on the merits, instead of remanding
them to the trial court where (a) the ends of justice would not be subserved by the remand of the case; or
(b) where public interest demand an early disposition of the case; or (c) where the trial court had already
received all the evidence presented by both parties and the Supreme Court is now in a position, based
upon said evidence, to decide the case on its merits.
8
It is settled that the doctrine of primary jurisdiction
has no application where only a question of law is involved.
8
a Because uniformity may be secured
through review by a single Supreme Court, questions of law may appropriately be determined in the first
82

instance by courts.
8
b In the case at bar, there are facts which cannot be denied, viz.: that the amended
by-laws were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the
power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a
special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were ratified
by more than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery
and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in
1948; and that in the stockholders' annual meeting held in 1972 and 1977, all foreign investments and
operations of San Miguel Corporation were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to
the Board of Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in purely a question of law.
9
Whether the by-
law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law.
10
This rule is subject, however, to the limitation
that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable
minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the
judgment of those who are authorized to make by-laws and who have exercised their authority.
11

Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to
suppress the minority and prevent them from having representation in the Board", at the same time
depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation
content that ex. conclusion of a competitor from the Board is legitimate corporate purpose, considering
that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation;
that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of
reasonable protective from the unrestrained self-interest of those charged with the promotion of the
corporate enterprise; that access to confidential information by a competitor may result either in the
promotion of the interest of the competitor at the expense of the San Miguel Corporation, or the promotion
of both the interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in
a combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free
competition to the detriment of the consuming public. It is further argued that there is not vested right of
any stockholder under Philippine Law to be voted as director of a corporation. It is alleged that petitioner,
as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by him, control
over the following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. 6,325
shares; (b) Universal Robina Corporation 738,647 shares; (c) CFC Corporation 658,313 shares, or
a total of 1,403,285 shares. Since the outstanding capital stock of San Miguel Corporation, as of the
present date, is represented by 33,139,749 shares with a par value of P10.00, the total shares owned or
controlled by petitioner represents 4.2344% of the total outstanding capital stock of San Miguel
Corporation. It is also contended that petitioner is the president and substantial stockholder of Universal
Robina Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and
members of his family. It is also claimed that both the Universal Robina Corporation and the CFC
Corporation are engaged in businesses directly and substantially competing with the alleged businesses
of San Miguel Corporation, and of corporations in which SMC has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL
CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board
the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:
83

Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product
sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly, the
combined market shares of SMC and CFC-Robina in layer pullets dressed chicken, poultry and hog feeds
ice cream, instant coffee and woven fabrics would result in a position of such dominance as to affect the
prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines which,
for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina was directly
competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line represented sales for
SMC amounting to more than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills
recently acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc.,
subsidiary of SMC, in product sales amounting to more than P95 million. The areas of competition
between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of more than
P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total
outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because they
"realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC." On
September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it by the
stockholders," approved the amendment to ' he by-laws in question. At the meeting of February 10, 1977,
these amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945 shares, or
more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005 shares,
opposed the confirmation and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349
shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected
petitioner's candidacy, while 946 stockholders, representing 1,648,801 shares voted for him. On the May
9, 1978 Annual Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares, or more
than 90% of the total outstanding shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY
CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were adopted by the Board of Directors
of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the clear and
present danger that the election of a business competitor to the Board may cause upon the corporation
and the other stockholders inseparable prejudice. Submitted for resolution, therefore, is the issue
whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a
competitor from nomination and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its
internal government, and to regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management of its affairs.
12
At common law, the
rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its
84

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 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 ... " InGovernment v. El Hogar,
14
the Court sustained the validity of a
provision in the corporate by-law requiring that persons elected to the Board of Directors must be holders
of shares of the paid up value of P5,000.00, which shall be held as security for their action, on the ground
that section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-
laws for the qualifications of directors and is "highly prudent and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by
a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all
matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by
law."
15
To this extent, therefore, the stockholder may be considered to have "parted with his personal
right or privilege to regulate the disposition of his property which he has invested in the capital stock of
the corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It cannot
therefore be justly said that the contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is authorized by a majority ... ."
16

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

It being settled that the corporation has the power to provide for the qualifications of its directors, the next
question that must be considered is whether the disqualification of a competitor from being elected to the
Board of Directors is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not regarded as trustees,
there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned. As agents entrusted with the management of the corporation for
the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is
one of trust."
18
"The ordinary trust relationship of directors of a corporation and stockholders", according
to Ashaman v. Miller,
19
"is not a matter of statutory or technical law. It springs from the fact that directors
have the control and guidance of corporate affairs and property and hence of the property interests of the
stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof * * *.
85

Justice Douglas, in Pepper v. Litton,
20
emphatically restated the standard of fiduciary obligation of the
directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such fiduciary
position cannot serve himself first and his cestuis second. ... He cannot manipulate the
affairs of his corporation to their detriment and in disregard of the standards of common
decency. He cannot by the intervention of a corporate entity violate the ancient precept
against serving two masters ... He cannot utilize his inside information and strategic
position for his own preferment. He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do so directly. He cannot violate rules of fair
play by doing indirectly though the corporation what he could not do so directly. He
cannot use his power for his personal advantage and to the detriment of the stockholders
and creditors no matter how absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that power is at all times subject to
the equitable limitation that it may not be exercised for the aggrandizement, preference or
advantage of the fiduciary to the exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co.,
21
it was said:
... A person cannot serve two hostile and adverse master, without detriment to one of
them. A judge cannot be impartial if personally interested in the cause. No more can a
director. Human nature is too weak -for this. Take whatever statute provision you please
giving power to stockholders to choose directors, and in none will you find any express
prohibition against a discretion to select directors having the company's interest at heart,
and it would simply be going far to deny by mere implication the existence of such a
salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from being
a director, the same reasoning would apply to disqualify the wife and immediate member of the family of
such stockholder, on account of the supposed interest of the wife in her husband's affairs, and his
suppose influence over her. It is perhaps true that such stockholders ought not to be condemned as
selfish and dangerous to the best interest of the corporation until tried and tested. So it is also true that
we cannot condemn as selfish and dangerous and unreasonable the action of the board in passing the
by-law. The strife over the matter of control in this corporation as in many others is perhaps carried on not
altogether in the spirit of brotherly love and affection. The only test that we can apply is as to whether or
not the action of the Board is authorized and sanctioned by law. ... .
22

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

AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER
INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS
IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS
VALID
It is a settled state law in the United States, according to Fletcher, that corporations have the power to
make by-laws declaring a person employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected, subjects to
removal, a director if he be also a director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid."
24
This is based upon the principle that where the director is
so employed in the service of a rival company, he cannot serve both, but must betray one or the other.
Such an amendment "advances the benefit of the corporation and is good." An exception exists in New
Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the only
qualification, and therefore the corporation was not empowered to add additional qualifications.
25
This is
the exact opposite of the situation in the Philippines because as stated heretofore, section 21 of the
86

Corporation Law expressly provides that a corporation may make by-laws for the qualifications of
directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a director by utilizing information he has received as
such officer, under "the established law that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injures the business of the corporation of which he is an officer or
director.
26

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

The doctrine of "corporate opportunity"
29
is precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for two entities with competing interests.
This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director
taking advantage of an opportunity for his own personal profit when the interest of the corporation justly
calls for protection.
30

It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to
sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b)
budget for expansion and diversification; (c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation,
who is also the officer or owner of a competing corporation, from taking advantage of the information
which he acquires as director to promote his individual or corporate interests to the prejudice of San
Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made.
Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and
reasonable an amendment to the by-laws of a bank, requiring that its directors should not be directors,
officers, employees, agents, nominees or attorneys of any other banking corporation, affiliate or
subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus:
... A bank director has access to a great deal of information concerning the business and
plans of a bank which would likely be injurious to the bank if known to another bank, and
it was reasonable and prudent to enlarge this minimum disqualification to include any
director, officer, employee, agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection against rivals and others who
might acquire information which might be used against the interests of the corporation as
a legitimate object of by-law protection. With respect to attorneys or persons associated
with a firm which is attorney for another bank, in addition to the direct conflict or potential
conflict of interest, there is also the danger of inadvertent leakage of confidential
information through casual office discussions or accessibility of files. Defendant's
directors determined that its welfare was best protected if this opportunity for conflicting
loyalties and potential misuse and leakage of confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
87

(1) A director shall not be directly or indirectly interested as a stockholder in any other
firm, company, or association which competes with the subject corporation.
(2) A director shall not be the immediate member of the family of any stockholder in any
other firm, company, or association which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other
firm, company, or association which compete with the subject corporation.
(4) A director shall be of good moral character as an essential qualification to holding
office.
(5) No person who is an attorney against the corporation in a law suit is eligible for
service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience that a person cannot serve
two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his
position as director of San Miguel Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the validity and reasonableness of the
by-laws here involved. Apart from the impractical results that would ensue from such arrangement, it
would be inconsistent with petitioner's primary motive in running for board membership which is to
protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct
would be against all accepted principles underlying a director's duty of fidelity to the corporation, for the
policy of the law is to encourage and enforce responsible corporate management. As explained by
Oleck:
31
"The law win not tolerate the passive attitude of directors ... without active and conscientious
participation in the managerial functions of the company. As directors, it is their duty to control and
supervise the day to day business activities of the company or to promulgate definite policies and rules of
guidance with a vigilant eye toward seeing to it that these policies are carried out. It is only then that
directors may be said to have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing sensitive information with a director
whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival.
These dangers are enhanced considerably where the common director such as the petitioner is a
controlling stockholder of two of the competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to appropriate for the benefit of his own corporation the
corporate plans and policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing strategies and pricing
policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly
enrich the competitor, for advance knowledge by the competitor of the strategies for the development of
existing or new markets of existing or new products could enable said competitor to utilize such
knowledge to his advantage.
32

There is another important consideration in determining whether or not the amended by-laws are
reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair competition.
Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or prohibit private
monopolies when the public interest so requires. No combinations in restraint of trade or unfair
competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
88

Art. 186. Monopolies and combinations in restraint of trade. The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition in the market.
2. Any person who shag monopolize any merchandise or object of trade or commerce, or
shall combine with any other person or persons to monopolize said merchandise or
object in order to alter the price thereof by spreading false rumors or making use of any
other artifice to restrain free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of any merchandise or
object of commerce or an importer of any merchandise or object of commerce from any
foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire
or agree in any manner with any person likewise engaged in the manufacture,
production, processing, assembling or importation of such merchandise or object of
commerce or with any other persons not so similarly engaged for the purpose of making
transactions prejudicial to lawful commerce, or of increasing the market price in any part
of the Philippines, or any such merchandise or object of commerce manufactured,
produced, processed, assembled in or imported into the Philippines, or of any article in
the manufacture of which such manufactured, produced, processed, or imported
merchandise or object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of
trade.
33

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

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

From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with
reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal
situation. This is because an express agreement is not necessary for the existence of a combination or
conspiracy in restraint of trade.
40
It is enough that a concert of action is contemplated and that the
defendants conformed to the arrangements,
41
and what is to be considered is what the parties actually
did and not the words they used. For instance, the Clayton Act prohibits a person from serving at the
89

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 theinterlock permits the coordination of policies between nominally independent firms
to an extent that competition between them may be completely eliminated. Indeed, if a
director, for example, is to be faithful to both corporations, some accommodation must
result. Suppose X is a director of both Corporation A and Corporation B. X could hardly
vote for a policy by A that would injure B without violating his duty of loyalty to B at the
same time he could hardly abstain from voting without depriving A of his best judgment. If
the firms really do compete in the sense of vying for economic advantage at the
expense of the other there can hardly be any reason for an interlock between
competitors other than the suppression of competition.
43
(Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the
Clayton Act, it was established that: "By means of the interlocking directorates one man or group of men
have been able to dominate and control a great number of corporations ... to the detriment of the small
ones dependent upon them and to the injury of the public.
44

Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the purpose
of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San
Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The competitor could so manipulate the prices
of his products or vary its marketing strategies by region or by brand in order to get the most out of the
consumers. Where the two competing firms control a substantial segment of the market this could lead to
collusion and combination in restraint of trade. Reason and experience point to the inevitable conclusion
that the inherent tendency of interlocking directorates between companies that are related to each other
as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of compromising
opposing interests, and thus eliminate competition. As respondent SMC aptly observes, knowledge by
CFC-Robina of SMC's costs in various industries and regions in the country win enable the former to
practice price discrimination. CFC-Robina can segment the entire consuming population by geographical
areas or income groups and change varying prices in order to maximize profits from every market
segment. CFC-Robina could determine the most profitable volume at which it could produce for every
product line in which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect
destroy free competition and deprive the consuming public of opportunity to buy goods of the highest
possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the
election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in section
13(5) of the Corporation Law. Said section provides in part that "any stockholder of more than one
corporation organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or attempting to bring about a
combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but
90

waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms, applies to all stockholders. The equal protection
clause of the Constitution requires only that the by-law operate equally upon all persons of a class.
Besides, before petitioner can be declared ineligible to run for director, there must be hearing and
evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of
public policy and management, therefore, support the view that a by-law which disqualifies a competition
from election to the Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the
corporation in adopting measures to protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who have expressed their authority.
45

Although it is asserted that the amended by-laws confer on the present Board powers to perpetua
themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to
certain well established limitations. One of these is inherent in the very convert and definition of the terms
"competition" and "competitor". "Competition" implies a struggle for advantage between two or more
forces, each possessing, in substantially similar if not Identical degree, certain characteristics essential to
the business sought. It means an independent endeavor of two or more persons to obtain the business
patronage of a third by offering more advantageous terms as an inducement to secure trade.
46
The test
must be whether the business does in fact compete, not whether it is capable of an indirect and highly
unsubstantial duplication of an isolated or non-characteristics activity.
47
It is, therefore, obvious that not
every person or entity engaged in business of the same kind is a competitor. Such factors as quantum
and place of business, Identity of products and area of competition should be taken into consideration. It
is, therefore, necessary to show that petitioner's business covers a substantial portion of the same
markets for similar products to the extent of not less than 10% of respondent corporation's market for
competing products. While We here sustain the validity of the amended by-laws, it does not follow as a
necessary consequence that petitioner is ipso facto disqualified. Consonant with the requirement of due
process, there must be due hearing at which the petitioner must be given the fullest opportunity to show
that he is not covered by the disqualification. As trustees of the corporation and of the stockholders, it is
the responsibility of directors to act with fairness to the stockholders.
48
Pursuant to this obligation and to
remove any suspicion that this power may be utilized by the incumbent members of the Board to
perpetuate themselves in power, any decision of the Board to disqualify a candidate for the Board of
Directors should be reviewed by the Securities behind Exchange Commission en banc and its decision
shall be final unless reversed by this Court on certiorari.
49
Indeed, it is a settled principle that where the
action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public policy,
or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste, dissipation or
misapplication of the corporation assets, a court of equity has the power to grant appropriate relief.
50

III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was denied
inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over a specific
period, petitioner had been furnished numerous documents and information," to wit: (1) a complete list of
stockholders and their stockholdings; (2) a complete list of proxies given by the stockholders for use at
the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the stockholders' meeting
of March 18,1976; (4) a breakdown of SMC's P186.6 million investment in associated companies and
other companies as of December 31, 1975; (5) a listing of the salaries, allowances, bonuses and other
compensation or remunerations received by the directors and corporate officers of SMC; (6) a copy of the
US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the
91

Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which deletions were
not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976; (1)
that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in Bermuda
and wholly owned by SMC; this was SMC's first venture abroad, having started in 1948 with an initial
outlay of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under the
personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of December 31,
1975, the estimated value of SMI would amount to almost P400 million (3) that the total cash dividends
received by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4) that from 1972-1975, SMI
did not declare cash or stock dividends, all earnings having been used in line with a program for the
setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the
afore-mentioned documents.
51

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business
transactions of the corporation and minutes of any meeting shall be open to the inspection of any director,
member or stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based upon their ownership
of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate
property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or
a ownership.
52
This right is predicated upon the necessity of self-protection. It is generally held by
majority of the courts that where the right is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation.
53
In other words, the inspection has to be germane
to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical
to the interest of the corporation.
54
In Grey v. Insular Lumber,
55
this Court held that "the right to examine
the books of the corporation must be exercised in good faith, for specific and honest purpose, and not to
gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative or
vexatious purposes. The weight of judicial opinion appears to be, that on application for mandamus to
enforce the right, it is proper for the court to inquire into and consider the stockholder's good faith and his
purpose and motives in seeking inspection.
56
Thus, it was held that "the right given by statute is not
absolute and may be refused when the information is not sought in good faith or is used to the detriment
of the corporation."
57
But the "impropriety of purpose such as will defeat enforcement must be set up the
corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the
specific provisions take from the stockholder the burden of showing propriety of purpose and place upon
the corporation the burden of showing impropriety of purpose or motive.
58
It appears to be the general
rule that stockholders are entitled to full information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain such information, especially where it
appears that the company is being mismanaged or that it is being managed for the personal benefit of
officers or directors or certain of the stockholders to the exclusion of others."
59

While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is
a matter of law, the right of such stockholder to examine the books and records of a wholly-owned
subsidiary of the corporation in which he is a stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus, it has been
held that where a corporation owns approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the holding company, the legal fiction of
distinct corporate entities may be disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination,
60
and that a writ of mandamus, may be
granted, as the records of the subsidiary were, to all incontents and purposes, the records of the parent
even though subsidiary was not named as a party.
61
mandamus was likewise held proper to inspect both
92

the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by the
parent showing the relation of principal or agent or something similar thereto.
62

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

In the Nash case,
65
The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect corporation's
subsidiaries' books and records which were in corporation's possession and control in its office in New
York."
In the Bailey case,
66
stockholders of a corporation were held entitled to inspect the records of a
controlled subsidiary corporation which used the same offices and had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC, petitioner
contended that respondent corporation "had been attempting to suppress information for the
stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies of some
documents which for some reason or another, respondent corporation is very reluctant in revealing to the
petitioner notwithstanding the fact that no harm would be caused thereby to the corporation."
67
There is
no question that stockholders are entitled to inspect the books and records of a corporation in order to
investigate the conduct of the management, determine the financial condition of the corporation, and
generally take an account of the stewardship of the officers and directors.
68

In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the
corporation as extending to books and records of such wholly subsidiary which are in respondent
corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent
corporation to ratify the investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested corporate
funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the Corporation
Law, and alleges that respondent SEC should have investigated the charge, being a statutory offense,
instead of allowing ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for ratification is a
sound corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or
business or for any purpose other than the main purpose for which it was organized" provided that its
Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling
them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of
shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote
of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting
power is necessary.
69

93

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose in its Articles of Incorporation, which is to
manufacture and market beer. It appears that the original investment was made in 1947-1948, when
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery &
Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the
investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., supra, appears
relevant. In said case, one of the issues was the legality of an investment made by Manao Sugar Central
Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders' voting power,
in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar bags. The
lower court said that "there is more logic in the stand that if the investment is made in a corporation
whose business is important to the investing corporation and would aid it in its purpose, to require
authority of the stockholders would be to unduly curtail the power of the Board of Directors." This Court
affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. A private corporation, in order
to accomplish is purpose as stated in its articles of incorporation, and subject to the
limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities, and other evidence of indebtedness of
any domestic or foreign corporation. Such an act, if done in pursuance of the corporate
purpose, does not need the approval of stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to accomplish the purpose of its
incorporation, the vote of approval of the stockholders is necessary. In any case, the
purchase of such shares or securities must be subject to the limitations established by
the Corporations law; namely, (a) that no agricultural or mining corporation shall be
restricted to own not more than 15% of the voting stock of nay agricultural or mining
corporation; and (c) that such holdings shall be solely for investment and not for the
purpose of bringing about a monopoly in any line of commerce of combination in restraint
of trade." The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89)
(Emphasis supplied.)
40. Power to invest corporate funds. A private corporation has the power to invest its
corporate funds "in any other corporation or business, or for any purpose other than the
main purpose for which it was organized, provide that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the voting power on such a
propose at a stockholders' meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in any other agricultural
or mining corporation. When the investment is necessary to accomplish its purpose or
purposes as stated in its articles of incorporation the approval of the stockholders is not
necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment,
there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the
originally unauthorized acts of its officers or other agents.
70
This is true because the questioned
investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or
contract which is within the corporate powers, but which is defective from a supported failure to observe
in its execution the. requirement of the law that the investment must be authorized by the affirmative vote
of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the
stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the
investment and its ratification by said stockholders obliterates any defect which it may have had at the
outset. "Mere ultra vires acts", said this Court in Pirovano,
71
"or those which are not 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.
94

Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is
apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the
assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be
construed as an admission that respondent corporation had committed an ultra vires act, considering the
common practice of corporations of periodically submitting for the gratification of their stockholders the
acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine
the books and records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6)
Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to
sustain the validity per se of the amended by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if
elected to sit as director of respondent San Miguel Corporation being decided, after a new and proper
hearing by the Board of Directors of said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this
Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned amended
by-laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the
validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing
by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise
concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a
separate opinion, wherein they voted against the validity of the questioned amended bylaws and that this
question should properly be resolved first by the SEC as the agency of primary jurisdiction. They concur
in the result that petitioner may be allowed to run for and sit as director of respondent SMC in the
scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing by the
respondent's Board of Directors and petitioner's disqualification shall have been sustained by respondent
SEC en banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the petition
by allowing petitioner to examine the books and records of San Miguel International, Inc. as specified in
the petition. The petition, insofar as it assails the validity of the amended by- laws and the ratification of
the foreign investment of respondent corporation, for lack of necessary votes, is hereby DISMISSED. No
costs.

95

G.R. No. L-15092 May 18, 1962
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
Taada, Teehankee and Carreon for plaintiffs-appellants.
Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J .:
Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros, in its Civil
Case No. 2603, dismissing plaintiff's complaint that sought to compel the defendant Milling Company to
increase plaintiff's share in the sugar produced from their cane, from 60% to 62.33%, starting from the
1951-1952 crop year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the Limited co-
partnership Gonzaga and Company, had been and are sugar planters adhered to the defendant-
appellee's sugar central mill under identical milling contracts. Originally executed in 1919, said contracts
were stipulated to be in force for 30 years starting with the 1920-21 crop, and provided that the resulting
product should be divided in the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it
was proposed to execute amended milling contracts, increasing the planters' share to 60% of the
manufactured sugar and resulting molasses, besides other concessions, but extending the operation of
the milling contract from the original 30 years to 45 years. To this effect, a printed Amended Milling
Contract form was drawn up. On August 20, 1936, the Board of Directors of the appellee Bacolod-Murcia
Milling Co., Inc., adopted a resolution (Acts No. 11, Acuerdo No. 1) granting further concessions to the
planters over and above those contained in the printed Amended Milling Contract. The bone of contention
is paragraph 9 of this resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
x x x x x x x x x
Acuerdo No. 1. Previa mocion debidamente secundada, la Junta en consideracion a
una peticion de los plantadores hecha por un comite nombrado por los mismos, acuerda
enmendar el contrato de molienda enmendado medientelas siguentes:
x x x x x x x x x
9.a Que si durante la vigencia de este contrato de Molienda Enmendado, lascentrales
azucareras, de Negros Occidental, cuya produccion anual de azucar centrifugado sea
mas de una tercera parte de la produccion total de todas lascentrales azucareras de
Negros Occidental, concedieren a sus plantadores mejores condiciones que la
estipuladas en el presente contrato, entonces esas mejores condiciones se concederan y
por el presente se entenderan concedidas a los platadores que hayan otorgado este
Contrato de Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on September 10, 1936, but a
copy of the resolution of August 10, 1936, signed by the Central's General Manager, was not attached to
the printed contract until April 17, 1937; with the notation
96

Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado, otorgado
por y la Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros sugar centrals (La
Carlota, Binalbagan-Isabela and San Carlos), with a total annual production exceeding one-third of the
production of all the sugar central mills in the province, had already granted increased participation (of
62.5%) to their planters, and that under paragraph 9 of the resolution of August 20, 1936, heretofore
quoted, the appellee had become obligated to grant similar concessions to the plaintiffs (appellants
herein). The appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging that the
stipulations contained in the resolution were made without consideration; that the resolution in question
was, therefore, null and void ab initio, being in effect a donation that was ultra vires and beyond the
powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant Milling company, and
dismissed the complaint. Thereupon, plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not stand. It must be remembered that the
controverted resolution was adopted by appellee corporation as a supplement to, or further amendment
of, the proposed milling contract, and that it was approved on August 20, 1936, twenty-one days prior to
the signing by appellants on September 10, of the Amended Milling Contract itself; so that when the
Milling Contract was executed, the concessions granted by the disputed resolution had been already
incorporated into its terms. No reason appears of record why, in the face of such concessions, the
appellants should reject them or consider them as separate and apart from the main amended milling
contract, specially taking into account that appellant Alfredo Montelibano was, at the time, the President
of the Planters Association (Exhibit 4, p. 11) that had agitated for the concessions embodied in the
resolution of August 20, 1936. That the resolution formed an integral part of the amended milling contract,
signed on September 10, and not a separate bargain, is further shown by the fact that a copy of the
resolution was simply attached to the printed contract without special negotiations or agreement between
the parties.
It follows from the foregoing that the terms embodied in the resolution of August 20, 1936 were supported
by the same causa or consideration underlying the main amended milling contract; i.e., the promises and
obligations undertaken thereunder by the planters, and, particularly, the extension of its operative period
for an additional 15 years over and beyond the 30 years stipulated in the original contract. Hence, the
conclusion of the court below that the resolution constituted gratuitous concessions not supported by any
consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors of the respondent sugar milling
company to make a gift to the planters would be relevant if the resolution in question had embodied a
separate agreement after the appellants had already bound themselves to the terms of the printed milling
contract. But this was not the case. When the resolution was adopted and the additional concessions
were made by the company, the appellants were not yet obligated by the terms of the printed contract,
since they admittedly did not sign it until twenty-one days later, on September 10, 1936. Before that date,
the printed form was no more than a proposal that either party could modify at its pleasure, and the
appellee actually modified it by adopting the resolution in question. So that by September 10, 1936
defendant corporation already understood that the printed terms were not controlling, save as modified by
its resolution of August 20, 1936; and we are satisfied that such was also the understanding of appellants
herein, and that the minds of the parties met upon that basis. Otherwise there would have been no
consent or "meeting of the minds", and no binding contract at all. But the conduct of the parties indicates
that they assumed, and they do not now deny, that the signing of the contract on September 10, 1936, did
give rise to a binding agreement. That agreement had to exist on the basis of the printed terms as
modified by the resolution of August 20, 1936, or not at all. Since there is no rational explanation for the
company's assenting to the further concessions asked by the planters before the contracts were signed,
except as further inducement for the planters to agree to the extension of the contract period, to allow the
97

company now to retract such concessions would be to sanction a fraud upon the planters who relied on
such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There can be no novation
unless two distinct and successive binding contracts take place, with the later designed to replace the
preceding convention. Modifications introduced before a bargain becomes obligatory can in no sense
constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not attached to the
printed contract until April 17, 1937. But, except in the case of statutory forms or solemn agreements (and
it is not claimed that this is one), it is the assent and concurrence (the "meeting of the minds") of the
parties, and not the setting down of its terms, that constitutes a binding contract. And the fact that the
addendum is only signed by the General Manager of the milling company emphasizes that the addition
was made solely in order that the memorial of the terms of the agreement should be full and complete.
Much is made of the circumstance that the report submitted by the Board of Directors of the appellee
company in November 19, 1936 (Exhibit 4) only made mention of 90%, the planters having agreed to the
60-40 sharing of the sugar set forth in the printed "amended milling contracts", and did not make any
reference at all to the terms of the resolution of August 20, 1936. But a reading of this report shows that it
was not intended to inventory all the details of the amended contract; numerous provisions of the printed
terms are alao glossed over. The Directors of the appellee Milling Company had no reason at the time to
call attention to the provisions of the resolution in question, since it contained mostly modifications in
detail of the printed terms, and the only major change was paragraph 9 heretofore quoted; but when the
report was made, that paragraph was not yet in effect, since it was conditioned on other centrals granting
better concessions to their planters, and that did not happen until after 1950. There was no reason in
1936 to emphasize a concession that was not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had authority to modify the proposed
terms of the Amended Milling Contract for the purpose of making its terms more acceptable to the other
contracting parties. The rule is that
It is a question, therefore, in each case of the logical relation of the act to the corporate purpose
expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is
done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of
those ends, in a substantial, and not in a remote and fanciful sense, it may fairly be considered
within charter powers. The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation's 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. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
As the resolution in question was passed in good faith by the board of directors, it is valid and binding,
and whether or not it will cause losses or decrease the profits of the central, the court has no authority to
review them.
They hold such office charged with the duty to act for the corporation according to their best
judgment, and in so doing they cannot be controlled in the reasonable exercise and performance
of such duty. Whether the business of a corporation should be operated at a loss during
depression, or close down at a smaller loss, is a purely business and economic problem to be
determined by the directors of the corporation and not by the court. It is a well-known rule of law
that questions of policy or of management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to substitute its judgment of the board
of directors; the board is the business manager of the corporation, and so long as it acts in good
faith its orders are not reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).
98

And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian Philippines, San
Carlos and Binalbagan (which produce over one-third of the entire annual sugar production in Occidental
Negros) have granted progressively increasing participations to their adhered planter at an average rate
of
62.333% for the 1951-52 crop year;
64.2% for 1952-53;
64.3% for 1953-54;
64.5% for 1954-55; and
63.5% for 1955-56,
the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20, 1936,
duty bound to grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreed sentencing
the defendant-appellee to pay plaintiffs-appellants the differential or increase of participation in the milled
sugar in accordance with paragraph 9 of the appellee Resolution of August 20, 1936, over and in addition
to the 60% expressed in the printed Amended Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants having received
an additional 2% corresponding to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all appellants thereafter

4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the time they were withheld; and the
right is reserved to plaintiffs-appellants to sue for such additional increases as they may be entitled to for
the crop years subsequent to those herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.

99

[G.R. NO. 126297 : February 11, 2008]
PROFESSIONAL SERVICES, INC., Petitioner, v. THE COURT OF APPEALS and NATIVIDAD and
ENRIQUE AGANA, Respondents,
[G.R. NO. 126467 : February 11, 2008]
NATIVIDAD (Substituted by her children MARCELINO AGANA III, ENRIQUE AGANA, JR., EMMA
AGANA ANDAYA, JESUS AGANA, and RAYMUND AGANA) and ENRIQUE
AGANA, Petitioners, v. THE COURT OF APPEALS and JUAN FUENTES, Respondents,
[G.R. NO. 127590 : February 11, 2008]
MIGUEL AMPIL, Petitioner, v. THE COURT OF APPEALS and NATIVIDAD AGANA and ENRIQUE
AGANA, Respondents.
R E S O L U T I O N
SANDOVAL-GUTIERREZ, J .:
As the hospital industry changes, so must the laws and jurisprudence governing hospital liability. The
immunity from medical malpractice traditionally accorded to hospitals has to be eroded if we are to
balance the interest of the patients and hospitals under the present setting.
Before this Court is a motion for reconsideration filed by Professional Services, Inc. (PSI), petitioner in
G.R. No. 126297, assailing the Court's First Division Decision dated January 31, 2007, finding PSI and
Dr. Miguel Ampil, petitioner in G.R. No. 127590, jointly and severally liable for medical negligence.
A brief revisit of the antecedent facts is imperative.
On April 4, 1984, Natividad Agana was admitted at the Medical City General Hospital (Medical City)
because of difficulty of bowel movement and bloody anal discharge. Dr. Ampil diagnosed her to be
suffering from "cancer of the sigmoid." Thus, on April 11, 1984, Dr. Ampil, assisted by the medical staff
1
of
Medical City, performed an anterior resection surgery upon her. During the surgery, he found that the
malignancy in her sigmoid area had spread to her left ovary, necessitating the removal of certain portions
of it. Thus, Dr. Ampil obtained the consent of Atty. Enrique Agana, Natividad's husband, to permit Dr.
Juan Fuentes, respondent in G.R. No. 126467, to perform hysterectomy upon Natividad.
Dr. Fuentes performed and completed the hysterectomy. Afterwards, Dr. Ampil took over, completed the
operation and closed the incision. However, the operation appeared to be flawed. In the corresponding
Record of Operation dated April 11, 1984, the attending nurses entered these remarks:
sponge count lacking 2
announced to surgeon searched done (sic) but to no avail continue for closure.
After a couple of days, Natividad complained of excruciating pain in her anal region. She consulted both
Dr. Ampil and Dr. Fuentes about it. They told her that the pain was the natural consequence of the
surgical operation performed upon her. Dr. Ampil recommended that Natividad consult an oncologist to
treat the cancerous nodes which were not removed during the operation.
100

On May 9, 1984, Natividad, accompanied by her husband, went to the United States to seek further
treatment. After four (4) months of consultations and laboratory examinations, Natividad was told that she
was free of cancer. Hence, she was advised to return to the Philippines.
On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two (2) weeks
thereafter, her daughter found a piece of gauze protruding from her vagina. Dr. Ampil was immediately
informed. He proceeded to Natividad's house where he managed to extract by hand a piece of gauze
measuring 1.5 inches in width. Dr. Ampil then assured Natividad that the pains would soon vanish.
Despite Dr. Ampil's assurance, the pains intensified, prompting Natividad to seek treatment at the
Polymedic General Hospital. While confined thereat, Dr. Ramon Gutierrez detected the presence of a
foreign object in her vagina - - a foul-smelling gauze measuring 1.5 inches in width. The gauze had badly
infected her vaginal vault. A recto-vaginal fistula had formed in her reproductive organ which forced stool
to excrete through the vagina. Another surgical operation was needed to remedy the situation. Thus, in
October 1984, Natividad underwent another surgery.
On November 12, 1984, Natividad and her husband filed with the Regional Trial Court, Branch 96,
Quezon City a complaint for damages against PSI (owner of Medical City), Dr. Ampil and Dr. Fuentes.
On February 16, 1986, pending the outcome of the above case, Natividad died. She was duly substituted
by her above-named children (the Aganas).
On March 17, 1993, the trial court rendered judgment in favor of spouses Agana finding PSI, Dr. Ampil
and Dr. Fuentes jointly and severally liable. On appeal, the Court of Appeals, in its Decision dated
September 6, 1996, affirmed the assailed judgment with modification in the sense that the complaint
against Dr. Fuentes was dismissed.
PSI, Dr. Ampil and the Aganas filed with this Court separate Petitions for Review onCertiorari. On January
31, 2007, the Court, through its First Division, rendered a Decision holding that PSI is jointly and severally
liable with Dr. Ampil for the following reasons:first, there is an employer-employee relationship between
Medical City and Dr. Ampil. The Court relied on Ramos v. Court of Appeals,
2
holding that for the purpose
of apportioning responsibility in medical negligence cases, an employer-employee relationship in effect
exists between hospitals and their attending and visiting physicians; second, PSI's act of publicly
displaying in the lobby of the Medical City the names and specializations of its accredited physicians,
including Dr. Ampil, estopped it from denying the existence of an employer-employee relationship
between them under the doctrine of ostensible agency or agency by estoppel; and third, PSI's failure
to supervise Dr. Ampil and its resident physicians and nurses and to take an active step in order to
remedy their negligence rendered it directly liable under the doctrine of corporate negligence.
In its motion for reconsideration, PSI contends that the Court erred in finding it liable under Article 2180 of
the Civil Code, there being no employer-employee relationship between it and its consultant, Dr. Ampil.
PSI stressed that the Court's Decision inRamos holding that "an employer-employee relationship in
effect exists between hospitals and their attending and visiting physicians for the purpose of apportioning
responsibility" had been reversed in a subsequent Resolution.
3
Further, PSI argues thatthe doctrine of
ostensible agency or agency by estoppel cannot apply because spouses Agana failed to establish one
requisite of the doctrine, i.e., that Natividad relied on the representation of the hospital in engaging the
services of Dr. Ampil. And lastly, PSI maintains that the doctrine of corporate negligence is misplaced
because the proximate cause of Natividad's injury was Dr. Ampil's negligence.
The motion lacks merit.
As earlier mentioned, the First Division, in its assailed Decision, ruled that an employer-employee
relationship "in effect" exists between the Medical City and Dr. Ampil. Consequently, both are jointly and
severally liable to the Aganas. This ruling proceeds from the following ratiocination in Ramos:
101

We now discuss the responsibility of the hospital in this particular incident. The unique practice (among
private hospitals) of filling up specialist staff with attending and visiting "consultants," who are allegedly
not hospital employees, presents problems in apportioning responsibility for negligence in medical
malpractice cases. However, the difficulty is only more apparent than real.
In the first place, hospitals exercise significant control in the hiring and firing of consultants and in
the conduct of their work within the hospital premises. Doctors who apply for "consultant" slots,
visiting or attending, are required to submit proof of completion of residency, their educational
qualifications; generally, evidence of accreditation by the appropriate board (diplomate), evidence of
fellowship in most cases, and references. These requirements are carefully scrutinized by members of the
hospital administration or by a review committee set up by the hospital who either accept or reject the
application. This is particularly true with respondent hospital.
After a physician is accepted, either as a visiting or attending consultant, he is normally required
to attend clinico-pathological conferences, conduct bedside rounds for clerks, interns and
residents, moderate grand rounds and patient audits and perform other tasks and responsibilities,
for the privilege of being able to maintain a clinic in the hospital, and/or for the privilege of
admitting patients into the hospital. In addition to these, the physician's performance as a specialist
is generally evaluated by a peer review committee on the basis of mortality and morbidity
statistics, and feedback from patients, nurses, interns and residents. A consultant remiss in his
duties, or a consultant who regularly falls short of the minimum standards acceptable to the
hospital or its peer review committee, is normally politely terminated.
In other words, private hospitals hire, fire and exercise real control over their attending and visiting
"consultant" staff. While "consultants" are not, technically employees, a point which respondent
hospital asserts in denying all responsibility for the patient's condition, the control exercised, the
hiring, and the right to terminate consultants all fulfill the important hallmarks of an employer-
employee relationship, with the exception of the payment of wages. In assessing whether such a
relationship in fact exists, the control test is determining. Accordingly, on the basis of the
foregoing, we rule that for the purpose of allocating responsibility in medical negligence cases, an
employer-employee relationship in effect exists between hospitals and their attending and visiting
physicians. This being the case, the question now arises as to whether or not respondent hospital is
solidarily liable with respondent doctors for petitioner's condition.
The basis for holding an employer solidarily responsible for the negligence of its employee is found in
Article 2180 of the Civil Code which considers a person accountable not only for his own acts but also for
those of others based on the former's responsibility under a relationship of partia ptetas.
Clearly, in Ramos, the Court considered the peculiar relationship between a hospital and its consultants
on the bases of certain factors. One such factor is the "control test" wherein the hospital exercises control
in the hiring and firing of consultants, like Dr. Ampil, and in the conduct of their work.
Actually, contrary to PSI's contention, the Court did not reverse its ruling in Ramos. What it clarified was
that the De Los Santos Medical Clinic did not exercise control over its consultant, hence, there is no
employer-employee relationship between them. Thus, despite the granting of the said hospital's motion
for reconsideration, the doctrine inRamos stays, i.e., for the purpose of allocating responsibility in medical
negligence cases, an employer-employee relationship exists between hospitals and their consultants.
In the instant cases, PSI merely offered a general denial of responsibility, maintaining that consultants,
like Dr. Ampil, are "independent contractors," not employees of the hospital. Even assuming that Dr.
Ampil is not an employee of Medical City, but an independent contractor, still the said hospital is liable to
the Aganas.
In Nograles, et al. v. Capitol Medical Center, et al.,
4
through Mr. Justice Antonio T. Carpio, the Court held:
102

The question now is whether CMC is automatically exempt from liability considering that Dr. Estrada is an
independent contractor-physician.
In general, a hospital is not liable for the negligence of an independent contractor-physician. There is,
however, an exception to this principle. The hospital may be liable if the physician is the "ostensible"
agent of the hospital. (Jones v. Philpott, 702 F. Supp. 1210 [1988]) This exception is also known as the
"doctrine of apparent authority." (Sometimes referred to as the apparent or ostensible agency theory.
[King v. Mitchell, 31 A.D.3
rd
958, 819 N.Y. S.2d 169 (2006)].
x x x
The doctrine of apparent authority essentially involves two factors to determine the liability of an
independent contractor-physician.
The first factor focuses on the hospital's manifestations and is sometimes described as an inquiry whether
the hospital acted in a manner which would lead a reasonable person to conclude that the individual who
was alleged to be negligent was an employee or agent of the hospital. (Diggs v. Novant Health, Inc., 628
S.E.2d 851 (2006) citing Hylton v. Koontz, 138 N.C. App. 629 (2000).In this regard, the hospital need
not make express representations to the patient that the treating physician is an employee of the
hospital; rather a representation may be general and implied. (Id.)
The doctrine of apparent authority is a specie of the doctrine of estoppel. Article 1431 of the Civil Code
provides that "[t]hrough estoppel, an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon." Estoppel rests on
this rule: "Whether a party has, by his own declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising
out of such declaration, act or omission, be permitted to falsify it. (De Castro v. Ginete, 137 Phil. 453
[1969], citing Sec. 3, par. A, Rule 131 of the Rules of Court. See also King v. Mitchell, 31 A.D.3
rd
958, 819
N.Y.S.2d 169 [2006]).
x x x
The second factor focuses on the patient's reliance. It is sometimes characterized as an inquiry on
whether the plaintiff acted in reliance upon the conduct of the hospital or its agent, consistent with
ordinary care and prudence. (Diggs v. Novant Health, Inc.)
PSI argues that the doctrine of apparent authority cannot apply to these cases because spouses
Agana failed to establish proof of their reliance on the representation of Medical City that Dr. Ampil is its
employee.
The argument lacks merit.
Atty. Agana categorically testified that one of the reasons why he chose Dr. Ampil was that he knew him
to be a staff member of Medical City, a prominent and known hospital.
Q Will you tell us what transpired in your visit to Dr. Ampil?cralawred
A Well, I saw Dr. Ampil at the Medical City, I know him to be a staff member there, and I told him
about the case of my wife and he asked me to bring my wife over so she could be examined. Prior to that,
I have known Dr. Ampil, first, he was staying in front of our house, he was a neighbor, second, my
daughter was his student in the University of the East School of Medicine at Ramon Magsaysay; and
when my daughter opted to establish a hospital or a clinic, Dr. Ampil was one of our consultants on how
103

to establish that hospital. And from there, I have known that he was a specialist when it comes to that
illness.
Atty. Agcaoili
On that particular occasion, April 2, 1984, what was your reason for choosing to contact Dr. Ampil in
connection with your wife's illness?cralawred
A First, before that, I have known him to be a specialist on that part of the body as a surgeon; second, I
have known him to be a staff member of the Medical City which is a prominent and known
hospital. And third, because he is a neighbor, I expect more than the usual medical service to be given to
us, than his ordinary patients.
5

Clearly, PSI is estopped from passing the blame solely to Dr. Ampil. Its act of displaying his name and
those of the other physicians in the public directory at the lobby of the hospital amounts to holding out to
the public that it offers quality medical service through the listed physicians. This justifies Atty. Agana's
belief that Dr. Ampil was a member of the hospital's staff. It must be stressed that under the doctrine
of apparent authority, the question in every case is whether the principal has by his voluntary act
placed the agent in such a situation that a person of ordinary prudence, conversant with business
usages and the nature of the particular business, is justified in presuming that such agent has
authority to perform the particular act in question.
6
In these cases, the circumstances yield a positive
answer to the question.
The challenged Decision also anchors its ruling on the doctrine of corporate responsibility.
7
The duty
of providing quality medical service is no longer the sole prerogative and responsibility of the physician.
This is because the modern hospital now tends to organize a highly-professional medical staff whose
competence and performance need also to be monitored by the hospital commensurate with its inherent
responsibility to provide quality medical care.
8
Such responsibility includes the proper supervision of
the members of its medical staff. Accordingly, the hospital has the duty to make a reasonable
effort to monitor and oversee the treatment prescribed and administered by the physicians
practicing in its premises.
Unfortunately, PSI had been remiss in its duty. It did not conduct an immediate investigation on the
reported missing gauzes to the great prejudice and agony of its patient. Dr. Jocson, a member of PSI's
medical staff, who testified on whether the hospital conducted an investigation, was evasive, thus:
Q We go back to the operative technique, this was signed by Dr. Puruganan, was this submitted
to the hospital?cralawred
A Yes, sir, this was submitted to the hospital with the record of the patient.
Q Was the hospital immediately informed about the missing sponges?cralawred
A That is the duty of the surgeon, sir.
Q As a witness to an untoward incident in the operating room, was it not your obligation, Dr., to
also report to the hospital because you are under the control and direction of the
hospital?cralawred
A The hospital already had the record of the two OS missing, sir.
Q If you place yourself in the position of the hospital, how will you recover.
104

A You do not answer my question with another question.
Q Did the hospital do anything about the missing gauzes?cralawred
A The hospital left it up to the surgeon who was doing the operation, sir.
Q Did the hospital investigate the surgeon who did the operation?cralawred
A I am not in the position to answer that, sir.
Q You never did hear the hospital investigating the doctors involved in this case of those
missing sponges, or did you hear something?cralawred
x x x x x x
A I think we already made a report by just saying that two sponges were missing, it is up to the
hospital to make the move.
Atty. Agana
Precisely, I am asking you if the hospital did a move, if the hospital did a move.
A I cannot answer that.
Court
By that answer, would you mean to tell the Court that you were aware if there was such a move
done by the hospital?cralawred
A I cannot answer that, your honor, because I did not have any more follow-up of the case that
happened until now.
9

The above testimony obviously shows Dr. Jocson's lack of concern for the patients. Such conduct is
reflective of the hospital's manner of supervision. Not only did PSI breach its duty to oversee or
supervise all persons who practice medicine within its walls, it also failed to take an active step in
fixing the negligence committed. This renders PSI, not only vicariously liable for the negligence of Dr.
Ampil under Article 2180 of the Civil Code, but also directly liable for its own negligence under Article
2176.
Moreover, there is merit in the trial court's finding that the failure of PSI to conduct an investigation
"established PSI's part in the dark conspiracy of silence and concealment about the gauzes." The
following testimony of Atty. Agana supports such findings, thus:
Q You said you relied on the promise of Dr. Ampil and despite the promise you were not able to obtain
the said record. Did you go back to the record custodian?cralawred
A I did not because I was talking to Dr. Ampil. He promised me.
Q After your talk to Dr. Ampil, you went to the record custodian?
105

A I went to the record custodian to get the clinical record of my wife, and I was given a portion
of the records consisting of the findings, among them, the entries of the dates, but not the
operating procedure and operative report.
10

In sum, we find no merit in the motion for reconsideration.
WHEREFORE, we DENY PSI's motion for reconsideration with finality.
SO ORDERED.

106

EXPERTRAVEL & TOURS, INC., petitioner, vs. COURT OF APPEALS and KOREAN
AIRLINES, respondents.
D E C I S I O N
CALLEJO, SR., J .:
Before us is a petition for review on certiorari of the Decision
[1]
of the Court of Appeals (CA) in CA-
G.R. SP No. 61000 dismissing the petition for certiorari and mandamus filed by Expertravel and Tours,
Inc. (ETI).
The Antecedents
Korean Airlines (KAL) is a corporation established and registered in the Republic of South Korea and
licensed to do business in the Philippines. Its general manager in the Philippines is Suk Kyoo Kim, while
its appointed counsel was Atty. Mario Aguinaldo and his law firm.
On September 6, 1999, KAL, through Atty. Aguinaldo, filed a Complaint
[2]
against ETI with the
Regional Trial Court (RTC) of Manila, for the collection of the principal amount of P260,150.00, plus
attorneys fees and exemplary damages. The verification and certification against forum shopping was
signed by Atty. Aguinaldo, who indicated therein that he was the resident agent and legal counsel of KAL
and had caused the preparation of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not authorized to
execute the verification and certificate of non-forum shopping as required by Section 5, Rule 7 of the
Rules of Court. KAL opposed the motion, contending that Atty. Aguinaldo was its resident agent and was
registered as such with the Securities and Exchange Commission (SEC) as required by the Corporation
Code of the Philippines. It was further alleged that Atty. Aguinaldo was also the corporate secretary of
KAL. Appended to the said opposition was the identification card of Atty. Aguinaldo, showing that he was
the lawyer of KAL.
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he had been authorized to file
the complaint through a resolution of the KAL Board of Directors approved during a special meeting held
on June 25, 1999. Upon his motion, KAL was given a period of 10 days within which to submit a copy of
the said resolution. The trial court granted the motion. Atty. Aguinaldo subsequently filed other similar
motions, which the trial court granted.
Finally, KAL submitted on March 6, 2000 an Affidavit
[3]
of even date, executed by its general
manager Suk Kyoo Kim, alleging that the board of directors conducted a special teleconference on June
25, 1999, which he and Atty. Aguinaldo attended. It was also averred that in that same teleconference,
the board of directors approved a resolution authorizing Atty. Aguinaldo to execute the certificate of non-
forum shopping and to file the complaint. Suk Kyoo Kim also alleged, however, that the corporation had
no written copy of the aforesaid resolution.
On April 12, 2000, the trial court issued an Order
[4]
denying the motion to dismiss, giving credence to
the claims of Atty. Aguinaldo and Suk Kyoo Kim that the KAL Board of Directors indeed conducted a
teleconference on June 25, 1999, during which it approved a resolution as quoted in the submitted
affidavit.
ETI filed a motion for the reconsideration of the Order, contending that it was inappropriate for the
court to take judicial notice of the said teleconference without any prior hearing. The trial court denied the
motion in its Order
[5]
dated August 8, 2000.
ETI then filed a petition for certiorari and mandamus, assailing the orders of the RTC. In its
comment on the petition, KAL appended a certificate signed by Atty. Aguinaldo dated January 10, 2000,
worded as follows:
107

SECRETARYS/RESIDENT AGENTS CERTIFICATE
KNOW ALL MEN BY THESE PRESENTS:
I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected and appointed Corporate Secretary and
Resident Agent of KOREAN AIRLINES, a foreign corporation duly organized and existing under and by
virtue of the laws of the Republic of Korea and also duly registered and authorized to do business in the
Philippines, with office address at Ground Floor, LPL Plaza Building, 124 Alfaro St., Salcedo Village,
Makati City, HEREBY CERTIFY that during a special meeting of the Board of Directors of the Corporation
held on June 25, 1999 at which a quorum was present, the said Board unanimously passed, voted upon
and approved the following resolution which is now in full force and effect, to wit:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & Associates or any of its lawyers
are hereby appointed and authorized to take with whatever legal action necessary to effect the collection
of the unpaid account of Expert Travel & Tours. They are hereby specifically authorized to prosecute,
litigate, defend, sign and execute any document or paper necessary to the filing and prosecution of said
claim in Court, attend the Pre-Trial Proceedings and enter into a compromise agreement relative to the
above-mentioned claim.
IN WITNESS WHEREOF, I have hereunto affixed my signature this 10
th
day of January, 1999, in the City
of Manila, Philippines.
(Sgd.)
MARIO A. AGUINALDO
Resident Agent
SUBSCRIBED AND SWORN to before me this 10
th
day of January, 1999, Atty. Mario A. Aguinaldo
exhibiting to me his Community Tax Certificate No. 14914545, issued on January 7, 2000 at Manila,
Philippines.
(Sgd.)
Doc. No. 119; ATTY. HENRY D. ADASA
Page No. 25; Notary Public
Book No. XXIV Until December 31, 2000
Series of 2000. PTR #889583/MLA 1/3/2000
[6]

On December 18, 2001, the CA rendered judgment dismissing the petition, ruling that the verification
and certificate of non-forum shopping executed by Atty. Aguinaldo was sufficient compliance with the
Rules of Court. According to the appellate court, Atty. Aguinaldo had been duly authorized by the board
resolution approved on June 25, 1999, and was the resident agent of KAL. As such, the RTC could not be
faulted for taking judicial notice of the said teleconference of the KAL Board of Directors.
ETI filed a motion for reconsideration of the said decision, which the CA denied. Thus, ETI, now the
petitioner, comes to the Court by way of petition for review on certiorari and raises the following issue:
DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM THE ACCEPTED AND USUAL
COURSE OF JUDICIAL PROCEEDINGS WHEN IT RENDERED ITS QUESTIONED DECISION AND
WHEN IT ISSUED ITS QUESTIONED RESOLUTION, ANNEXES A AND B OF THE INSTANT
PETITION?
[7]

The petitioner asserts that compliance with Section 5, Rule 7, of the Rules of Court can be
determined only from the contents of the complaint and not by documents or pleadings outside thereof.
Hence, the trial court committed grave abuse of discretion amounting to excess of jurisdiction, and the CA
erred in considering the affidavit of the respondents general manager, as well as the
108

Secretarys/Resident Agents Certification and the resolution of the board of directors contained therein,
as proof of compliance with the requirements of Section 5, Rule 7 of the Rules of Court. The petitioner
also maintains that the RTC cannot take judicial notice of the said teleconference without prior hearing,
nor any motion therefor. The petitioner reiterates its submission that the teleconference and the resolution
adverted to by the respondent was a mere fabrication.
The respondent, for its part, avers that the issue of whether modern technology is used in the field of
business is a factual issue; hence, cannot be raised in a petition for review on certiorariunder Rule 45 of
the Rules of Court. On the merits of the petition, it insists that Atty. Aguinaldo, as the resident agent and
corporate secretary, is authorized to sign and execute the certificate of non-forum shopping required by
Section 5, Rule 7 of the Rules of Court, on top of the board resolution approved during the teleconference
of June 25, 1999. The respondent insists that technological advances in this time and age are as
commonplace as daybreak. Hence, the courts may take judicial notice that the Philippine Long Distance
Telephone Company, Inc. had provided a record of corporate conferences and meetings through
FiberNet using fiber-optic transmission technology, and that such technology facilitates voice and image
transmission with ease; this makes constant communication between a foreign-based office and its
Philippine-based branches faster and easier, allowing for cost-cutting in terms of travel concerns. It
points out that even the E-Commerce Law has recognized this modern technology. The respondent
posits that the courts are aware of this development in technology; hence, may take judicial notice thereof
without need of hearings. Even if such hearing is required, the requirement is nevertheless satisfied if a
party is allowed to file pleadings by way of comment or opposition thereto.
In its reply, the petitioner pointed out that there are no rulings on the matter of teleconferencing as a
means of conducting meetings of board of directors for purposes of passing a resolution; until and after
teleconferencing is recognized as a legitimate means of gathering a quorum of board of directors, such
cannot be taken judicial notice of by the court. It asserts that safeguards must first be set up to prevent
any mischief on the public or to protect the general public from any possible fraud. It further proposes
possible amendments to the Corporation Code to give recognition to such manner of board meetings to
transact business for the corporation, or other related corporate matters; until then, the petitioner asserts,
teleconferencing cannot be the subject of judicial notice.
The petitioner further avers that the supposed holding of a special meeting on June 25, 1999 through
teleconferencing where Atty. Aguinaldo was supposedly given such an authority is a farce, considering
that there was no mention of where it was held, whether in this country or elsewhere. It insists that the
Corporation Code requires board resolutions of corporations to be submitted to the SEC. Even assuming
that there was such a teleconference, it would be against the provisions of the Corporation Code not to
have any record thereof.
The petitioner insists that the teleconference and resolution adverted to by the respondent in its
pleadings were mere fabrications foisted by the
respondent and its counsel on the RTC, the CA and this Court.
The petition is meritorious.
Section 5, Rule 7 of the Rules of Court provides:
SEC. 5. Certification against forum shopping. The plaintiff or principal party shall certify under oath in
the complaint or other initiatory pleading asserting a claim for relief, or in a sworn certification annexed
thereto and simultaneously filed therewith: (a) that he has not theretofore commenced any action or filed
any claim involving the same issues in any court, tribunal or quasi-judicial agency and, to the best of his
knowledge, no such other action or claim is pending therein; (b) if there is such other pending action or
claim, a complete statement of the present status thereof; and (c) if he should thereafter learn that the
same or similar action or claim has been filed or is pending, he shall report that fact within five (5) days
therefrom to the court wherein his aforesaid complaint or initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable by mere amendment of the
complaint or other initiatory pleading but shall be cause for the dismissal of the case without prejudice,
unless otherwise provided, upon motion and after hearing. The submission of a false certification or non-
109

compliance with any of the undertakings therein shall constitute indirect contempt of court, without
prejudice to the corresponding administrative and criminal actions. If the acts of the party or his counsel
clearly constitute willful and deliberate forum shopping, the same shall be ground for summary dismissal
with prejudice and shall constitute direct contempt, as well as a cause for administrative sanctions.
It is settled that the requirement to file a certificate of non-forum shopping is mandatory
[8]
and that the
failure to comply with this requirement cannot be excused. The certification is a peculiar and personal
responsibility of the party, an assurance given to the court or other tribunal that there are no other
pending cases involving basically the same parties, issues and causes of action. Hence, the certification
must be accomplished by the party himself because he has actual knowledge of whether or not he has
initiated similar actions or proceedings in different courts or tribunals. Even his counsel may be unaware
of such facts.
[9]
Hence, the requisite certification executed by the plaintiffs counsel will not suffice.
[10]

In a case where the plaintiff is a private corporation, the certification may be signed, for and on
behalf of the said corporation, by a specifically authorized person, including its retained counsel, who has
personal knowledge of the facts required to be established by the documents. The reason was
explained by the Court in National Steel Corporation v. Court of Appeals,
[11]
as follows:
Unlike natural persons, corporations may perform physical actions only through properly delegated
individuals; namely, its officers and/or agents.

The corporation, such as the petitioner, has no powers except those expressly conferred on it by the
Corporation Code and those that are implied by or are incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its duly-authorized officers and
agents. Physical acts, like the signing of documents, can be performed only by natural persons duly-
authorized for the purpose by corporate by-laws or by specific act of the board of directors. All acts
within the powers of a corporation may be performed by agents of its selection; and except so far as
limitations or restrictions which may be imposed by special charter, by-law, or statutory provisions, the
same general principles of law which govern the relation of agency for a natural person govern the officer
or agent of a corporation, of whatever status or rank, in respect to his power to act for the corporation;
and agents once appointed, or members acting in their stead, are subject to the same rules, liabilities and
incapacities as are agents of individuals and private persons.

For who else knows of the circumstances required in the Certificate but its own retained counsel. Its
regular officers, like its board chairman and president, may not even know the details required therein.
Indeed, the certificate of non-forum shopping may be incorporated in the complaint or appended
thereto as an integral part of the complaint. The rule is that compliance with the rule after the filing of the
complaint, or the dismissal of a complaint based on its non-compliance with the rule, is
impermissible. However, in exceptional circumstances, the court may allow subsequent compliance with
the rule.
[12]
If the authority of a partys counsel to execute a certificate of non-forum shopping is disputed
by the adverse party, the former is required to show proof of such authority or representation.
In this case, the petitioner, as the defendant in the RTC, assailed the authority of Atty. Aguinaldo to
execute the requisite verification and certificate of non-forum shopping as the resident agent and counsel
of the respondent. It was, thus, incumbent upon the respondent, as the plaintiff, to allege and establish
that Atty. Aguinaldo had such authority to execute the requisite verification and certification for and in its
behalf. The respondent, however, failed to do so.
The verification and certificate of non-forum shopping which was incorporated in the complaint and
signed by Atty. Aguinaldo reads:
110

I, Mario A. Aguinaldo of legal age, Filipino, with office address at Suite 210 Gedisco Centre, 1564 A.
Mabini cor. P. Gil Sts., Ermita, Manila, after having sworn to in accordance with law hereby deposes and
say: THAT -
1. I am the Resident Agent and Legal Counsel of the plaintiff in the above entitled case and have caused
the preparation of the above complaint;
2. I have read the complaint and that all the allegations contained therein are true and correct based on
the records on files;
3. I hereby further certify that I have not commenced any other action or proceeding involving the same
issues in the Supreme Court, the Court of Appeals, or different divisions thereof, or any other tribunal or
agency. If I subsequently learned that a similar action or proceeding has been filed or is pending before
the Supreme Court, the Court of Appeals, or different divisions thereof, or any tribunal or agency, I will
notify the court, tribunal or agency within five (5) days from such notice/knowledge.
(Sgd.)
MARIO A. AGUINALDO
Affiant
CITY OF MANILA
SUBSCRIBED AND SWORN TO before me this 30
th
day of August, 1999, affiant exhibiting to me his
Community Tax Certificate No. 00671047 issued on January 7, 1999 at Manila, Philippines.
(Sgd.)
Doc. No. 1005; ATTY. HENRY D. ADASA
Page No. 198; Notary Public
Book No. XXI Until December 31, 2000
Series of 1999. PTR No. 320501 Mla. 1/4/99
[13]

As gleaned from the aforequoted certification, there was no allegation that Atty. Aguinaldo had been
authorized to execute the certificate of non-forum shopping by the respondents Board of Directors;
moreover, no such board resolution was appended thereto or incorporated therein.
While Atty. Aguinaldo is the resident agent of the respondent in the Philippines, this does not mean
that he is authorized to execute the requisite certification against forum shopping. Under Section 127, in
relation to Section 128 of the Corporation Code, the authority of the resident agent of a foreign
corporation with license to do business in the Philippines is to receive, for and in behalf of the foreign
corporation, services and other legal processes in all actions and other legal proceedings against such
corporation, thus:
SEC. 127. Who may be a resident agent. A resident agent may either be an individual residing in the
Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided, That in
the case of an individual, he must be of good moral character and of sound financial standing.
SEC. 128. Resident agent; service of process. The Securities and Exchange Commission shall require
as a condition precedent to the issuance of the license to transact business in the Philippines by any
foreign corporation that such corporation file with the Securities and Exchange Commission a written
power of attorney designating some persons who must be a resident of the Philippines, on whom any
summons and other legal processes may be served in all actions or other legal proceedings against such
corporation, and consenting that service upon such resident agent shall be admitted and held as valid as
if served upon the duly-authorized officers of the foreign corporation as its home office.
[14]

111

Under the law, Atty. Aguinaldo was not specifically authorized to execute a certificate of non-forum
shopping as required by Section 5, Rule 7 of the Rules of Court. This is because while a resident agent
may be aware of actions filed against his principal (a foreign corporation doing business in the
Philippines), such resident may not be aware of actions initiated by its principal, whether in the Philippines
against a domestic corporation or private individual, or in the country where such corporation was
organized and registered, against a Philippine registered corporation or a Filipino citizen.
The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, was not specifically
authorized to execute the said certification. It attempted to show its compliance with the rule subsequent
to the filing of its complaint by submitting, on March 6, 2000, a resolution purporting to have been
approved by its Board of Directors during a teleconference held on June 25, 1999, allegedly with Atty.
Aguinaldo and Suk Kyoo Kim in attendance. However, such attempt of the respondent casts veritable
doubt not only on its claim that such a teleconference was held, but also on the approval by the Board of
Directors of the resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping.
In its April 12, 2000 Order, the RTC took judicial notice that because of the onset of modern
technology, persons in one location may confer with other persons in other places, and, based on the
said premise, concluded that Suk Kyoo Kim and Atty. Aguinaldo had a teleconference with the
respondents Board of Directors in South Korea on June 25, 1999. The CA, likewise, gave credence to
the respondents claim that such a teleconference took place, as contained in the affidavit of Suk Kyoo
Kim, as well as Atty. Aguinaldos certification.
Generally speaking, matters of judicial notice have three material requisites: (1) the matter must be
one of common and general knowledge; (2) it must be well and authoritatively settled and not doubtful or
uncertain; and (3) it must be known to be within the limits of the jurisdiction of the court. The principal
guide in determining what facts may be assumed to be judicially known is that of notoriety. Hence, it can
be said that judicial notice is limited to facts evidenced by public records and facts of general
notoriety.
[15]
Moreover, a judicially noticed fact must be one not subject to a reasonable dispute in that it is
either: (1) generally known within the territorial jurisdiction of the trial court; or (2) capable of accurate and
ready determination by resorting to sources whose accuracy cannot reasonably be questionable.
[16]

Things of common knowledge, of which courts take judicial matters coming to the knowledge of
men generally in the course of the ordinary experiences of life, or they may be matters which are
generally accepted by mankind as true and are capable of ready and unquestioned demonstration. Thus,
facts which are universally known, and which may be found in encyclopedias, dictionaries or other
publications, are judicially noticed, provided, they are of such universal notoriety and so generally
understood that they may be regarded as forming part of the common knowledge of every person. As the
common knowledge of man ranges far and wide, a wide variety of particular facts have been judicially
noticed as being matters of common knowledge. But a court cannot take judicial notice of any fact which,
in part, is dependent on the existence or non-existence of a fact of which the court has no constructive
knowledge.
[17]

In this age of modern technology, the courts may take judicial notice that business transactions may
be made by individuals through teleconferencing. Teleconferencing is interactive group communication
(three or more people in two or more locations) through an electronic medium. In general terms,
teleconferencing can bring people together under one roof even though they are separated by hundreds
of miles.
[18]
This type of group communication may be used in a number of ways, and have three basic
types: (1) video conferencing - television-like communication augmented with sound; (2) computer
conferencing - printed communication through keyboard terminals, and (3) audio-conferencing-verbal
communication via the telephone with optional capacity for telewriting or telecopying.
[19]

A teleconference represents a unique alternative to face-to-face (FTF) meetings. It was first
introduced in the 1960s with American Telephone and Telegraphs Picturephone. At that time, however,
no demand existed for the new technology. Travel costs were reasonable and consumers were unwilling
to pay the monthly service charge for using the picturephone, which was regarded as more of a novelty
than as an actual means for everyday communication.
[20]
In time, people found it advantageous to hold
teleconferencing in the course of business and corporate governance, because of the money saved,
among other advantages include:
112

1. People (including outside guest speakers) who wouldnt normally attend a distant FTF meeting can
participate.
2. Follow-up to earlier meetings can be done with relative ease and little expense.
3. Socializing is minimal compared to an FTF meeting; therefore, meetings are shorter and more
oriented to the primary purpose of the meeting.
4. Some routine meetings are more effective since one can audio-conference from any location
equipped with a telephone.
5. Communication between the home office and field staffs is maximized.
6. Severe climate and/or unreliable transportation may necessitate teleconferencing.
7. Participants are generally better prepared than for FTF meetings.
8. It is particularly satisfactory for simple problem-solving, information exchange, and procedural
tasks.
9. Group members participate more equally in well-moderated teleconferences than an FTF
meeting.
[21]

On the other hand, other private corporations opt not to hold teleconferences because of the
following disadvantages:
1. Technical failures with equipment, including connections that arent made.
2. Unsatisfactory for complex interpersonal communication, such as negotiation or bargaining.
3. Impersonal, less easy to create an atmosphere of group rapport.
4. Lack of participant familiarity with the equipment, the medium itself, and meeting skills.
5. Acoustical problems within the teleconferencing rooms.
6. Difficulty in determining participant speaking order; frequently one person monopolizes the
meeting.
7. Greater participant preparation time needed.
8. Informal, one-to-one, social interaction not possible.
[22]

Indeed, teleconferencing can only facilitate the linking of people; it does not alter the complexity of
group communication. Although it may be easier to communicate via teleconferencing, it may also be
easier to miscommunicate. Teleconferencing cannot satisfy the individual needs of every type of
meeting.
[23]

In the Philippines, teleconferencing and videoconferencing of members of board of directors of
private corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange
Commission issued SEC Memorandum Circular No. 15, on November 30, 2001, providing the guidelines
to be complied with related to such conferences.
[24]
Thus, the Court agrees with the RTC that persons in
113

the Philippines may have a teleconference with a group of persons in South Korea relating to business
transactions or corporate governance.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a teleconference
along with the respondents Board of Directors, the Court is not convinced that one was conducted; even
if there had been one, the Court is not inclined to believe that a board resolution was duly passed
specifically authorizing Atty. Aguinaldo to file the complaint and execute the required certification against
forum shopping.
The records show that the petitioner filed a motion to dismiss the complaint on the ground that the
respondent failed to comply with Section 5, Rule 7 of the Rules of Court. The respondent opposed the
motion on December 1, 1999, on its contention that Atty. Aguinaldo, its resident agent, was duly
authorized to sue in its behalf. The respondent, however, failed to establish its claim that Atty. Aguinaldo
was its resident agent in the Philippines. Even the identification card
[25]
of Atty. Aguinaldo which the
respondent appended to its pleading merely showed that he is the company lawyer of the respondents
Manila Regional Office.
The respondent, through Atty. Aguinaldo, announced the holding of the teleconference only during
the hearing of January 28, 2000; Atty. Aguinaldo then prayed for ten days, or until February 8, 2000,
within which to submit the board resolution purportedly authorizing him to file the complaint and execute
the required certification against forum shopping. The court granted the motion.
[26]
The respondent,
however, failed to comply, and instead prayed for 15 more days to submit the said resolution, contending
that it was with its main office in Korea. The court granted the motion per its Order
[27]
dated February 11,
2000. The respondent again prayed for an extension within which to submit the said resolution, until
March 6, 2000.
[28]
It was on the said date that the respondent submitted an affidavit of its general
manager Suk Kyoo Kim, stating, inter alia, that he and Atty. Aguinaldo attended the said teleconference
on June 25, 1999, where the Board of Directors supposedly approved the following resolution:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & Associates or any of its lawyers
are hereby appointed and authorized to take with whatever legal action necessary to effect the collection
of the unpaid account of Expert Travel & Tours. They are hereby specifically authorized to prosecute,
litigate, defend, sign and execute any document or paper necessary to the filing and prosecution of said
claim in Court, attend the Pre-trial Proceedings and enter into a compromise agreement relative to the
above-mentioned claim.
[29]

But then, in the same affidavit, Suk Kyoo Kim declared that the respondent do[es] not keep a written
copy of the aforesaid Resolution because no records of board resolutions approved during
teleconferences were kept. This belied the respondents earlier allegation in its February 10, 2000 motion
for extension of time to submit the questioned resolution that it was in the custody of its main office in
Korea. The respondent gave the trial court the impression that it needed time to secure a copy of the
resolution kept in Korea, only to allege later (via the affidavit of Suk Kyoo Kim) that it had no such written
copy. Moreover, Suk Kyoo Kim stated in his affidavit that the resolution was embodied in the
Secretarys/Resident Agents Certificate signed by Atty. Aguinaldo. However, no such resolution was
appended to the said certificate.
The respondents allegation that its board of directors conducted a teleconference on June 25, 1999
and approved the said resolution (with Atty. Aguinaldo in attendance) is incredible, given the additional
fact that no such allegation was made in the complaint. If the resolution had indeed been approved on
June 25, 1999, long before the complaint was filed, the respondent should have incorporated it in its
complaint, or at least appended a copy thereof. The respondent failed to do so. It was only on January
28, 2000 that the respondent claimed, for the first time, that there was such a meeting of the Board of
Directors held on June 25, 1999; it even represented to the Court that a copy of its resolution was with its
main office in Korea, only to allege later that no written copy existed. It was only on March 6, 2000 that
the respondent alleged, for the first time, that the meeting of the Board of Directors where the resolution
was approved was held viateleconference.
114

Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had signed a
Secretarys/Resident Agents Certificate alleging that the board of directors held a teleconference on June
25, 1999. No such certificate was appended to the complaint, which was filed on September 6,
1999. More importantly, the respondent did not explain why the said certificate was signed by Atty.
Aguinaldo as early as January 9, 1999, and yet was notarized one year later (on January 10, 2000); it
also did not explain its failure to append the said certificate to the complaint, as well as to its Compliance
dated March 6, 2000. It was only on January 26, 2001 when the respondent filed its comment in the CA
that it submitted the Secretarys/Resident Agents Certificate
[30]
dated January 10, 2000.
The Court is, thus, more inclined to believe that the alleged teleconference on June 25, 1999 never
took place, and that the resolution allegedly approved by the respondents Board of Directors during the
said teleconference was a mere concoction purposefully foisted on the RTC, the CA and this Court, to
avert the dismissal of its complaint against the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of
Appeals in CA-G.R. SP No. 61000 is REVERSED and SET ASIDE. The Regional Trial Court of Manila is
hereby ORDERED to dismiss, without prejudice, the complaint of the respondent.
SO ORDERED.

115

G.R. 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.
Paredes, Poblador, Cruz and Nazareno and Meer, Meer and Meer and Juan T. David for petitioners.
Office of the 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 margin
1
hereinafter referred to as
Respondents-Prosecutors several judges
2
hereinafter referred to as Respondents-Judges
issued, on different dates,
3
a total of 42 search warrants against petitioners herein
4
and/or the
corporations of which they were officers,
5
directed to the 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 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 law on 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 Respondents-Prosecutors, 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 alleged,
6
(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
116

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

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 offices 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 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 belongsexclusively 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:
. . . 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 themselves 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. . . . (A Guckenheimer & Bros. Co. vs.
United States, [1925] 3 F. 2d. 786, 789, Emphasis 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.1wph1.t
Petitioners maintain that the aforementioned search warrants are in the nature of general warrants and
that accordingly, the seizures effected upon the authority there of are null and void. In this connection, the
Constitution
13
provides:
117

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 person therein named had committed a
"violation of Central Ban Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal
Code." In other words, nospecific 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 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 the 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
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 Court
14
by providing in
its counterpart, under the Revised Rules of Court
15
that "a search warrant 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 Rights that the
things to be seized be particularly described as well as tending to defeat its major objective: the
elimination of general warrants.
118

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 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 on the same Federal
Court.
20
After reviewing previous decisions thereon, said Court held, in Mapp vs. Ohio (supra.):
. . . 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.
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
119

proposition. The right to 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 federal it was logically and constitutionally necessarily that the exclusion
doctrine an essential part of the right to privacy be 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 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
to "is to deter to compel respect for the constitutional guaranty in the only effectively available
way by removing the incentive to disregard it" . . . .
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 enforcement is entitled, and, to the
courts, that judicial integrity so necessary in the true administration of justice. (emphasis 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 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 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 usually but, understandably finds itself
in prosecuting agents of the majority, one must not lose sight of the fact that the psychological and moral
effect of the possibility
21
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 federal courts of
the United States.
22

120

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, notin 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
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 said 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.

121

WILSON P. GAMBOA,
Petitioner,
G.R. No. 176579
Present:
- versus -

FINANCE SECRETARY MARGARITO B.
TEVES, FINANCE UNDERSECRETARY JOHN
P. SEVILLA, AND COMMISSIONER RICARDO
ABCEDE OF THE PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT
(PCGG) IN THEIR CAPACITIES AS CHAIR
AND MEMBERS, RESPECTIVELY, OF THE
PRIVATIZATION COUNCIL,
CHAIRMAN ANTHONI SALIM OF FIRST
PACIFIC CO., LTD. IN HIS CAPACITY AS
DIRECTOR OF METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN MANUEL V.
PANGILINAN OF PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY (PLDT)
IN HIS CAPACITY AS MANAGING DIRECTOR
OF FIRST PACIFIC CO., LTD., PRESIDENT
NAPOLEON L. NAZARENO OF PHILIPPINE
LONG DISTANCE TELEPHONE COMPANY,
CHAIR FE BARIN OF THE SECURITIES
EXCHANGE COMMISSION, and PRESIDENT
FRANCIS LIM OF THE PHILIPPINE STOCK
EXCHANGE,
Respondents.

CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO, JJ.
PABLITO V. SANIDAD and
ARNO V. SANIDAD,
Petitioners-in-Intervention.
Promulgated:

June 28, 2011
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

D E C I S I O N


CARPIO, J .:
122

The Case

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of the sale
of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of
the Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific
Company Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance
Telephone Company (PLDT), are as follows:
1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a franchise
and the right to engage in telecommunications business. In 1969, General Telephone and Electronics
Corporation (GTE), an American company and a major PLDT stockholder, sold 26 percent of the
outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by
several persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the owner of
111,415 shares of stock of PTIC by virtue of three Deeds of Assignment executed by PTIC stockholders
Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held by PHI were
sequestered by the Presidential Commission on Good Government (PCGG). The 111,415 PTIC shares,
which represent about 46.125 percent of the outstanding capital stock of PTIC, were later declared by this
Court to be owned by the Republic of the Philippines.
2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining
54 percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-Agency Privatization
Council (IPC) of the Philippine Government announced that it would sell the 111,415 PTIC shares, or
46.125 percent of the outstanding capital stock of PTIC, through a public bidding to be conducted on 4
December 2006. Subsequently, the public bidding was reset to 8 December 2006, and only two bidders,
Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio Capital, submitted their bids. Parallax won
with a bid of P25.6 billion or US$510 million.
Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC stockholder
and buy the 111,415 PTIC shares by matching the bid price of Parallax. However, First Pacific failed to do
so by the 1 February 2007 deadline set by IPC and instead, yielded its right to PTIC itself which was then
given by IPC until 2 March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its
subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the 111,415 PTIC shares,
or 46.125 percent of the outstanding capital stock of PTIC, with the Philippine Government for the price
of P25,217,556,000 or US$510,580,189. The sale was completed on 28 February 2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC
shares is actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding common
shares of PLDT. With the sale, First Pacifics common shareholdings in PLDT increased from 30.7
percent to 37 percent, thereby increasing the common shareholdings of foreigners in PLDT to
about 81.47 percent. This violates Section 11, Article XII of the 1987 Philippine Constitution which limits
foreign ownership of the capital of a public utility to not more than 40 percent.
3


123

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John
P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts:
On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment
holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total PLDT outstanding
common shares. PHI, on the other hand, was incorporated in 1977, and became the owner of 111,415
PTIC shares or 46.125 percent of the outstanding capital stock of PTIC by virtue of three Deeds of
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares held
by PHI were sequestered by the PCGG, and subsequently declared by this Court as part of the ill-gotten
wealth of former President Ferdinand Marcos. The sequestered PTIC shares were reconveyed to the
Republic of the Philippines in accordance with this Courts decision
4
which became final and executory on
8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent of the
outstanding common shares of stock of PLDT, and designated the Inter-Agency Privatization Council
(IPC), composed of the Department of Finance and the PCGG, as the disposing entity. An invitation to bid
was published in seven different newspapers from 13 to 24 November 2006. On 20 November 2006, a
pre-bid conference was held, and the original deadline for bidding scheduled on 4 December 2006 was
reset to 8 December 2006. The extension was published in nine different newspapers.
During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest bidder
with a bid of P25,217,556,000. The government notified First Pacific, the majority owner of PTIC shares,
of the bidding results and gave First Pacific until 1 February 2007 to exercise its right of first refusal in
accordance with PTICs Articles of Incorporation. First Pacific announced its intention to match Parallaxs
bid.
On 31 January 2007, the House of Representatives (HR) Committee on Good Government conducted a
public hearing on the particulars of the then impending sale of the 111,415 PTIC shares.
Respondents Teves and Sevilla were among those who attended the public hearing. The HR Committee
Report No. 2270 concluded that: (a) the auction of the governments 111,415 PTIC shares bore due
diligence, transparency and conformity with existing legal procedures; and (b) First Pacifics intended
acquisition of the governments 111,415 PTIC shares resulting in First Pacifics 100% ownership
of PTIC will not violate the 40 percent constitutional limit on foreign ownership of a public utility
since PTIC holds only 13.847 percent of the total outstanding common shares of PLDT.
5
On 28
February 2007, First Pacific completed the acquisition of the 111,415 shares of stock of PTIC.
Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding for
the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the remaining 54
percent of PTIC shares was already owned by First Pacific and its affiliates); (b) Parallax offered the
highest bid amounting to P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its
shareholders granted in PTICs Articles of Incorporation, MPAH, a First Pacific affiliate, exercised its right
of first refusal by matching the highest bid offered for PTIC shares on 13 February 2007; and (d) on 28
February 2007, the sale was consummated when MPAH paid IPC P25,217,556,000 and the government
delivered the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other
allegations of facts of petitioner.
On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory relief, and
declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others, that the sale of
the 111,415 PTIC shares would result in an increase in First Pacifics common shareholdings in PLDT
from 30.7 percent to 37 percent, and this, combined with Japanese NTT DoCoMos common
shareholdings in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56 percent
which is over the 40 percent constitutional limit.
6
Petitioner asserts:

124

If and when the sale is completed, First Pacifics equity in PLDT will go up from 30.7 percent to
37.0 percent of its common or voting- stockholdings, x x x. Hence, the consummation of the
sale will put the two largest foreign investors in PLDT First Pacific and Japans NTT DoCoMo,
which is the worlds largest wireless telecommunications firm, owning 51.56 percent of PLDT
common equity. x x x With the completion of the sale, data culled from the official website of the
New York Stock Exchange (www.nyse.com) showed that those foreign entities, which own at
least five percent of common equity, will collectively own 81.47 percent of PLDTs common
equity. x x x
x x x as the annual disclosure reports, also referred to as Form 20-K reports
x x x which PLDT submitted to the New York Stock Exchange for the period
2003-2005, revealed that First Pacific and several other foreign entities breached
the constitutional limit of 40 percent ownership as early as 2003. x x x
7


Petitioner raises the following issues: (1) whether the consummation of the then impending sale of
111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of a public utility;
(2) whether public respondents committed grave abuse of discretion in allowing the sale of the 111,415
PTIC shares to First Pacific; and (3) whether the sale of common shares to foreigners in excess of 40
percent of the entire subscribed common capital stock violates the constitutional limit on foreign
ownership of a public utility.
8


On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene and
Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the Court granted the
motion and noted the Petition-in-Intervention.

Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin and/or
nullify the sale by respondents of the 111,415 PTIC shares to First Pacific or assignee. Petitioners-in-
intervention claim that, as PLDT subscribers, they have a stake in the outcome of the controversy
x x x where the Philippine Government is completing the sale of government owned assets in [PLDT],
unquestionably a public utility, in violation of the nationality restrictions of the Philippine Constitution.

The Issue


This Court is not a trier of facts. Factual questions such as those raised by petitioner,
9
which indisputably
demand a thorough examination of the evidence of the parties, are generally beyond this Courts
jurisdiction. Adhering to this well-settled principle, the Court shall confine the resolution of the instant
controversy solely on the threshold and purely legal issue of whether the term capital in Section 11,
Article XII of the Constitution refers to the total common shares only or to the total outstanding capital
stock (combined total of common and non-voting preferred shares) of PLDT, a public utility.

125

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks, only the
petition for prohibition is within the original jurisdiction of this court, which however is not exclusive but is
concurrent with the Regional Trial Court and the Court of Appeals. The actions for declaratory
relief,
10
injunction, and annulment of sale are not embraced within the original jurisdiction of the Supreme
Court. On this ground alone, the petition could have been dismissed outright.
While direct resort to this Court may be justified in a petition for prohibition,
11
the Court shall nevertheless
refrain from discussing the grounds in support of the petition for prohibition since on 28 February 2007,
the questioned sale was consummated when MPAH paid IPC P25,217,556,000 and the government
delivered the certificates for the 111,415 PTIC shares.
However, since the threshold and purely legal issue on the definition of the term capital in Section 11,
Article XII of the Constitution has far-reaching implications to the nationaleconomy, the Court treats the
petition for declaratory relief as one for mandamus.
12

In Salvacion v. Central Bank of the Philippines,
13
the Court treated the petition for declaratory relief as
one for mandamus considering the grave injustice that would result in the interpretation of a banking law.
In that case, which involved the crime of rape committed by a foreign tourist against a Filipino minor and
the execution of the final judgment in the civil case for damages on the tourists dollar deposit with a local
bank, the Court declared Section 113 of Central Bank Circular No. 960, exempting foreign currency
deposits from attachment, garnishment or any other order or process of any court, inapplicable due to the
peculiar circumstances of the case. The Court held that injustice would result especially to a citizen
aggrieved by a foreign guest like accused x x x that would negate Article 10 of the Civil Code which
provides that in case of doubt in the interpretation or application of laws, it is presumed that the
lawmaking body intended right and justice to prevail. The Court therefore required respondents Central
Bank of the Philippines, the local bank, and the accused to comply with the writ of execution issued in the
civil case for damages and to release the dollar deposit of the accused to satisfy the judgment.
In Alliance of Government Workers v. Minister of Labor,
14
the Court similarly brushed aside the procedural
infirmity of the petition for declaratory relief and treated the same as one for mandamus. In Alliance, the
issue was whether the government unlawfully excluded petitioners, who were government employees,
from the enjoyment of rights to which they were entitled under the law. Specifically, the question was:
Are the branches, agencies, subdivisions, and instrumentalities of the Government, including
government owned or controlled corporations included among the four employers under Presidential
Decree No. 851 which are required to pay their employees x x x a thirteenth (13th) month pay x x x ?
The Constitutional principle involved therein affected all government employees, clearly justifying a
relaxation of the technical rules of procedure, and certainly requiring the interpretation of the assailed
presidential decree.

126

In short, it is well-settled that this Court may treat a petition for declaratory relief as one for mandamus if
the issue involved has far-reaching implications. As this Court held inSalvacion:

The Court has no original and exclusive jurisdiction over a petition for declaratory
relief. However, exceptions to this rule have been recognized. Thus, where the petition has
far-reaching implications and raises questions that should be resolved, it may be treated
as one for mandamus.
15
(Emphasis supplied)


In the present case, petitioner seeks primarily the interpretation of the term capital in Section 11, Article
XII of the Constitution. He prays that this Court declare that the term capital refers to common shares
only, and that such shares constitute the sole basis in determining foreign equity in a public utility.
Petitioner further asks this Court to declare any ruling inconsistent with such interpretation
unconstitutional.
The interpretation of the term capital in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy. In fact, a resolution of this issue will determine whether Filipinos are
masters, or second class citizens, in their own country. What is at stake here is whether Filipinos or
foreigners will have effective control of the national economy. Indeed, if ever there is a legal issue that
has far-reaching implications to the entire nation, and to future generations of Filipinos, it is
the threshhold legal issue presented in this case.
The Court first encountered the issue on the definition of the term capital in Section 11, Article XII of the
Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360.
16
That case involved
the same public utility (PLDT) and substantially the same private respondents. Despite the importance
and novelty of the constitutional issue raised therein and despite the fact that the petition involved a
purely legal question, the Court declined to resolve the case on the merits, and instead denied the same
for disregarding the hierarchy of courts.
17
There, petitioner Fernandez assailed on a pure question of law
the Regional Trial Courts Decision of 21 February 2003 via a petition for review under Rule 45. The
Courts Resolution, denying the petition, became final on 21 December 2004.
The instant petition therefore presents the Court with another opportunity to finally settle this purely legal
issue which is of transcendental importance to the national economy and a fundamental requirement to a
faithful adherence to our Constitution. The Court must forthwith seize such opportunity, not only for the
benefit of the litigants, but more significantly for the benefit of the entire Filipino people, to ensure, in the
words of the Constitution, a self-reliant and independent national economy effectively controlled by
Filipinos.
18
Besides, in the light of vague and confusing positions taken by government agencies on this
purely legal issue, present and future foreign investors in this country deserve, as a matter of basic
fairness, a categorical ruling from this Court on the extent of their participation in the capital of public
utilities and other nationalized businesses.
Despite its far-reaching implications to the national economy, this purely legal issue has remained
unresolved for over 75 years since the 1935 Constitution. There is no reason for this Court to evade this
ever recurring fundamental issue and delay again defining the term capital, which appears not only in
Section 11, Article XII of the Constitution, but also in Section 2, Article XII on co-production and joint
venture agreements for the development of our natural resources,
19
in Section 7, Article XII on ownership
of private lands,
20
in Section 10, Article XII on the reservation of certain investments to Filipino
citizens,
21
in Section 4(2), Article XIV on the ownership of educational institutions,
22
and in Section 11(2),
Article XVI on the ownership of advertising companies.
23

127

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question the
subject sale, which he claims to violate the nationality requirement prescribed in Section 11, Article XII of
the Constitution. If the sale indeed violates the Constitution, then there is a possibility that PLDTs
franchise could be revoked, a dire consequence directly affecting petitioners interest as a stockholder.
More importantly, there is no question that the instant petition raises matters of transcendental
importance to the public. The fundamental and threshold legal issue in this case, involving the national
economy and the economic welfare of the Filipino people, far outweighs any perceived impediment in the
legal personality of the petitioner to bring this action.
In Chavez v. PCGG,
24
the Court upheld the right of a citizen to bring a suit on matters of transcendental
importance to the public, thus:
In Taada v. Tuvera, the Court asserted that when the issue concerns a public right and the object of
mandamus is to obtain the enforcement of a public duty, the people are regarded as the real
parties in interest; and because it is sufficient that petitioner is a citizen and as such is interested
in the execution of the laws, he need not show that he has any legal or special interest in the
result of the action. In the aforesaid case, the petitioners sought to enforce their right to be informed on
matters of public concern, a right then recognized in Section 6, Article IV of the 1973 Constitution, in
connection with the rule that laws in order to be valid and enforceable must be published in the Official
Gazette or otherwise effectively promulgated. In ruling for the petitioners legal standing, the Court
declared that the right they sought to be enforced is a public right recognized by no less than the
fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating Taada, further declared that when a mandamus
proceeding involves the assertion of a public right, the requirement of personal interest is
satisfied by the mere fact that petitioner is a citizen and, therefore, part of the general public
which possesses the right.
Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been involved
under the questioned contract for the development, management and operation of the Manila
International Container Terminal, public interest [was] definitely involved considering the important
role [of the subject contract] . . . in the economic development of the country and the magnitude
of the financial consideration involved. We concluded that, as a consequence, the disclosure
provision in the Constitution would constitute sufficient authority for upholding the petitioners standing.
(Emphasis supplied)
Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public
importance, the petitioner has the requisite locus standi.
Definition of the Term Capital in
Section 11, Article XII of the 1987 Constitution
Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates
the Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
128

associations organized under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years. Neither shall any such franchise
or right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or association must be
citizens of the Philippines. (Emphasis supplied)
The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:
Section 5. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of the
capital of which is owned by such citizens, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty years. Neither shall any
such franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the National Assembly when the public interest so requires.
The State shall encourage equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public utility enterprise shall be
limited to their proportionate share in the capital thereof. (Emphasis supplied)
The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935
Constitution, viz:
Section 8. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
other entities organized under the laws of the Philippines sixty per centum of the capital of
which is owned by citizens of the Philippines, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty years. No franchise or right
shall be granted to any individual, firm, or corporation, except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the public interest so requires.
(Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds us
that the Filipinization provision in the 1987 Constitution is one of the products of the spirit of nationalism
which gripped the 1935 Constitutional Convention.
25
The 1987 Constitution provides for
the Filipinization of public utilities by requiring that any form of authorization for the operation of public
utilities should be granted only to citizens of the Philippines or to corporations or associations organized
under the laws of the Philippines at least sixty per centum of whose capital is owned by such
citizens. The provision is [an express] recognition of the sensitive and vital position of public
utilities both in the national economy and for national security.
26
The evident purpose of the
citizenship requirement is to prevent aliens from assuming control of public utilities, which may be inimical
to the national interest.
27
This specific provision explicitly reserves to Filipino citizens control of public
utilities, pursuant to an overriding economic goal of the 1987 Constitution: to conserve and develop our
patrimony
28
and ensure a self-reliant and independent national economy effectively controlled by
Filipinos.
29

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum
nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a corporation to
be granted authority to operate a public utility, at least 60 percent of its capital must be owned by
Filipino citizens.
129

The crux of the controversy is the definition of the term capital. Does the term capital in Section 11,
Article XII of the Constitution refer to common shares or to the total outstanding capital stock (combined
total of common and non-voting preferred shares)?
Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers only to
common shares because such shares are entitled to vote and it is through voting that control over a
corporation is exercised. Petitioner posits that the term capital in Section 11, Article XII of the
Constitution refers to the ownership of common capital stock subscribed and outstanding, which class of
shares alone, under the corporate set-up of PLDT, can vote and elect members of the board of directors.
It is undisputed that PLDTs non-voting preferred shares are held mostly by Filipino citizens.
30
This arose
from Presidential Decree No. 217,
31
issued on 16 June 1973 by then President Ferdinand Marcos,
requiring every applicant of a PLDT telephone line to subscribe to non-voting preferred shares to pay for
the investment cost of installing the telephone line.
32

Petitioners-in-intervention basically reiterate petitioners arguments and adopt petitioners definition of the
term capital.
33
Petitioners-in-intervention allege that the approximate foreign ownership of common
capital stock of PLDT x x x already amounts to at least 63.54% of the total outstanding common stock,
which means that foreigners exercise significant control over PLDT, patently violating the 40 percent
foreign equity limitation in public utilities prescribed by the Constitution.
Respondents, on the other hand, do not offer any definition of the term capital in Section 11, Article XII
of the Constitution. More importantly, private respondents Nazareno andPangilinan of PLDT do not
dispute that more than 40 percent of the common shares of PLDT are held by foreigners.
In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps mainly on the
procedural infirmities of the petition and the supposed violation of the due process rights of the affected
foreign common shareholders. Respondent Nazareno does not deny petitioners allegation of foreigners
dominating the common shareholdings of PLDT. Nazarenostressed mainly that the petition seeks to
divest foreign common shareholders purportedly exceeding 40% of the total common
shareholdings in PLDT of their ownership over their shares. Thus, the foreign natural and juridical
PLDT shareholders must be impleaded in this suit so that they can be
heard.
34
Essentially, Nazareno invokes denial of due process on behalf of the foreign common
shareholders.
While Nazareno does not introduce any definition of the term capital, he states that among the factual
assertions that need to be established to counter petitioners allegations is the uniform
interpretation by government agencies (such as the SEC), institutions and corporations (such as
the Philippine National Oil Company-Energy Development Corporation or PNOC-EDC) of including
both preferred shares and common shares in controlling interest in view of testing compliance
with the 40% constitutional limitation on foreign ownership in public utilities.
35

Similarly, respondent Manuel V. Pangilinan does not define the term capital in Section 11, Article XII of
the Constitution. Neither does he refute petitioners claim of foreigners holding more than 40 percent of
PLDTs common shares. Instead, respondent Pangilinan focuses on the procedural flaws of the petition
and the alleged violation of the due process rights of foreigners. Respondent Pangilinan emphasizes in
his Memorandum (1) the absence of this Courts jurisdiction over the petition; (2) petitioners lack of
standing; (3) mootnessof the petition; (4) non-availability of declaratory relief; and (5) the denial of due
process rights. Moreover, respondent Pangilinan alleges that the issue should be whether owners of
shares in PLDT as well as owners of shares in companies holding shares in PLDT may be required to
relinquish their shares in PLDT and in those companies without any law requiring them to surrender their
shares and also without notice and trial.

130

Respondent Pangilinan further asserts that Section 11, [Article XII of the Constitution] imposes no
nationality requirement on the shareholders of the utility company as a condition for keeping their
shares in the utility company. According to him, Section 11 does not authorize taking one persons
property (the shareholders stock in the utility company) on the basis of another partys alleged failure to
satisfy a requirement that is a condition only for that other partys retention of another piece of property
(the utility company being at least 60% Filipino-owned to keep its franchise).
36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P. Sevilla,
Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the definition of the term
capital. In its Memorandum
37
dated 24 September 2007, the OSG also limits its discussion on the
supposed procedural defects of the petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of
interested parties, and lack of basis for injunction. The OSG does not present any definition or
interpretation of the term capital in Section 11, Article XII of the Constitution. The OSG contends that
the petition actually partakes of a collateral attack on PLDTs franchise as a public utility, which in effect
requires a full-blown trial where all the parties in interest are given their day in court.
38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine
Stock Exchange (PSE), does not also define the term capital and seeks the dismissal of the petition on
the following grounds: (1) failure to state a cause of action against Lim; (2) the PSE allegedly
implemented its rules and required all listed companies, including PLDT, to make proper and timely
disclosures; and (3) the reliefs prayed for in the petition would adversely impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder of
record of PLDT, contended that the term capital in the 1987 Constitution refers to shares entitled to vote
or the common shares. Fernandez explained thus:
The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution
refers to ownership of shares of stock entitled to vote, i.e., common shares, considering that it is
through voting that control is being exercised. x x x
Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on
fully nationalized and partially nationalized activities is for Filipino nationals to be always in control
of the corporation undertaking said activities. Otherwise, if the Trial Courts ruling upholding
respondents arguments were to be given credence, it would be possible for the ownership
structure of a public utility corporation to be divided into one percent (1%) common stocks and
ninety-nine percent (99%) preferred stocks. Following the Trial Courts ruling adopting
respondents arguments, the common shares can be owned entirely by foreigners thus creating
an absurd situation wherein foreigners, who are supposed to be minority shareholders, control
the public utility corporation.
x x x x
Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial
ownership and the controlling interest.
x x x x
Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by
the Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares.
Furthermore, ownership of record of shares will not suffice but it must be shown that the legal and
beneficial ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner
PLDT, since it is already admitted that the voting interests of foreigners which would gain entry to
petitioner PLDT by the acquisition of SMART shares through the Questioned Transactions is
equivalent to 82.99%, and the nominee arrangements between the foreign principals and the
131

Filipino owners is likewise admitted, there is, therefore, a violation of Section 11, Article XII of the
Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court
to support the proposition that the meaning of the word capital as used in Section 11, Article XII
of the Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the
shareholder and it allegedly is immaterial how the stock is classified, whether as common or
preferred, cannot stand in the face of a clear legislative policy as stated in the FIA which took
effect in 1991 or way after said opinions were rendered, and as clarified by the above-quoted
Amendments. In this regard, suffice it to state that as between the law and an opinion rendered
by an administrative agency, the law indubitably prevails. Moreover, said Opinions are merely
advisory and cannot prevail over the clear intent of the framers of the Constitution.
In the same vein, the SECs construction of Section 11, Article XII of the Constitution is at best
merely advisory for it is the courts that finally determine what a law means.
39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A. Arellano,
Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. BienvenidoF. Nebres, Ray C. Espinosa,
Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that the term capital in
Section 11, Article XII of the Constitution includes preferred shares since the Constitution does not
distinguish among classes of stock, thus:
16. The Constitution applies its foreign ownership limitation on the corporations capital, without
distinction as to classes of shares. x x x
In this connection, the Corporation Code which was already in force at the time the present
(1987) Constitution was drafted defined outstanding capital stock as follows:
Section 137. Outstanding capital stock defined. The term outstanding capital stock, as used in
this Code, means the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid, except treasury shares.
Section 137 of the Corporation Code also does not distinguish between common and preferred
shares, nor exclude either class of shares, in determining the outstanding capital stock (the
capital) of a corporation. Consequently, petitioners suggestion to reckon PLDTs foreign equity
only on the basis of PLDTs outstanding common shares is without legal basis. The language of
the Constitution should be understood in the sense it has in common use.
x x x x
17. But even assuming that resort to the proceedings of the Constitutional Commission is necessary,
there is nothing in the Record of the Constitutional Commission (Vol. III) which petitioner
misleadingly cited in the Petition x x x which supports petitioners view that only common shares
should form the basis for computing a public utilitys foreign equity.
x x x x
18. In addition, the SEC the government agency primarily responsible for implementing the
Corporation Code, and which also has the responsibility of ensuring compliance with the
Constitutions foreign equity restrictions as regards nationalized activities x x x has categorically
ruled that both common and preferred shares are properly considered in determining outstanding
capital stock and the nationality composition thereof.
40

132

We agree with petitioner and petitioners-in-intervention. The term capital in Section 11, Article XII of the
Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares,
41
and not to the total outstanding capital stock comprising both
common and non-voting preferred shares.
The Corporation Code of the Philippines
42
classifies shares as common or preferred, thus:
Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such
rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That
no share may be deprived of voting rights except those classified and issued as
preferred or redeemable shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of shares which have complete voting rights.
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 the 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 in the articles of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other share.
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;
133

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.
Indisputably, one of the rights of a stockholder is the right to participate in the control or management of
the corporation.
43
This is exercised through his vote in the election of directors because it is the board of
directors that controls or manages the corporation.
44
In the absence of provisions in the articles of
incorporation denying voting rights to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded from any control, that is, deprived
of the right to vote in the election of directors and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for income in the same manner as bondholders.
45
In
fact, under the Corporation Code only preferred or redeemable shares can be deprived of the right to
vote.
46
Common shares cannot be deprived of the right to vote in any corporate meeting, and any
provision in the articles of incorporation restricting the right of common shareholders to vote is invalid.
47

Considering that common shares have voting rights which translate to control, as opposed to preferred
shares which usually have no voting rights, the term capital in Section 11, Article XII of the Constitution
refers only to common shares. However, if the preferred shares also have the right to vote in the election
of directors, then the term capital shall include such preferred shares because the right to participate in
the control or management of the corporation is exercised through the right to vote in the election of
directors. In short, the term capital in Section 11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of
Filipino citizens the control and management of public utilities. As revealed in the deliberations of the
Constitutional Commission, capital refers to the voting stock or controlling interest of a corporation, to
wit:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this question: Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation? Will the Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP
Law Center who provided us a draft. The phrase that is contained here which we adopted
from the UP draft is 60 percent of voting stock.
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
134

MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with
60-40 percent equity invests in another corporation which is permitted by the
Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.
48

x x x x
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase voting
stock or controlling interest.
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens.
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to
be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let
us say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the
Filipinos own the nonvoting shares. So we can have a situation where the corporation is
controlled by foreigners despite being the minority because they have the voting capital.
That is the anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word stock as stated in the 1973 and
1935 Constitutions is that according to Commissioner Rodrigo, there are associations that
do not have stocks. That is why we say CAPITAL.
MR. AZCUNA. We should not eliminate the phrase controlling interest.
MR. BENGZON. In the case of stock corporations, it is assumed.
49
(Emphasis supplied)
Thus, 60 percent of the capital assumes, or should result in, controlling interest in the corporation.
Reinforcing this interpretation of the term capital, as referring to controlling interest or shares entitled to
vote, is the definition of a Philippine national in the Foreign Investments Act of 1991,
50
to wit:
SEC. 3. Definitions. - As used in this Act:
a. The term Philippine national shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the
135

capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock
outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or
other employee retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided,
That where a corporation and its non-Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital
stock outstanding and entitled to vote of each of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent (60%) of the members of the Board of
Directors of each of both corporations must be citizens of the Philippines, in order that the
corporation, shall be considered a Philippine national. (Emphasis supplied)
In explaining the definition of a Philippine national, the Implementing Rules and Regulations of the
Foreign Investments Act of 1991 provide:
b. Philippine national shall mean a citizen of the Philippines or a domestic partnership or
association wholly owned by the citizens of the Philippines; or a corporation organized under
the laws of the Philippines of which at least sixty percent [60%] of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
trustee of funds for pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent [60%] of the fund will accrue to the
benefit of the Philippine nationals; Provided, that where a corporation its non-Filipino stockholders
own stocks in a Securities and Exchange Commission [SEC] registered enterprise, at least sixty
percent [60%] of the capital stock outstanding and entitled to vote of both corporations must be
owned and held by citizens of the Philippines and at least sixty percent [60%] of the members of
the Board of Directors of each of both corporation must be citizens of the Philippines, in order that
the corporation shall be considered a Philippine national. The control test shall be applied for this
purpose.
Compliance with the required Filipino ownership of a corporation shall be determined on
the basis of outstanding capital stock whether fully paid or not, but only such stocks
which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the required Filipino equity. Full beneficial
ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks,
the voting rights of which have been assigned or transferred to aliens cannot be
considered held by Philippine citizens or Philippine nationals.
Individuals or juridical entities not meeting the aforementioned qualifications are
considered as non-Philippine nationals. (Emphasis supplied)
Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required in the Constitution.
Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the
voting rights, is required. The legal and beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipino nationals in accordance with the constitutional mandate. Otherwise, the
corporation is considered as non-Philippine national[s].
Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such
higher percentage as Congress may prescribe, certain areas of investments. Thus, in numerous laws
Congress has reserved certain areas of investments to Filipino citizens or to corporations at least sixty
percent of the capital of which is owned by Filipino citizens. Some of these laws are: (1) Regulation of
136

Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No.
3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine
Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004
or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship
Mortgage Decree or P.D. No. 1521. Hence, the term capital in Section 11, Article XII of the Constitution
is also used in the same context in numerous laws reserving certain areas of investments to Filipino
citizens.
To construe broadly the term capital as the total outstanding capital stock, including both common
and non-voting preferred shares, grossly contravenes the intent and letter of the Constitution that the
State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.
A broad definition unjustifiably disregards who owns the all-important voting stock, which necessarily
equates to control of the public utility.
We shall illustrate the glaring anomaly in giving a broad definition to the term capital. Let us assume that
a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares
owned by Filipinos, with both classes of share having a par value of one peso (P1.00) per share. Under
the broad definition of the term capital, such corporation would be considered compliant with the 40
percent constitutional limit on foreign equity of public utilities since the overwhelming majority, or more
than 99.999 percent, of the total outstanding capital stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting rights in the election of
directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001
percent, exercise control over the public utility. On the other hand, the Filipinos, holding more than 99.999
percent of the equity, cannot vote in the election of directors and hence, have no control over the public
utility. This starkly circumvents the intent of the framers of the Constitution, as well as the clear language
of the Constitution, to place the control of public utilities in the hands of Filipinos. It also renders illusory
the State policy of an independent national economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in fact exists in the present
case.
Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors.
PLDTs Articles of Incorporation expressly state that the holders of Serial Preferred Stock shall not be
entitled to vote at any meeting of the stockholders for the election of directors or for any other
purpose or otherwise participate in any action taken by the corporation or its stockholders, or to receive
notice of any meeting of stockholders.
51

On the other hand, holders of common shares are granted the exclusive right to vote in the election of
directors. PLDTs Articles of Incorporation
52
state that each holder of Common Capital Stock shall have
one vote in respect of each share of such stock held by him on all matters voted upon by the
stockholders, and the holders of Common Capital Stock shall have the exclusive right to vote for
the election of directors and for all other purposes.
53

In short, only holders of common shares can vote in the election of directors, meaning only common
shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have no voting
rights in the election of directors, do not have any control over PLDT. In fact, under PLDTs Articles of
Incorporation, holders of common shares have voting rights for all purposes, while holders of preferred
shares have no voting right for any purpose whatsoever.
It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common
shares of PLDT. In fact, based on PLDTs 2010 General Information Sheet (GIS),
54
which is a document
required to be submitted annually to the Securities and Exchange Commission,
55
foreigners hold
120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares.
56
In other
137

words, foreigners hold 64.27% of the total number of PLDTs common shares, while Filipinos hold only
35.73%. Since holding a majority of the common shares equates to control, it is clear that foreigners
exercise control over PLDT. Such amount of control unmistakably exceeds the allowable 40 percent limit
on foreign ownership of public utilities expressly mandated in Section 11, Article XII of the Constitution.
Moreover, the Dividend Declarations of PLDT for 2009,
57
as submitted to the SEC, shows that per share
the SIP
58
preferred shares earn a pittance in dividends compared to the common shares. PLDT declared
dividends for the common shares at P70.00 per share, while the declared dividends for the preferred
shares amounted to a measly P1.00 per share.
59
So the preferred shares not only cannot vote in the
election of directors, they also have very little and obviously negligible dividend earning capacity
compared to common shares.
As shown in PLDTs 2010 GIS,
60
as submitted to the SEC, the par value of PLDT common shares
is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words,
preferred shares have twice the par value of common shares but cannot elect directors and have only
1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by
Filipinos while foreigners own only a minuscule 0.56% of the preferred shares.
61
Worse, preferred shares
constitute 77.85% of the authorized capital stock of PLDT while common shares constitute only
22.15%.
62
This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred
shares but with the common shares, blatantly violating the constitutional requirement of 60 percent
Filipino control and Filipino beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is constitutionally required for the
States grant of authority to operate a public utility. The undisputed fact that the PLDT preferred shares,
99.44% owned by Filipinos, are non-voting and earn only 1/70 of the dividends that PLDT common
shares earn, grossly violates the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of
the dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of the
Constitution that [n]o franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to x x xcorporations x x x organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned by such citizens x x x.
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises
the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own
only 35.73% of PLDTs common shares, constituting a minority of the voting stock, and thus do not
exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4)
preferred shares earn only 1/70 of the dividends that common shares earn;
63
(5) preferred shares have
twice the par value of common shares; and (6) preferred shares constitute 77.85% of the authorized
capital stock of PLDT and common shares only 22.15%. This kind of ownership and control of a public
utility is a mockery of the Constitution.
Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock market
value of P2,328.00 per share,
64
while PLDT preferred shares with a par value ofP10.00 per share have a
current stock market value ranging from only P10.92 to P11.06 per share,
65
is a glaring confirmation by
the market that control and beneficial ownership of PLDT rest with the common shares, not with the
preferred shares.
Indisputably, construing the term capital in Section 11, Article XII of the Constitution to include both
voting and non-voting shares will result in the abject surrender of our telecommunications industry to
foreigners, amounting to a clear abdication of the States constitutional duty to limit control of public
138

utilities to Filipino citizens. Such an interpretation certainly runs counter to the constitutional provision
reserving certain areas of investment to Filipino citizens, such as the exploitation of natural resources as
well as the ownership of land, educational institutions and advertising businesses. The Court should
never open to foreign control what the Constitution has expressly reserved to Filipinos for that would be a
betrayal of the Constitution and of the national interest. The Court must perform its solemn duty to defend
and uphold the intent and letter of the Constitution to ensure, in the words of the Constitution, a self-
reliant and independent national economy effectively controlled by Filipinos.
Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly reserving to
Filipinos specific areas of investment, such as the development of natural resources and ownership of
land, educational institutions and advertising business, is self-executing. There is no need for legislation
to implement these self-executing provisions of the Constitution. The rationale why these constitutional
provisions are self-executing was explained in Manila Prince Hotel v. GSIS,
66
thus:
x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a
constitutional mandate, the presumption now is that all provisions of the constitution are self-
executing. If the constitutional provisions are treated as requiring legislation instead of self-
executing, the legislature would have the power to ignore and practically nullify the mandate of
the fundamental law. This can be cataclysmic. That is why the prevailing view is, as it has always
been, that
. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-
executing. . . . Unless the contrary is clearly intended, the provisions of the Constitution
should be considered self-executing, as a contrary rule would give the legislature
discretion to determine when, or whether, they shall be effective. These provisions would be
subordinated to the will of the lawmaking body, which could make them entirely meaningless by
simply refusing to pass the needed implementing statute. (Emphasis supplied)
In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno, later
Chief Justice, agreed that constitutional provisions are presumed to be self-executing. Justice Puno
stated:
Courts as a rule consider the provisions of the Constitution as self-executing, rather than as
requiring future legislation for their enforcement. The reason is not difficult to discern. For if they
are not treated as self-executing, the mandate of the fundamental law ratified by the
sovereign people can be easily ignored and nullified by Congress. Suffused with wisdom
of the ages is the unyielding rule that legislative actions may give breath to constitutional
rights but congressional inaction should not suffocate them.
Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches
and seizures, the rights of a person under custodial investigation, the rights of an accused, and
the privilege against self-incrimination. It is recognized that legislation is unnecessary to enable
courts to effectuate constitutional provisions guaranteeing the fundamental rights of life, liberty
and the protection of property. The same treatment is accorded to constitutional provisions
forbidding the taking or damaging of property for public use without just compensation. (Emphasis
supplied)
Thus, in numerous cases,
67
this Court, even in the absence of implementing legislation, applied directly
the provisions of the 1935, 1973 and 1987 Constitutions limiting land ownership to Filipinos. In Soriano
v. Ong Hoo,
68
this Court ruled:
x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of his land to an
alien, and as both the citizen and the alien have violated the law, none of them should have a recourse
against the other, and it should only be the State that should be allowed to intervene and determine what
139

is to be done with the property subject of the violation. We have said that what the State should do or
could do in such matters is a matter of public policy, entirely beyond the scope of judicial
authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the
legislature has not definitely decided what policy should be followed in cases of violations against
the constitutional prohibition, courts of justice cannot go beyond by declaring the disposition to
be null and void as violative of the Constitution. x x x (Emphasis supplied)
To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the 1935
Constitution, or over the last 75 years, not one of the constitutional provisions expressly reserving specific
areas of investments to corporations, at least 60 percent of the capital of which is owned by Filipinos,
was enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions miserably failed to
effectively reserve to Filipinos specific areas of investment, like the operation by corporations of public
utilities, the exploitation by corporations of mineral resources, the ownership by corporations of real
estate, and the ownership of educational institutions. All the legislatures that convened since 1935 also
miserably failed to enact legislations to implement these vital constitutional provisions that determine who
will effectively control the national economy, Filipinos or foreigners. This Court cannot allow such an
absurd interpretation of the Constitution.
This Court has held that the SEC has both regulatory and adjudicative functions.
69
Under its regulatory
functions, the SEC can be compelled by mandamus to perform its statutory duty when it unlawfully
neglects to perform the same. Under its adjudicative or quasi-judicial functions, the SEC can be also be
compelled by mandamus to hear and decide a possible violation of any law it administers or enforces
when it is mandated by law to investigate such violation.
Under Section 17(4)
70
of the Corporation Code, the SEC has the regulatory function to reject or
disapprove the Articles of Incorporation of any corporation where the required percentage of
ownership of the capital stock to be owned by citizens of the Philippines has not been complied
with as required by existing laws or the Constitution. Thus, the SEC is the government agency
tasked with the statutory duty to enforce the nationality requirement prescribed in Section 11, Article XII of
the Constitution on the ownership of public utilities. This Court, in a petition for declaratory relief that is
treated as a petition for mandamus as in the present case, can direct the SEC to perform its statutory
duty under the law, a duty that the SEC has apparently unlawfully neglected to do based on the 2010 GIS
that respondent PLDT submitted to the SEC.
Under Section 5(m) of the Securities Regulation Code,
71
the SEC is vested with the power and function
to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration
of corporations, partnerships or associations, upon any of the grounds provided by law. The SEC
is mandated under Section 5(d) of the same Code with the power and function to investigate x x x the
activities of persons to ensure compliance with the laws and regulations that SEC administers or
enforces. The GIS that all corporations are required to submit to SEC annually should put the SEC on
guard against violations of the nationality requirement prescribed in the Constitution and existing laws.
This Court can compel the SEC, in a petition for declaratory relief that is treated as a petition for
mandamus as in the present case, to hear and decide a possible violation of Section 11, Article XII of the
Constitution in view of the ownership structure of PLDTs voting shares, as admitted by respondents and
as stated in PLDTs 2010 GIS that PLDT submitted to SEC.
WHEREFORE, we PARTLY GRANT the petition and rule that the term capital in Section 11, Article XII
of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus
in the present case only to common shares, and not to the total outstanding capital stock (common and
non-voting preferred shares). Respondent Chairperson of the Securities and Exchange Commission
is DIRECTED to apply this definition of the term capital in determining the extent of allowable foreign
ownership in respondent Philippine Long Distance Telephone Company, and if there is a violation of
Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law.
SO ORDERED.
140

G.R. No. 176579 October 9, 2012
HEIRS OF WILSON P. GAMBOA,
*
Petitioners,
vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P. SEVILLA,
AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF
THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS
CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V.
PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY
AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO
OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES
AND EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.
R E S O L U T I O N
CARPIO, J .:
This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the Philippine
Stock Exchange's (PSE) President,
1
(2) Manuel V. Pangilinan (Pangilinan),
2
(3) Napoleon L. Nazareno
(Nazareno ),
3
and ( 4) the Securities and Exchange Commission (SEC)
4
(collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfofthe
SEC,
5
assailing the 28 June 2011 Decision. However, it subsequently filed a Consolidated Comment on
behalf of the State,
6
declaring expressly that it agrees with the Court's definition of the term "capital" in
Section 11, Article XII of the Constitution. During the Oral Arguments on 26 June 2012, the OSG
reiterated its position consistent with the Court's 28 June 2011 Decision.
We deny the motions for reconsideration.
I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.
As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital" in Section
11, Article XII of the Constitution has far-reaching implications to the national economy. In fact, a
resolution of this issue will determine whether Filipinos are masters, or second-class citizens, in their own
country. What is at stake here is whether Filipinos or foreigners will have effective control of the
Philippine national economy. Indeed, if ever there is a legal issue that has far-reaching implications to the
entire nation, and to future generations of Filipinos, it is the threshold legal issue presented in this case.
Contrary to Pangilinans narrow view, the serious economic consequences resulting in the interpretation
of the term "capital" in Section 11, Article XII of the Constitution undoubtedly demand an immediate
adjudication of this issue. Simply put, the far-reaching implications of this issue justify the treatment
of the petition as one for mandamus.
7

In Luzon Stevedoring Corp. v. Anti-Dummy Board,
8
the Court deemed it wise and expedient to resolve the
case although the petition for declaratory relief could be outrightly dismissed for being procedurally
defective. There, appellant admittedly had already committed a breach of the Public Service Act in
relation to the Anti-Dummy Law since it had been employing non- American aliens long before the
141

decision in a prior similar case. However, the main issue in Luzon Stevedoring was of transcendental
importance, involving the exercise or enjoyment of rights, franchises, privileges, properties and
businesses which only Filipinos and qualified corporations could exercise or enjoy under the Constitution
and the statutes. Moreover, the same issue could be raised by appellant in an appropriate action. Thus,
in Luzon Stevedoring the Court deemed it necessary to finally dispose of the case for the guidance of all
concerned, despite the apparent procedural flaw in the petition.
The circumstances surrounding the present case, such as the supposed procedural defect of the petition
and the pivotal legal issue involved, resemble those in Luzon Stevedoring. Consequently, in the interest
of substantial justice and faithful adherence to the Constitution, we opted to resolve this case for the
guidance of the public and all concerned parties.
II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."
Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long been settled
and defined to refer to the total outstanding shares of stock, whether voting or non-voting. In fact,
movants claim that the SEC, which is the administrative agency tasked to enforce the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution and various statutes, has consistently adopted
this particular definition in its numerous opinions. Movants point out that with the 28 June 2011 Decision,
the Court in effect introduced a "new" definition or "midstream redefinition"
9
of the term "capital" in Section
11, Article XII of the Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term
"capital" found in various economic provisions of the 1935, 1973 and 1987 Constitutions. There has never
been a judicial precedent interpreting the term "capital" in the 1935, 1973 and 1987 Constitutions, until
now. Hence, it is patently wrong and utterly baseless to claim that the Court in defining the term "capital"
in its 28 June 2011 Decision modified, reversed, or set aside the purported long-standing definition of the
term "capital," which supposedly refers to the total outstanding shares of stock, whether voting or non-
voting. To repeat, until the present case there has never been a Court ruling categorically defining the
term "capital" found in the various economic provisions of the 1935, 1973 and 1987 Philippine
Constitutions.
The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term
"capital" as referring to both voting and non-voting shares (combined total of common and preferred
shares) are, in the first place, conflicting and inconsistent. There is no basis whatsoever to the claim that
the SEC and the DOJ have consistently and uniformly adopted a definition of the term "capital" contrary to
the definition that this Court adopted in its 28 June 2011 Decision.
In DOJ Opinion No. 130, s. 1985,
10
dated 7 October 1985, the scope of the term "capital" in Section 9,
Article XIV of the 1973 Constitution was raised, that is, whether the term "capital" includes "both preferred
and common stocks." The issue was raised in relation to a stock-swap transaction between a Filipino and
a Japanese corporation, both stockholders of a domestic corporation that owned lands in the Philippines.
Then Minister of Justice Estelito P. Mendoza ruled that the resulting ownership structure of the
corporation would beunconstitutional because 60% of the voting stock would be owned by Japanese
while Filipinos would own only 40% of the voting stock, although when the non-voting stock is added,
Filipinos would own 60% of the combined voting and non-voting stock. This ownership structure is
remarkably similar to the current ownership structure of PLDT. Minister Mendoza ruled:
x x x x
142

Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common and
preferred) while the Japanese investors control sixty percent (60%) of the common (voting) shares.
It is your position that x x x since Section 9, Article XIV of the Constitution uses the word
"capital," which is construed "to include both preferred and common shares" and "that where the
law does not distinguish, the courts shall not distinguish."
x x x x
In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in question
may not be constitutionally upheld. While it may be ordinary corporate practice to classify corporate
shares into common voting shares and preferred non-voting shares, any arrangement which attempts to
defeat the constitutional purpose should be eschewed. Thus, the resultant equity arrangement which
would place ownership of 60%
11
of the common (voting) shares in the Japanese group, while
retaining 60% of the total percentage of common and preferred shares in Filipino hands would
amount to circumvention of the principle of control by Philippine stockholders that is implicit in
the 60% Philippine nationality requirement in the Constitution. (Emphasis supplied)
In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9, Article
XIV of the 1973 Constitution includes "both preferred and common stocks" treated as the same class of
shares regardless of differences in voting rights and privileges. Minister Mendoza stressed that the 60-40
ownership requirement in favor of Filipino citizens in the Constitution is not complied with unless the
corporation "satisfies the criterion of beneficial ownership" and that in applying the same "the
primordial consideration is situs of control."
On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan
Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied the Voting Control
Test, that is, using only the voting stock to determine whether a corporation is a Philippine national. The
Opinion states:
Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine national
because: (1) sixty percent (60%) of its outstanding capital stock entitled to vote is owned by a
Philippine national, the Trustee; and (2) at least sixty percent (60%) of the ERF will accrue to the benefit
of Philippine nationals. Still pursuant to the Control Test, MLRCs investment in 60% of BFDCs
outstanding capital stock entitled to vote shall be deemed as of Philippine nationality, thereby
qualifying BFDC to own private land.
Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals, considering
that: (1) sixty percent (60%) of their respective outstanding capital stock entitled to vote is owned by a
Philippine national (i.e., by the Trustee, in the case of MLRC; and by MLRC, in the case of BFDC); and
(2) at least 60% of their respective board of directors are Filipino citizens. (Boldfacing and italicization
supplied)
Clearly, these DOJ and SEC opinions are compatible with the Courts interpretation of the 60-40
ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic
activities. At the same time, these opinions highlight the conflicting, contradictory, and inconsistent
positions taken by the DOJ and the SEC on the definition of the term "capital" found in the economic
provisions of the Constitution.
The opinions issued by SEC legal officers do not have the force and effect of SEC rules and regulations
because only the SEC en banc can adopt rules and regulations. As expressly provided in Section 4.6 of
the Securities Regulation Code,
12
the SEC cannot delegate to any of its individual Commissioner or staff
the power to adopt any rule or regulation. Further, under Section 5.1 of the same Code, it is the SEC
143

as a collegial body, and not any of its legal officers, that is empowered to issue opinions and
approve rules and regulations. Thus:
4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department or
office of the Commission, an individual Commissioner or staff member of the Commission exceptits
review or appellate authority and its power to adopt, alter and supplement any rule or regulation.
The Commission may review upon its own initiative or upon the petition of any interested party any action
of any department or office, individual Commissioner, or staff member of the Commission.
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency and
shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, the
Corporation Code, the Investment Houses Law, the Financing Company Act and other existing laws.
Pursuant thereto the Commission shall have, among others, the following powers and functions:
x x x x
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinionsand
provide guidance on and supervise compliance with such rules, regulations and orders;
x x x x (Emphasis supplied)
Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions that have
the effect of SEC rules or regulations is ultra vires. Under Sections 4.6 and 5.1(g) of the Code, only the
SEC en banc can "issue opinions" that have the force and effect of rules or regulations. Section 4.6 of the
Code bars the SEC en banc from delegating to any individual Commissioner or staff the power to adopt
rules or regulations. In short, any opinion of individual Commissioners or SEC legal officers does
not constitute a rule or regulation of the SEC.
The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its individual
commissioners or legal staff, is empowered to issue opinions which have the same binding effect as SEC
rules and regulations, thus:
JUSTICE CARPIO:
So, under the law, it is the Commission En Banc that can issue an
SEC Opinion, correct?
COMMISSIONER GAITE:
13

Thats correct, Your Honor.
JUSTICE CARPIO:
Can the Commission En Banc delegate this function to an SEC officer?
COMMISSIONER GAITE:
Yes, Your Honor, we have delegated it to the General Counsel.
JUSTICE CARPIO:
144

It can be delegated. What cannot be delegated by the Commission En Banc to a
commissioner or an individual employee of the Commission?
COMMISSIONER GAITE:
Novel opinions that [have] to be decided by the En Banc...
JUSTICE CARPIO:
What cannot be delegated, among others, is the power to adopt or amend rules and
regulations, correct?
COMMISSIONER GAITE:
Thats correct, Your Honor.
JUSTICE CARPIO:
So, you combine the two (2), the SEC officer, if delegated that power, can issue an
opinion but that opinion does not constitute a rule or regulation, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, all of these opinions that you mentioned they are not rules and regulations,
correct?
COMMISSIONER GAITE:
They are not rules and regulations.
JUSTICE CARPIO:
If they are not rules and regulations, they apply only to that particular situation and will
not constitute a precedent, correct?
COMMISSIONER GAITE:
Yes, Your Honor.
14
(Emphasis supplied)
Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and
opinions on behalf of the SEC, has adopted even the Grandfather Rule in determining compliance with
the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any
circumvention of the required Filipino "ownership and control," is laid down in the 25 March 2010
SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,
15
to wit:
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural
resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not
145

diminish that right through the legal fiction of corporate ownership and control. But the
constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners
contrary to the command of the Constitution. Hence, the Grandfather Rule must be applied to
accurately determine the actual participation, both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity or business.
Compliance with the constitutional limitation(s) on engaging in nationalized activities must be determined
by ascertaining if 60% of the investing corporations outstanding capital stock is owned by "Filipino
citizens", or as interpreted, by natural or individual Filipino citizens. If such investing corporation is in turn
owned to some extent by another investing corporation, the same process must be observed. One must
not stop until the citizenships of the individual or natural stockholders of layer after layer of investing
corporations have been established, the very essence of the Grandfather Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule. In
one of the discussions on what is now Article XII of the present Constitution, the framers made the
following exchange:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity;
namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with the question: Where do we base the equity
requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital
stock of a corporation? Will the Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from the UP draft is
60 percent of voting stock.
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another corporation,
say, a corporation with 60-40 percent equity invests in another corporation which is permitted by the
Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)
This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership requirement in
favor of Filipino citizens in the Constitution to engage in certain economic activities applies not only to
voting control of the corporation, but also to the beneficial ownership of the corporation. Thus, in our
28 June 2011 Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the
146

outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)
Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a
corporation is a "Philippine national."
The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions which
respondents relied upon, is merely preliminary and an opinion only of such officers. To repeat, any such
opinion does not constitute an SEC rule or regulation. In fact, many of these opinions contain a disclaimer
which expressly states: "x x x the foregoing opinion is based solely on facts disclosed in your query and
relevant only to the particular issue raised therein and shall not be used in the nature of a standing
rule binding upon the Commission in other cases whether of similar or dissimilar
circumstances."
16
Thus, the opinions clearly make a caveat that they do not constitute binding
precedents on any one, not even on the SEC itself.
Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are neither
conclusive nor controlling and thus, do not bind the Court. It is hornbook doctrine that any interpretation of
the law that administrative or quasi-judicial agencies make is only preliminary, never conclusive on the
Court. The power to make a final interpretation of the law, in this case the term "capital" in Section 11,
Article XII of the 1987 Constitution, lies with this Court, not with any other government entity.
In his motion for reconsideration, the PSE President cites the cases of National Telecommunications
Commission v. Court of Appeals
17
and Philippine Long Distance Telephone Company v. National
Telecommunications Commission
18
in arguing that the Court has already defined the term "capital" in
Section 11, Article XII of the 1987 Constitution.
19

The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court of
Appeals
20
andPhilippine Long Distance Telephone Company v. National Telecommunications
Commission,
21
the Court did not define the term "capital" as found in Section 11, Article XII of the 1987
Constitution. In fact, these two cases never mentioned, discussed or cited Section 11, Article XII of
the Constitution or any of its economic provisions, and thus cannot serve as precedent in the
interpretation of Section 11, Article XII of the Constitution. These two cases dealt solely with the
determination of the correct regulatory fees under Section 40(e) and (f) of the Public Service Act, to wit:
(e) For annual reimbursement of the expenses incurred by the Commission in the supervision of other
public services and/or in the regulation or fixing of their rates, twenty centavos for each one hundred
pesos or fraction thereof, of the capital stock subscribed or paid, or if no shares have been issued, of
the capital invested, or of the property and equipment whichever is higher.
(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or fraction
thereof, of the increased capital. (Emphasis supplied)
The Courts interpretation in these two cases of the terms "capital stock subscribed or paid," "capital
stock" and "capital" does not pertain to, and cannot control, the definition of the term "capital" as used in
Section 11, Article XII of the Constitution, or any of the economic provisions of the Constitution where the
term "capital" is found. The definition of the term "capital" found in the Constitution must not be taken out
of context. A careful reading of these two cases reveals that the terms "capital stock subscribed or paid,"
"capital stock" and "capital" were defined solely to determine the basis for computing the supervision and
regulation fees under Section 40(e) and (f) of the Public Service Act.
III.
Filipinization of Public Utilities
147

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodies the
ideals that the Constitution intends to achieve.
22
The Preamble reads:
We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and humane
society, and establish a Government that shall embody our ideals and aspirations, promote the common
good, conserve and develop our patrimony, and secure to ourselves and our posterity, the blessings of
independence and democracy under the rule of law and a regime of truth, justice, freedom, love, equality,
and peace, do ordain and promulgate this Constitution. (Emphasis supplied)
Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy the
development of a national economy "effectively controlled" by Filipinos:
Section 19. The State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:
Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the
national interest dictates, reserve to citizens of the Philippines or to corporations or associations at least
sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may
prescribe, certain areas of investments. The Congress shall enact measures that will encourage the
formation and operation of enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State
shall give preference to qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its national jurisdiction and
in accordance with its national goals and priorities.
23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such
citizens, or such higher percentage as Congress may prescribe, certain areas of investments." Thus, in
numerous laws Congress has reserved certain areas of investments to Filipino citizens or to corporations
at least sixty percent of the "capital" of which is owned by Filipino citizens. Some of these laws are: (1)
Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or
R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine
Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004
or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship
Mortgage Decree or P.D. No. 1521.
With respect to public utilities, the 1987 Constitution specifically ordains:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per centum of whose capital is owned
by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common
good so requires. The State shall encourage equity participation in public utilities by the general public.
The participation of foreign investors in the governing body of any public utility enterprise shall be limited
to their proportionate share in its capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines. (Emphasis supplied)
148

This provision, which mandates the Filipinization of public utilities, requires that any form of authorization
for the operation of public utilities shall be granted only to "citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of whose capital is
owned by such citizens." "The provision is [an express] recognition of the sensitive and vital
position of public utilities both in the national economy and for national security."
24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1) Filipino
citizens, or (2) corporations or associations at least 60 percent of whose "capital" is owned by Filipino
citizens. Hence, in the case of individuals, only Filipino citizens can validly own and operate a public
utility. In the case of corporations or associations, at least 60 percent of their "capital" must be owned by
Filipino citizens. In other words, under Section 11, Article XII of the 1987 Constitution, to own and
operate a public utility a corporations capital must at least be 60 percent owned by Philippine
nationals.
IV.
Definition of "Philippine National"
Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress enacted
Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended, which defined a
"Philippine national" as follows:
SEC. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled
to vote is owned and held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which one hundred percent
(100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities
and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the corporation, shall be considered a
"Philippine national." (Boldfacing, italicization and underscoring supplied)
Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or a
domestic corporation at least "60% of the capital stock outstanding and entitled to vote" is owned by
Philippine citizens.
The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in its
predecessor statute, Executive Order No. 226 or the Omnibus Investments Code of 1987,
25
which was
issued by then President Corazon C. Aquino. Article 15 of this Code states:
Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership or
association wholly-owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty per cent (60%) of the capital stock outstandingand entitled
to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty
per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent
(60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held
149

by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of
Directors of both corporations must be citizens of the Philippines in order that the corporation shall be
considered a Philippine national. (Boldfacing, italicization and underscoring supplied)
Under Article 48(3)
26
of the Omnibus Investments Code of 1987, "no corporation x x x which is not a
Philippine national x x x shall do business
x x x in the Philippines x x x without first securing from the Board of Investments a written certificate to the
effect that such business or economic activity x x x would not conflict with the Constitution or laws of the
Philippines."
27
Thus, a "non-Philippine national" cannot own and operate a reserved economic activity like
a public utility. This means, of course, that only a "Philippine national" can own and operate a public
utility.
In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of 1987
was a reiteration of the meaning of such term as provided in Article 14 of the Omnibus Investments Code
of 1981,
28
to wit:
Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled
to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty
per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent
(60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held
by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of
Directors of both corporations must be citizens of the Philippines in order that the corporation shall be
considered a Philippine national. (Boldfacing, italicization and underscoring supplied)
Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not a
Philippine national x x x shall do business x x x in the Philippines x x x without first securing a written
certificate from the Board of Investments to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines."
29
Thus, a "non-Philippine national"
cannot own and operate a reserved economic activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.
Prior to the Omnibus Investments Code of 1981, Republic Act No. 5186
30
or the Investment Incentives
Act, which took effect on 16 September 1967, contained a similar definition of a "Philippine national," to
wit:
(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association wholly
owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of
which at least sixty per cent of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine National and at least sixty per cent of the fund will
accrue to the benefit of Philippine Nationals: Provided, That where a corporation and its non-Filipino
stockholders own stock in a registered enterprise, at least sixty per cent of the capital stock outstanding
and entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at
least sixty per cent of the members of the Board of Directors of both corporations must be citizens of the
Philippines in order that the corporation shall be considered a Philippine National. (Boldfacing, italicization
and underscoring supplied)
Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took effect on
30 September 1968, if the investment in a domestic enterprise by non-Philippine nationals exceeds 30%
150

of its outstanding capital stock, such enterprise must obtain prior approval from the Board of Investments
before accepting such investment. Such approval shall not be granted if the investment "would conflict
with existing constitutional provisions and laws regulating the degree of required ownership by Philippine
nationals in the enterprise."
31
A "non-Philippine national" cannot own and operate a reserved economic
activity like a public utility. Again, this means that only a "Philippine national" can own and operate a
public utility.
The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino citizen, or
adomestic corporation "at least sixty percent (60%) of the capital stock outstanding and entitled
to vote"is owned by Filipino citizens. A domestic corporation is a "Philippine national" only if at least 60%
of its voting stock is owned by Filipino citizens. This definition of a "Philippine national" is crucial in the
present case because the FIA reiterates and clarifies Section 11, Article XII of the 1987 Constitution,
which limits the ownership and operation of public utilities to Filipino citizens or to corporations or
associations at least 60% Filipino-owned.
The FIA is the basic law governing foreign investments in the Philippines, irrespective of the nature of
business and area of investment. The FIA spells out the procedures by which non-Philippine nationals
can invest in the Philippines. Among the key features of this law is the concept of a negative list or the
Foreign Investments Negative List.
32
Section 8 of the law states:
SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment Negative
List]. - The Foreign Investment Negative List shall have two
2
component lists: A and B:
a. List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the
Constitution and specific laws.
b. List B shall contain the areas of activities and enterprises regulated pursuant to law:
1. which are defense-related activities, requiring prior clearance and authorization from the Department of
National Defense [DND] to engage in such activity, such as the manufacture, repair, storage and/or
distribution of firearms, ammunition, lethal weapons, military ordinance, explosives, pyrotechnics and
similar materials; unless such manufacturing or repair activity is specifically authorized, with a substantial
export component, to a non-Philippine national by the Secretary of National Defense; or
2. which have implications on public health and morals, such as the manufacture and distribution of
dangerous drugs; all forms of gambling; nightclubs, bars, beer houses, dance halls, sauna and steam
bathhouses and massage clinics. (Boldfacing, underscoring and italicization supplied)
Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." Foreign
Investment Negative List A consists of "areas of activities reserved to Philippine nationals by
mandate of the Constitution and specific laws," where foreign equity participation in any
enterprise shall be limited to the maximum percentage expressly prescribed by the Constitution
and other specific laws. In short, to own and operate a public utility in the Philippines one must be
a "Philippine national" as defined in the FIA. The FIA is abundant notice to foreign investors to
what extent they can invest in public utilities in the Philippines.
To repeat, among the areas of investment covered by the Foreign Investment Negative List A is the
ownership and operation of public utilities, which the Constitution expressly reserves to Filipino citizens
and to corporations at least 60% owned by Filipino citizens. In other words, Negative List A of the FIA
reserves the ownership and operation of public utilities only to "Philippine nationals," defined in
Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a corporation organized under
the laws of the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or (4) a
corporation organized abroad and registered as doing business in the Philippines under the Corporation
151

Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the
benefit of Philippine nationals."
Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus
Investments Code of 1981, to the enactment of the Omnibus Investments Code of 1987, and to the
passage of the present Foreign Investments Act of 1991, or for more than four decades, the statutory
definition of the term "Philippine national" has been uniform and consistent: it means a Filipino
citizen, or a domestic corporation at least 60% of the voting stock is owned by Filipinos. Likewise,
these same statutes have uniformly and consistently required that only "Philippine nationals"
could own and operate public utilities in the Philippines. The following exchange during the Oral
Arguments is revealing:
JUSTICE CARPIO:
Counsel, I have some questions. You are aware of the Foreign Investments Act of 1991,
x x x? And the FIA of 1991 took effect in 1991, correct? Thats over twenty (20) years
ago, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine
nationals can own and operate public utilities[], correct?
COMMISSIONER GAITE:
Yes, Your Honor.
JUSTICE CARPIO:
And the same Foreign Investments Act of 1991 defines a "Philippine national" either as a
citizen of the Philippines, or if it is a corporation at least sixty percent (60%) of the voting
stock is owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And, you are also aware that under the predecessor law of the Foreign Investments Act
of 1991, the Omnibus Investments Act of 1987, the same provisions apply: x x x only
Philippine nationals can own and operate a public utility and the Philippine national, if it is
a corporation, x x x sixty percent (60%) of the capital stock of that corporation must be
owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
152

Correct, Your Honor.
JUSTICE CARPIO:
And even prior to the Omnibus Investments Act of 1987, under the Omnibus Investments
Act of 1981, the same rules apply: x x x only a Philippine national can own and operate a
public utility and a Philippine national, if it is a corporation, sixty percent (60%) of its x x x
voting stock, must be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to that, under [the]1967 Investments Incentives Act and the Foreign
Company Act of 1968, the same rules applied, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, for the last four (4) decades, x x x, the law has been very consistent only a
Philippine national can own and operate a public utility, and a Philippine national,
if it is a corporation, x x x at least sixty percent (60%) of the voting stock must be
owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
33
(Emphasis supplied)
Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which
categorically prescribe that certain economic activities, like the ownership and operation of public utilities,
are reserved to corporations "at least sixty percent (60%) of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines." Foreign Investment Negative List A refers to
"activities reserved to Philippine nationals by mandate of the Constitution and specific laws." The FIA is
the basic statute regulating foreign investments in the Philippines. Government agencies tasked
with regulating or monitoring foreign investments, as well as counsels of foreign investors, should start
with the FIA in determining to what extent a particular foreign investment is allowed in the Philippines.
Foreign investors and their counsels who ignore the FIA do so at their own peril. Foreign investors and
their counsels who rely on opinions of SEC legal officers that obviously contradict the FIA do so also at
their own peril.
Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately raise a red
flag. There are already numerous opinions of SEC legal officers that cite the definition of a "Philippine
national" in Section 3(a) of the FIA in determining whether a particular corporation is qualified to own and
operate a nationalized or partially nationalized business in the Philippines. This shows that SEC legal
officers are not only aware of, but also rely on and invoke, the provisions of the FIA in ascertaining the
eligibility of a corporation to engage in partially nationalized industries. The following are some of such
opinions:
153

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;
2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine Overseas
Employment Administration;
3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato S.
Calma;
4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos & Jardeleza;
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De Los
Angeles;
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S.
Arbolado.
The SEC legal officers occasional but blatant disregard of the definition of the term "Philippine national"
in the FIA signifies their lack of integrity and competence in resolving issues on the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.
The PSE President argues that the term "Philippine national" defined in the FIA should be limited and
interpreted to refer to corporations seeking to avail of tax and fiscal incentives under investment
incentives laws and cannot be equated with the term "capital" in Section 11, Article XII of the 1987
Constitution. Pangilinan similarly contends that the FIA and its predecessor statutes do not apply to
"companies which have not registered and obtained special incentives under the schemes established by
those laws."
Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any enterprise.
Tax and fiscal incentives to investments are granted separately under the Omnibus Investments Code of
1987, not under the FIA. In fact, the FIA expressly repealed Articles 44 to 56 of Book II of the Omnibus
Investments Code of 1987, which articles previously regulated foreign investments in nationalized or
partially nationalized industries.
The FIA is the applicable law regulating foreign investments in nationalized or partially nationalized
industries. There is nothing in the FIA, or even in the Omnibus Investments Code of 1987 or its
predecessor statutes, that states, expressly or impliedly, that the FIA or its predecessor statutes do not
apply to enterprises not availing of tax and fiscal incentives under the Code. The FIA and its predecessor
statutes apply to investments in all domestic enterprises, whether or not such enterprises enjoy tax and
fiscal incentives under the Omnibus Investments Code of 1987 or its predecessor statutes. The reason is
quite obvious mere non-availment of tax and fiscal incentives by a non-Philippine national
cannot exempt it from Section 11, Article XII of the Constitution regulating foreign investments in
public utilities. In fact, the Board of Investments Primer on Investment Policies in the
Philippines,
34
which is given out to foreign investors, provides:
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES
Investors who do not seek incentives and/or whose chosen activities do not qualify for incentives, (i.e.,
the activity is not listed in the IPP, and they are not exporting at least 70% of their production) may go
ahead and make the investments without seeking incentives. They only have to be guided by the
Foreign Investments Negative List (FINL).
154

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other areas
outside of this list are fully open to foreign investors. (Emphasis supplied)
V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the Constitution to
engage in certain economic activities applies not only to voting control of the corporation, but also to the
beneficial ownership of the corporation. To repeat, we held:
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held by
"a trustee of funds for pension or other employee retirement or separation benefits," the trustee is a
Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be
deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights, is essential."
Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting
control of the corporation but also to the beneficial ownership of the corporation, it is therefore imperative
that such requirement apply uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital
stock
35
consists of all classes of shares issued to stockholders, that is, common shares as well as
preferred shares, which may have different rights, privileges or restrictions as stated in the articles of
incorporation.
36

The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but disallows
denial of the right to vote in specific corporate matters. Thus, common shares have the right to vote in the
election of directors, while preferred shares may be denied such right. Nonetheless, preferred shares,
even if denied the right to vote in the election of directors, are entitled to vote on the following corporate
matters: (1) amendment of articles of incorporation; (2) increase and decrease of capital stock; (3)
incurring, creating or increasing bonded indebtedness; (4) sale, lease, mortgage or other disposition of
substantially all corporate assets; (5) investment of funds in another business or corporation or for a
purpose other than the primary purpose for which the corporation was organized; (6) adoption,
amendment and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of corporation.
37

Since a specific class of shares may have rights and privileges or restrictions different from the rest of the
shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article
XII of the Constitution must apply not only to shares with voting rights but also to shares without voting
rights. Preferred shares, denied the right to vote in the election of directors, are anyway still entitled to
vote on the eight specific corporate matters mentioned above. Thus, if a corporation, engaged in a
partially nationalized industry, issues a mixture of common and preferred non-voting shares, at
least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares
must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership
requirement in favor of Filipino citizens must apply separately to each class of shares, whether
common, preferred non-voting, preferred voting or any other class of shares. This uniform
155

application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the
constitutional command that the ownership and operation of public utilities shall be reserved exclusively
to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40
ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in
voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as
mandated by the Constitution.
Moreover, such uniform application to each class of shares insures that the "controlling interest" in public
utilities always lies in the hands of Filipino citizens. This addresses and extinguishes Pangilinans worry
that foreigners, owning most of the non-voting shares, will exercise greater control over fundamental
corporate matters requiring two-thirds or majority vote of all shareholders.
VI.
Intent of the framers of the Constitution
While Justice Velasco quoted in his Dissenting Opinion
38
a portion of the deliberations of the
Constitutional Commission to support his claim that the term "capital" refers to the total outstanding
shares of stock, whether voting or non-voting, the following excerpts of the deliberations reveal otherwise.
It is clear from the following exchange that the term "capital" refers to controlling interest of a
corporation, thus:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity;
namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the equity
requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital
stock of a corporation"? Will the Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from the UP
draft is "60 percent of voting stock."
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with 60-40
percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.
39

x x x x
156

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or
controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or
associations at least sixty percent of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be
owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say
40 percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos own
the nonvoting shares. So we can have a situation where the corporation is controlled by
foreigners despite being the minority because they have the voting capital. That is the anomaly
that would result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935
Constitutions is that according to Commissioner Rodrigo, there are associations that do not have
stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling interest."
MR. BENGZON. In the case of stock corporations, it is assumed.
40
(Boldfacing and underscoring
supplied)
Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in the corporation.
The use of the term "capital" was intended to replace the word "stock" because associations without
stocks can operate public utilities as long as they meet the 60-40 ownership requirement in favor of
Filipino citizens prescribed in Section 11, Article XII of the Constitution. However, this did not change the
intent of the framers of the Constitution to reserve exclusively to Philippine nationals the "controlling
interest" in public utilities.
During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of the nationalists
in the Convention."
41
The same battle-cry resulted in the nationalization of the public utilities.
42
This is also
the same intent of the framers of the 1987 Constitution who adopted the exact formulation embodied in
the 1935 and 1973 Constitutions on foreign equity limitations in partially nationalized industries.
The OSG, in its own behalf and as counsel for the State,
43
agrees fully with the Courts interpretation of
the term "capital." In its Consolidated Comment, the OSG explains that the deletion of the phrase
"controlling interest" and replacement of the word "stock" with the term "capital" were intended specifically
to extend the scope of the entities qualified to operate public utilities to include associations without
stocks. The framers omission of the phrase "controlling interest" did not mean the inclusion of all shares
of stock, whether voting or non-voting. The OSG reiterated essentially the Courts declaration that the
Constitution reserved exclusively to Philippine nationals the ownership and operation of public utilities
consistent with the States policy to "develop a self-reliant and independent national economy effectively
controlled by Filipinos."
157

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total outstanding
capital stock, treated as a single class regardless of the actual classification of shares, grossly
contravenes the intent and letter of the Constitution that the "State shall develop a self-reliant and
independent national economyeffectively controlled by Filipinos." We illustrated the glaring anomaly
which would result in defining the term "capital" as the total outstanding capital stock of a corporation,
treated as a single class of shares regardless of the actual classification of shares, to wit:
Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting
preferred shares owned by Filipinos, with both classes of share having a par value of one peso (P 1.00)
per share. Under the broad definition of the term "capital," such corporation would be considered
compliant with the 40 percent constitutional limit on foreign equity of public utilities since the
overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino
owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting rights in the election of
directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001
percent, exercise control over the public utility. On the other hand, the Filipinos, holding more than 99.999
percent of the equity, cannot vote in the election of directors and hence, have no control over the public
utility. This starkly circumvents the intent of the framers of the Constitution, as well as the clear language
of the Constitution, to place the control of public utilities in the hands of Filipinos. x x x
Further, even if foreigners who own more than forty percent of the voting shares elect an all-Filipino board
of directors, this situation does not guarantee Filipino control and does not in any way cure the violation of
the Constitution. The independence of the Filipino board members so elected by such foreign
shareholders is highly doubtful. As the OSG pointed out, quoting Justice George Sutherlands words
in Humphreys Executor v. US,
44
"x x x it is quite evident that one who holds his office only during the
pleasure of another cannot be depended upon to maintain an attitude of independence against the latters
will." Allowing foreign shareholders to elect a controlling majority of the board, even if all the directors are
Filipinos, grossly circumvents the letter and intent of the Constitution and defeats the very purpose of our
nationalization laws.
VII.
Last sentence of Section 11, Article XII of the Constitution
The last sentence of Section 11, Article XII of the 1987 Constitution reads:
The participation of foreign investors in the governing body of any public utility enterprise shall be limited
to their proportionate share in its capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines.
During the Oral Arguments, the OSG emphasized that there was never a question on the intent of the
framers of the Constitution to limit foreign ownership, and assure majority Filipino ownership and control
of public utilities. The OSG argued, "while the delegates disagreed as to the percentage threshold to
adopt, x x x the records show they clearly understood that Filipino control of the public utility corporation
can only be and is obtained only through the election of a majority of the members of the board."
Indeed, the only point of contention during the deliberations of the Constitutional Commission on 23
August 1986 was the extent of majority Filipino control of public utilities. This is evident from the following
exchange:
THE PRESIDENT. Commissioner Jamir is recognized.
MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the phrase "two
thirds of whose voting stock or controlling interest," and instead substitute the words "SIXTY PERCENT
158

OF WHOSE CAPITAL" so that the sentence will read: "No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines at least SIXTY PERCENT OF
WHOSE CAPITAL is owned by such citizens."
x x x x
THE PRESIDENT: Will Commissioner Jamir first explain?
MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previous sections in
which we fixed the Filipino equity to 60 percent as against 40 percent for foreigners. It is only in this
Section 15 with respect to public utilities that the committee proposal was increased to two-thirds. I think it
would be better to harmonize this provision by providing that even in the case of public utilities, the
minimum equity for Filipino citizens should be 60 percent.
MR. ROMULO. Madam President.
THE PRESIDENT. Commissioner Romulo is recognized.
MR. ROMULO. My reason for supporting the amendment is based on the discussions I have had with
representatives of the Filipino majority owners of the international record carriers, and the subsequent
memoranda they submitted to me. x x x
Their second point is that under the Corporation Code, the management and control of a corporation is
vested in the board of directors, not in the officers but in the board of directors. The officers are only
agents of the board. And they believe that with 60 percent of the equity, the Filipino majority stockholders
undeniably control the board. Only on important corporate acts can the 40-percent foreign equity exercise
a veto, x x x.
x x x x
45

MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. Commissioner Rosario Braid is recognized.
MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a memorandum by the
spokesman of the Philippine Chamber of Communications on why they would like to maintain the present
equity, I am referring to the 66 2/3. They would prefer to have a 75-25 ratio but would settle for 66 2/3. x x
x
x x x x
THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of two-thirds
rather than the 60 percent?
MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipino citizens.
x x x x
46

While they had differing views on the percentage of Filipino ownership of capital, it is clear that the
framers of the Constitution intended public utilities to be majority Filipino-owned and controlled. To
ensure that Filipinos control public utilities, the framers of the Constitution approved, as additional
159

safeguard, the inclusion of the last sentence of Section 11, Article XII of the Constitution commanding that
"[t]he participation of foreign investors in the governing body of any public utility enterprise shall be limited
to their proportionate share in its capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines." In other words, the last sentence of Section 11, Article
XII of the Constitution mandates that (1) the participation of foreign investors in the governing body of the
corporation or association shall be limited to their proportionate share in the capital of such entity; and (2)
all officers of the corporation or association must be Filipino citizens.
Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing officers of the
corporation or association to be Filipino citizens specifically to prevent management contracts, which
were designed primarily to circumvent the Filipinization of public utilities, and to assure Filipino control of
public utilities, thus:
MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding a phrase
which states: "THE MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN
ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES." I have with me their position
paper.
THE PRESIDENT. The Commissioner may proceed.
MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which
Commissioner Romulo mentioned Philippine Global Communications, Eastern Telecommunications,
Globe Mackay Cable are 40-percent owned by foreign multinational companies and 60-percent owned
by their respective Filipino partners. All three, however, also have management contracts with these
foreign companies Philcom with RCA, ETPI with Cable and Wireless PLC, and GMCR with ITT. Up to
the present time, the general managers of these carriers are foreigners. While the foreigners in these
common carriers are only minority owners, the foreign multinationals are the ones managing and
controlling their operations by virtue of their management contracts and by virtue of their strength in the
governing bodies of these carriers.
47

x x x x
MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to propose an
amendment with respect to the operating management of public utilities, and in this amendment, we are
associated with Fr. Bernas, Commissioners Nieva and Rodrigo. Commissioner Rosario Braid will state
this amendment now.
Thank you.
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. This is still on Section 15.
MS. ROSARIO BRAID. Yes.
MR. VILLEGAS. Yes, Madam President.
x x x x
MS. ROSARIO BRAID. Madam President, I propose a new section to read: THE MANAGEMENT BODY
OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY
CITIZENS OF THE PHILIPPINES."
160

This will prevent management contracts and assure control by Filipino citizens. Will the committee
assure us that this amendment will insure that past activities such as management contracts will no
longer be possible under this amendment?
x x x x
FR. BERNAS. Madam President.
THE PRESIDENT. Commissioner Bernas is recognized.
FR. BERNAS. Will the committee accept a reformulation of the first part?
MR. BENGZON. Let us hear it.
FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which reads:
"THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC
UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL
THEREOF AND..."
MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS
AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
MR. BENGZON. Will Commissioner Bernas read the whole thing again?
FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY
PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE
CAPITAL THEREOF..." I do not have the rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that correct?
MR. VILLEGAS. Yes.
MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept the
amendment. Is that all right with Commissioner Rosario Braid?
MS. ROSARIO BRAID. Yes.
x x x x
MR. DE LOS REYES. The governing body refers to the board of directors and trustees.
MR. VILLEGAS. That is right.
MR. BENGZON. Yes, the governing body refers to the board of directors.
MR. REGALADO. It is accepted.
MR. RAMA. The body is now ready to vote, Madam President.
VOTING
161

x x x x
The results show 29 votes in favor and none against; so the proposed amendment is approved.
x x x x
THE PRESIDENT. All right. Can we proceed now to vote on Section 15?
MR. RAMA. Yes, Madam President.
THE PRESIDENT. Will the chairman of the committee please read Section 15?
MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines at least 60 PERCENT OF
WHOSE CAPITAL is owned by such citizens." May I request Commissioner Bengzon to please continue
reading.
MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF
ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN
THE CAPITAL THEREOF AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE
EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE YEARS
RENEWABLE FOR NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any such franchise or right
be granted except under the condition that it shall be subject to amendment, alteration, or repeal by
Congress when the common good so requires. The State shall encourage equity participation in public
utilities by the general public."
VOTING
x x x x
The results show 29 votes in favor and 4 against; Section 15, as amended, is approved.
48
(Emphasis
supplied)
The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision on the
limited participation of foreign investors in the governing body of public utilities, is a reiteration of the last
sentence of Section 5, Article XIV of the 1973 Constitution,
49
signifying its importance in reserving
ownership and control of public utilities to Filipino citizens.
VIII.
The undisputed facts
There is no dispute, and respondents do not claim the contrary, that (1) foreigners own 64.27% of the
common shares of PLDT, which class of shares exercises the sole right to vote in the election of
directors, and thus foreigners control PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus Filipinos do not control PLDT; (3) preferred shares,
99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends
that common shares earn;
50
(5) preferred shares have twice the par value of common shares; and (6)
preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only
22.15%.
162

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the question of
whether PLDT violated the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article
XII of the 1987 Constitution. Such question indisputably calls for a presentation and determination of
evidence through a hearing, which is generally outside the province of the Courts jurisdiction, but well
within the SECs statutory powers. Thus, for obvious reasons, the Court limited its decision on the purely
legal and threshold issue on the definition of the term "capital" in Section 11, Article XII of the Constitution
and directed the SEC to apply such definition in determining the exact percentage of foreign ownership in
PLDT.
IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.
In his petition, Gamboa prays, among others:
x x x x
5. For the Honorable Court to issue a declaratory relief that ownership of common or voting shares is the
sole basis in determining foreign equity in a public utility and that any other government rulings, opinions,
and regulations inconsistent with this declaratory relief be declared unconstitutional and a violation of the
intent and spirit of the 1987 Constitution;
6. For the Honorable Court to declare null and void all sales of common stocks to foreigners in excess of
40 percent of the total subscribed common shareholdings; and
7. For the Honorable Court to direct the Securities and Exchange Commission and Philippine Stock
Exchange to require PLDT to make a public disclosure of all of its foreign shareholdings and their
actual and real beneficial owners.
Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)
As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to perform its
statutory duty to investigate whether "the required percentage of ownership of the capital stock to be
owned by citizens of the Philippines has been complied with [by PLDT] as required by x x x the
Constitution."
51
Such plea clearly negates SECs argument that it was not impleaded.
Granting that only the SEC Chairman was impleaded in this case, the Court has ample powers to order
the SECs compliance with its directive contained in the 28 June 2011 Decision in view of the far-reaching
implications of this case. In Domingo v. Scheer,
52
the Court dispensed with the amendment of the
pleadings to implead the Bureau of Customs considering (1) the unique backdrop of the case; (2) the
utmost need to avoid further delays; and (3) the issue of public interest involved. The Court held:
The Court may be curing the defect in this case by adding the BOC as party-petitioner. The petition
should not be dismissed because the second action would only be a repetition of the first. In Salvador, et
al., v. Court of Appeals, et al., we held that this Court has full powers, apart from that power and authority
which is inherent, to amend the processes, pleadings, proceedings and decisions by substituting as party-
plaintiff the real party-in-interest. The Court has the power to avoid delay in the disposition of this
case, to order its amendment as to implead the BOC as party-respondent. Indeed, it may no longer
be necessary to do so taking into account the unique backdrop in this case, involving as it does
an issue of public interest. After all, the Office of the Solicitor General has represented the petitioner in
the instant proceedings, as well as in the appellate court, and maintained the validity of the deportation
order and of the BOCs Omnibus Resolution. It cannot, thus, be claimed by the State that the BOC was
not afforded its day in court, simply because only the petitioner, the Chairperson of the BOC, was the
163

respondent in the CA, and the petitioner in the instant recourse. In Alonso v. Villamor, we had the
occasion to state:
There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose
is to facilitate the application of justice to the rival claims of contending parties. They were created,
not to hinder and delay, but to facilitate and promote, the administration of justice. They do not constitute
the thing itself, which courts are always striving to secure to litigants. They are designed as the means
best adapted to obtain that thing. In other words, they are a means to an end. When they lose the
character of the one and become the other, the administration of justice is at fault and courts are
correspondingly remiss in the performance of their obvious duty.
53
(Emphasis supplied)
In any event, the SEC has expressly manifested
54
that it will abide by the Courts decision and
defer to the Courts definition of the term "capital" in Section 11, Article XII of the Constitution.
Further, the SEC entered its special appearance in this case and argued during the Oral
Arguments, indicating its submission to the Courts jurisdiction. It is clear, therefore, that there
exists no legal impediment against the proper and immediate implementation of the Courts
directive to the SEC.
PLDT is an indispensable party only insofar as the other issues, particularly the factual questions, are
concerned. In other words, PLDT must be impleaded in order to fully resolve the issues on (1) whether
the sale of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of
PLDT; (2) whether the sale of common shares to foreigners exceeded the 40 percent limit on foreign
equity in PLDT; and (3) whether the total percentage of the PLDT common shares with voting rights
complies with the 60-40 ownership requirement in favor of Filipino citizens under the Constitution for the
ownership and operation of PLDT. These issues indisputably call for an examination of the parties
respective evidence, and thus are clearly within the jurisdiction of the SEC. In short, PLDT must be
impleaded, and must necessarily be heard, in the proceedings before the SEC where the factual issues
will be thoroughly threshed out and resolved.
Notably, the foregoing issues were left untouched by the Court. The Court did not rule on the factual
issues raised by Gamboa, except the single and purely legal issue on the definition of the term "capital" in
Section 11, Article XII of the Constitution. The Court confined the resolution of the instant case to this
threshold legal issue in deference to the fact-finding power of the SEC.
Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal issue in this
case even without the participation of PLDT since defining the term "capital" in Section 11, Article XII of
the Constitution does not, in any way, depend on whether PLDT was impleaded. Simply put, PLDT is not
indispensable for a complete resolution of the purely legal question in this case.
55
In fact, the Court, by
treating the petition as one for mandamus,
56
merely directed the SEC to apply the Courts definition of the
term "capital" in Section 11, Article XII of the Constitution in determining whether PLDT committed any
violation of the said constitutional provision. The dispositive portion of the Courts ruling is addressed
not to PLDT but solely to the SEC, which is the administrative agency tasked to enforce the 60-40
ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.
Since the Court limited its resolution on the purely legal issue on the definition of the term "capital" in
Section 11, Article XII of the 1987 Constitution, and directed the SEC to investigate any violation by PLDT
of the 60-40 ownership requirement in favor of Filipino citizens under the Constitution,
57
there is no
deprivation of PLDTs property or denial of PLDTs right to due process, contrary to Pangilinan and
Nazarenos misimpression. Due process will be afforded to PLDT when it presents proof to the SEC that it
complies, as it claims here, with Section 11, Article XII of the Constitution.
X.
Foreign Investments in the Philippines
164

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may result in a
sudden flight of existing foreign investors to "friendlier" countries and simultaneously deterring new
foreign investors to our country. In particular, the PSE claims that the 28 June 2011 Decision may result
in the following: (1) loss of more than P 630 billion in foreign investments in PSE-listed shares; (2)
massive decrease in foreign trading transactions; (3) lower PSE Composite Index; and (4) local investors
not investing in PSE-listed shares.
58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants apprehension.
Without providing specific details, he pointed out the depressing state of the Philippine economy
compared to our neighboring countries which boast of growing economies. Further, Dr. Villegas explained
that the solution to our economic woes is for the government to "take-over" strategic industries, such as
the public utilities sector, thus:
JUSTICE CARPIO:
I would like also to get from you Dr. Villegas if you have additional information on whether this high
FDI
59
countries in East Asia have allowed foreigners x x x control [of] their public utilities, so that we can
compare apples with apples.
DR. VILLEGAS:
Correct, but let me just make a comment. When these neighbors of ours find an industry strategic, their
solution is not to "Filipinize" or "Vietnamize" or "Singaporize." Their solution is to make sure that those
industries are in the hands of state enterprises. So, in these countries, nationalization means the
government takes over. And because their governments are competent and honest enough to the
public, that is the solution. x x x
60
(Emphasis supplied)
If government ownership of public utilities is the solution, then foreign investments in our public utilities
serve no purpose. Obviously, there can never be foreign investments in public utilities if, as Dr. Villegas
claims, the "solution is to make sure that those industries are in the hands of state enterprises." Dr.
Villegass argument that foreign investments in telecommunication companies like PLDT are badly
needed to save our ailing economy contradicts his own theory that the solution is for government to take
over these companies. Dr. Villegas is barking up the wrong tree since State ownership of public utilities
and foreign investments in such industries are diametrically opposed concepts, which cannot possibly be
reconciled.
In any event, the experience of our neighboring countries cannot be used as argument to decide the
present case differently for two reasons. First, the governments of our neighboring countries have, as
claimed by Dr. Villegas, taken over ownership and control of their strategic public utilities like the
telecommunications industry. Second, our Constitution has specific provisions limiting foreign ownership
in public utilities which the Court is sworn to uphold regardless of the experience of our neighboring
countries.
In our jurisdiction, the Constitution expressly reserves the ownership and operation of public utilities to
Filipino citizens, or corporations or associations at least 60 percent of whose capital belongs to Filipinos.
Following Dr. Villegass claim, the Philippines appears to be more liberal in allowing foreign investors to
own 40 percent of public utilities, unlike in other Asian countries whose governments own and operate
such industries.
XI.
Prospective Application of Sanctions
165

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the application
and imposition of appropriate sanctions against PLDT if found violating Section 11, Article XII of the
Constitution.1avvphi1
As discussed, the Court has directed the SEC to investigate and determine whether PLDT violated
Section 11, Article XII of the Constitution. Thus, there is no dispute that it is only after the SEC has
determined PLDTs violation, if any exists at the time of the commencement of the administrative case or
investigation, that the SEC may impose the statutory sanctions against PLDT. In other words, once the 28
June 2011 Decision becomes final, the SEC shall impose the appropriate sanctions only if it finds after
due hearing that, at the start of the administrative case or investigation, there is an existing violation of
Section 11, Article XII of the Constitution. Under prevailing jurisprudence, public utilities that fail to comply
with the nationality requirement under Section 11, Article XII and the FIA can cure their deficiencies prior
to the start of the administrative case or investigation.
61

XII.
Final Word
The Constitution expressly declares as State policy the development of an economy "effectively
controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves the
ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of whose
capital with voting rights belongs to Filipinos. The FIAs implementing rules explain that "[f]or stocks to
be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that the
term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as
well as with full beneficial ownership. This is precisely because the right to vote in the election of
directors, coupled with full beneficial ownership of stocks, translates to effective control of a corporation.
Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenes the
letter and intent of the Constitution. Any other meaning of the term "capital" openly invites alien
domination of economic activities reserved exclusively to Philippine nationals. Therefore, respondents
interpretation will ultimately result in handing over effective control of our national economy to foreigners
in patent violation of the Constitution, making Filipinos second-class citizens in their own country.
Filipinos have only to remind themselves of how this country was exploited under the Parity Amendment,
which gave Americans the same rights as Filipinos in the exploitation of natural resources, and in the
ownership and control of public utilities, in the Philippines. To do this the 1935 Constitution, which
contained the same 60 percent Filipino ownership and control requirement as the present 1987
Constitution, had to be amended to give Americans parity rights with Filipinos. There was bitter opposition
to the Parity Amendment
62
and many Filipinos eagerly awaited its expiration. In late 1968, PLDT was one
of the American-controlled public utilities that became Filipino-controlled when the controlling American
stockholders divested in anticipation of the expiration of the Parity Amendment on 3 July 1974.
63
No
economic suicide happened when control of public utilities and mining corporations passed to Filipinos
hands upon expiration of the Parity Amendment.
Movants interpretation of the term "capital" would bring us back to the same evils spawned by the Parity
Amendment, effectively giving foreigners parity rights with Filipinos, but this time even without
any amendment to the present Constitution. Worse, movants interpretation opens up our national
economy toeffective control not only by Americans but also by all foreigners, be they Indonesians,
Malaysians or Chinese, even in the absence of reciprocal treaty arrangements. At least the Parity
Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-starved Filipinos
theoretical parity the same rights as Americans to exploit natural resources, and to own and control
public utilities, in the United States of America. Here, movants interpretation would effectively mean
a unilateral opening up of our national economy to all foreigners, without any reciprocal
166

arrangements. That would mean that Indonesians, Malaysians and Chinese nationals could effectively
control our mining companies and public utilities while Filipinos, even if they have the capital, could not
control similar corporations in these countries.
The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and control
requirement for public utilities like PLOT. Any deviation from this requirement necessitates an amendment
to the Constitution as exemplified by the Parity Amendment. This Court has no power to amend the
Constitution for its power and duty is only to faithfully apply and interpret the Constitution.
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be
entertained.
SO ORDERED.

167

VIRGINIA O. GOCHAN, FELIX Y. GOCHAN III, MAE GOCHAN-EFANN, LOUISE Y. GOCHAN,
ESTEBAN Y. GOCHAN JR., DOMINIC Y. GOCHAN, FELIX O. GOCHAN III, MERCEDES R.
GOCHAN, ALFREDO R. GOCHAN, ANGELINA R. GOCHAN-HERNAEZ, MARIA MERCED R.
GOCHAN, CRISPO R. GOCHAN JR., MARION R. GOCHAN, MACTAN REALTY
DEVELOPMENT CORPORATION and FELIX GOCHAN & SONS REALTY
CORPORATION, petitioners, vs. RICHARD G. YOUNG, DAVID G. YOUNG, JANE G. YOUNG-
LLABAN, JOHN D. YOUNG JR., MARY G. YOUNG-HSU and ALEXANDER THOMAS G.
YOUNG as heirs of Alice Gochan; the INTESTATE ESTATE OF JOHN D. YOUNG SR.; and
CECILIA GOCHAN-UY and MIGUEL C. UY, for themselves and on behalf and for the benefit
of FELIX GOCHAN & SONS REALTY CORPORATION, respondents.
D E C I S I O N
PANGANIBAN, J .:
A court or tribunals jurisdiction over the subject matter is determined by the allegations in the
complaint. The fact that certain persons are not registered as stockholders in the books of the
corporation will not bar them from filing a derivative suit, if it is evident from the allegations in the
complaint that they are bona fide stockholders. In view of RA 8799, intra-corporate controversies are now
within the jurisdiction of courts of general jurisdiction, no longer of the Securities and Exchange
Commission.
The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. The Petition
assails the February 28, 1996 Decision
[1]
of the Court of Appeals (CA), as well as its December 18, 1997
Resolution denying petitioners Motion for Reconsideration. The dispositive part of the CA Decision reads
as follows:
WHEREFORE, the petition as far as the heirs of Alice Gochan, is DISMISSED, without prejudice to filing
the same in the regular courts.
SO ORDERED.
[2]

In dismissing the Complaint before the SEC regarding only Alice Gochans heirs but not the other
complainants, the CA effectively modified the December 9, 1994 Order of the hearing officer
[3]
of the
Securities and Exchange Commission (SEC). The Order, which was affirmed in full by the SEC en banc,
dismissed the entire case.
The Facts

The undisputed facts are summarized by the Court of Appeals as follows:
Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was registered with the SEC on
June, 1951, with Felix Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan, Tomasa Gochan, Esteban
Gochan and Crispo Gochan as its incorporators.
Felix Gochan Sr.s daughter, Alice, mother of [herein respondents], inherited 50 shares of stock in
Gochan Realty from the former.
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Alice died in 1955, leaving the 50 shares to her husband, John Young, Sr.
In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of these shares to her children, herein
[respondents] Richard Young, David Young, Jane Young Llaban, John Young Jr., Mary Young Hsu and
Alexander Thomas Young.
Having earned dividends, these stocks numbered 179 by 20 September 1979.
Five days later (25 September), at which time all the children had reached the age of majority, their
father John Sr., requested Gochan Realty to partition the shares of his late wife by cancelling the stock
certificates in his name and issuing in lieu thereof, new stock certificates in the names of [herein
respondents].
On 17 October 1979, respondent Gochan Realty refused, citing as reason, the right of first refusal
granted to the remaining stockholders by the Articles of Incorporation.
On 21, 1990, [sic] John, Sr. died, leaving the shares to the [respondents].
On 8 February 1994, [respondents] Cecilia Gochan Uy and Miguel Uy filed a complaint with the SEC for
issuance of shares of stock to the rightful owners, nullification of shares of stock, reconveyance of
property impressed with trust, accounting, removal of officers and directors and damages against
respondents. A Notice of Lis Pendens was annotated as [sic] real properties of the corporation.
On 16 March 1994, [herein petitioners] moved to dismiss the complaint alleging that: (1) the SEC ha[d]
no jurisdiction over the nature of the action; (2) the [respondents] [were] not the real parties-in-interest
and ha[d] no capacity to sue; and (3) [respondents] causes of action [were] barred by the Statute of
Limitations.
The motion was opposed by herein [respondents].
On 29 March 1994, [petitioners] filed a Motion for cancellation of Notice of Lis Pendens. [Respondents]
opposed the said motion.
On 9 December 1994, the SEC, through its Hearing Officer, granted the motion to dismiss and ordered
the cancellation of the notice of lis pendens annotated upon the titles of the corporate lands. In its order,
the SEC opined:
In the instant case, the complaint admits that complainants Richard G. Young, David G. Young, Jane G.
Young Llaban, John D. Young, Jr., Mary G. Young Hsu and Alexander Thomas G. Young, who are the
children of the late Alice T. Gochan and the late John D. Young, Sr. are suing in their own right and as
heirs of and/or as the beneficial owners of the shares in the capital stock of FGSRC held in trust for them
during his lifetime by the late John D. Young. Moreover, it has been shown that said complainants ha[d]
never been x x x stockholder[s] of record of FGSRC to confer them with the legal capacity to bring and
maintain their action. Conformably, the case cannot be considered as an intra-corporate controversy
within the jurisdiction of this Commission.
The complainant heirs base what they perceived to be their stockholders rights upon the fact of their
succession to all the rights, property and interest of their father, John D. Young, Sr. While their heirship is
not disputed, their right to compel the corporation to register John D. Youngs Sr. shares of stock in their
names cannot go unchallenged because the devolution of property to the heirs by operation of law in
succession is subject to just obligations of the deceased before such property passes to the
heirs. Conformably, until therefore the estate is settled and the payment of the debts of the deceased is
accomplished, the heirs cannot as a matter of right compel the delivery of the shares of stock to them and
169

register such transfer in the books of the corporation to recognize them as stockholders. The
complainant heirs succeed to the estate of [the] deceased John D. Young, Sr. but they do not thereby
become stockholders of the corporation.
Moreover, John D. [Young Sr.s] shares of stocks form part of his estate which is the subject of Special
Proceedings No. 3694-CEB in the Regional Trial Court of Cebu, Branch VIII, [par. 4 of the complaint]. As
complainants clearly claim[,] the Intestate Estate of John D. Young, Sr. has an interest in the subject
matter of the instant case. However, actions for the recovery or protection of the property [such as the
shares of stock in question] may be brought or defended not by the heirs but by the executor or
administrator thereof.
Complainants further contend that the alleged wrongful acts of the corporation and its directors constitute
fraudulent devices or schemes which may be detrimental to the stockholders. Again, the injury [is]
perceived[,] as is alleged[,] to have been suffered by complainants as stockholders, which they are
not. Admittedly, the SEC has no jurisdiction over a controversy wherein one of the parties involved is not
or not yet a stockholder of the corporation. [SEC vs. CA, 201 SCRA 134].
Further, by the express allegation of the complaint, herein complainants bring this action as [a] derivative
suit on their own behalf and on behalf of respondent FGSRC.
Section 5, Rule III of the Revised Rules of Procedure in the Securities and Exchange Commission
provides:
Section 5. Derivative Suit. No action shall be brought by stockholder in the right of a corporation unless
the complainant was a stockholder at the time the questioned transaction occurred as well as at the time
the action was filed and remains a stockholder during the pendency of the action. x x x.
The rule is in accord with well settled jurisprudence holding that a stockholder bringing a derivative action
must have been [so] at the time the transaction or act complained of [took] place. (Pascual vs. Orozco,
19 Phil. 82; Republic vs. Cuaderno, 19 SCRA 671; San Miguel Corporation vs. Khan, 176 SCRA 462-
463) The language of the rule is mandatory, strict compliance with the terms thereof thus being a
condition precedent, a jurisdictional requirement to the filing of the instant action.
Otherwise stated, proof of compliance with the requirement must be sufficiently established for the action
to be given due course by this Commission. The failure to comply with this jurisdictional requirement on
derivative action must necessarily result in the dismissal of the instant complaint. (pp. 77-79, Rollo)
[Respondents] moved for a reconsideration but the same was denied for being pro-forma.
[Respondents] appealed to the SEC en banc, contending, among others, that the SEC ha[d] jurisdiction
over the case.
[Petitioners], on the other hand, contend that the appeal was 97 days late, beyond the 30-day period for
appeals.
On 3 March 1995, the SEC en banc ruled for the [petitioners,] holding that the [respondents] motion for
reconsideration did not interrupt the 30-day period for appeal because said motion was pro-forma.
[4]

Aggrieved, herein respondents then filed a Petition for Review with the Court of Appeals.
Ruling of the Court of Appeals

170

The Court of Appeals ruled that the SEC had no jurisdiction over the case as far as the heirs of Alice
Gochan were concerned, because they were not yet stockholders of the corporation. On the other hand,
it upheld the capacity of Respondents Cecilia Gochan Uy and her spouse Miguel Uy. It also held that the
intestate Estate of John Young Sr. was an indispensable party.
The appellate court further ruled that the cancellation of the notice of lis pendens on the titles of the
corporate real estate was not justified. Moreover, it declared that respondents Motion for
Reconsideration before the SEC was not pro forma; thus, its filing tolled the appeal period.
Hence, this Petition.
[5]

The Issues

These are the issues presented before us:
A. Whether or not the Spouses Uy have the personality to file an action before the SEC
against Gochan Realty Corporation.
B. Whether or not the Spouses Uy could properly bring a derivative suit in the name of
Gochan Realty to redress wrongs allegedly committed against it for which the
directors refused to sue.
C. Whether or not the intestate estate of John D. Young Sr. is an indispensable party in
the SEC case considering that the individual heirs shares are still in the decedent
stockholders name.
D. Whether or not the cancellation of [the] notice of lis pendens was justified considering
that the suit did not involve real properties owned by Gochan Realty.
[6]

In addition, the Court will determine the effect of Republic Act No. 8799
[7]
on this case.
The Courts Ruling

The Petition has no merit. In view of the effectivity of RA 8799, however, the case should be
remanded to the proper regional trial court, not to the Securities and Exchange Commission.
First Issue:

Personality of the Spouses Uy to File a Suit Before the SEC

Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal standing to bring the
suit before the SEC on February 8, 1994, because the latter were no longer stockholders at the
time. Allegedly, the stocks had already been purchased by the corporation. Petitioners further assert
that, being allegedly a simple contract of sale cognizable by the regular courts, the purchase by Gochan
Realty of Cecilia Gochan Uys 210 shares does not come within the purview of an intra-corporate
controversy.
As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by the
allegations in the complaint.
[8]
For purposes of resolving a motion to dismiss, Cecilia Uys averment in the
Complaint -- that the purchase of her stocks by the corporation was null and void ab initio is deemed
admitted. It is elementary that a void contract produces no effect either against or in favor of anyone; it
cannot create, modify or extinguish the juridical relation to which it refers.
[9]
Thus, Cecilia remains a
stockholder of the corporation in view of the nullity of the Contract of Sale. Although she was no longer
registered as a stockholder in the corporate records as of the filing of the case before the SEC, the
admitted allegations in the Complaint made her still a bona fide stockholder of Felix Gochan & Sons
Realty Corporation (FGSRC), as between said parties.
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In any event, the present controversy, whether intra-corporate or not, is no longer cognizable by the
SEC, in view of RA 8799, which transferred to regional trial courts the formers jurisdiction over cases
involving intra-corporate disputes.
Action Has Not Prescribed

Petitioners contend that the statute of limitations already bars the Uy spouses action, be it one for
annulment of a voidable contract or one based upon a written contract. The Complaint, however,
contains respondents allegation that the sale of the shares of stock was not merely voidable, but was
void ab initio. Below we quote its relevant portion:
38. That on November 21, 1979, respondent Felix Gochan & Sons Realty Corporation did not
have unrestricted retained earnings in its books to cover the purchase price of the 208 shares of stock it
was then buying from complainant Cecilia Gochan Uy, thereby rendering said purchase null and void ab
initio for being violative of the trust fund doctrine and contrary to law, morals good customs, public order
and public policy;
Necessarily, petitioners contention that the action has prescribed cannot be sustained. Prescription
cannot be invoked as a ground if the contract is alleged to be void ab initio.
[10]
It is axiomatic that the
action or defense for the declaration of nullity of a contract does not prescribe.
[11]

Second Issue: Derivative Suit and the Spouses Uy

Petitioners also contend that the action filed by the Spouses Uy was not a derivative suit, because
the spouses and not the corporation were the injured parties. The Court is not convinced. The following
quoted portions of the Complaint readily shows allegations of injury to the corporation itself:
16. That on information and belief, in further pursuance of the said conspiracy and for the
fraudulent purpose of depressing the value of the stock of the Corporation and to induce the minority
stockholders to sell their shares of stock for an inadequate consideration as aforesaid, respondent
Esteban T. Gochan . . ., in violation of their duties as directors and officers of the Corporation . . .,
unlawfully and fraudulently appropriated [for] themselves the funds of the Corporation by drawing
excessive amounts in the form of salaries and cash advances. . . and by otherwise charging their purely
personal expenses to the Corporation.
x x x x x x x x x
41. That the payment of P1,200,000.00 by the Corporation to complainant Cecilia Gochan Uy for her
shares of stock constituted an unlawful, premature and partial liquidation and distribution of assets to a
stockholder, resulting in the impairment of the capital of the Corporation and prevented it from otherwise
utilizing said amount for its regular and lawful business, to the damage and prejudice of the Corporation,
its creditors, and of complainants as minority stockholders;
[12]

As early as 1911, this Court has recognized the right of a single stockholder to file derivative
suits. In its words:
[W]here corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or
negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a single
stockholder may institute that suit, suing on behalf of himself and other stockholders and for the benefit of
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the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to
the stockholders.
[13]

In the present case, the Complaint alleges all the components of a derivative suit. The allegations of
injury to the Spouses Uy can coexist with those pertaining to the corporation. The personal injury
suffered by the spouses cannot disqualify them from filing a derivative suit on behalf of the corporation. It
merely gives rise to an additional cause of action for damages against the erring directors. This cause of
action is also included in the Complaint filed before the SEC.
The Spouses Uy have the capacity to file a derivative suit in behalf of and for the benefit of the
corporation. The reason is that, as earlier discussed, the allegations of the Complaint make them out as
stockholders at the time the questioned transaction occurred, as well as at the time the action was filed
and during the pendency of the action.
Third Issue: Capacity of the Intestate Estate of J ohn D. Young Sr.

Petitioners contend that the Intestate Estate of John D. Young Sr. is not an indispensable party, as
there is no showing that it stands to be benefited or injured by any court judgment.
It would be useful to point out at this juncture that one of the causes of action stated in the Complaint
filed with the SEC refers to the registration, in the name of the other heirs of Alice Gochan Young, of
6/14th of the shares still registered under the name of John D. Young Sr. Since all the shares that
belonged to Alice are still in his name, no final determination can be had without his estate being
impleaded in the suit. His estate is thus an indispensable party with respect to the cause of action
dealing with the registration of the shares in the names of the heirs of Alice.
Petitioners further claim that the Estate of John Young Sr. was not properly represented. They claim
that when the estate is under administration, suits for the recovery or protection of the property or rights
of the deceased may be brought only by the administrator or executor as approved by the court.
[14]
The
rules relative to this matter do not, however, make any such categorical and confining statement.
Section 3 of Rule 3 of the Rules of Court, which is cited by petitioner in support of their position,
reads:
Sec. 3. Representatives as parties. - Where the action is allowed to be prosecuted or defended by a
representative or someone acting in a fiduciary capacity, the beneficiary shall be included in the title of
the case and shall be deemed to be the real party in interest. A representative may be a trustee of an
express trust, a guardian, an executor or administrator, or a party authorized by law or these Rules. An
agent acting in his own name and for the benefit of an undisclosed principal may sue or be sued without
joining the principal except when the contract involves things belonging to the principal.
Section 2 of Rule 87 of the same Rules, which also deals with administrators, states:
Sec. 2. Executor or administrator may bring or defend actions which survive. - For the recovery or
protection of the property or rights of the deceased, an executor or administrator may bring or defend, in
the right of the deceased, actions for causes which survive.
The above-quoted rules, while permitting an executor or administrator to represent or to bring suits
on behalf of the deceased, do not prohibit the heirs from representing the deceased. These rules are
easily applicable to cases in which an administrator has already been appointed. But no rule
categorically addresses the situation in which special proceedings for the settlement of an estate have
already been instituted, yet no administrator has been appointed. In such instances, the heirs cannot be
expected to wait for the appointment of an administrator; then wait further to see if the administrator
173

appointed would care enough to file a suit to protect the rights and the interests of the deceased; and in
the meantime do nothing while the rights and the properties of the decedent are violated or dissipated.
The Rules are to be interpreted liberally in order to promote their objective of securing a just, speedy
and inexpensive disposition of every action and proceeding.
[15]
They cannot be interpreted in such a way
as to unnecessarily put undue hardships on litigants. For the protection of the interests of the decedent,
this Court has in previous instances
[16]
recognized the heirs as proper representatives of the decedent,
even when there is already an administrator appointed by the court. When no administrator has been
appointed, as in this case, there is all the more reason to recognize the heirs as the proper
representatives of the deceased. Since the Rules do not specifically prohibit them from representing the
deceased, and since no administrator had as yet been appointed at the time of the institution of the
Complaint with the SEC, we see nothing wrong with the fact that it was the heirs of John D. Young Sr.
who represented his estate in the case filed before the SEC.
Fourth Issue

Notice of Lis Pendens

On the issue of the annotation of the Notice of Lis Pendens on the titles of the properties of the
corporation and the other respondents, we still find no reason to disturb the ruling of the Court of Appeals.
Under the third, fourth and fifth causes of action of the Complaint, there are allegations of breach of
trust and confidence and usurpation of business opportunities in conflict with petitioners fiduciary duties
to the corporation, resulting in damage to the Corporation. Under these causes of action, respondents
are asking for the delivery to the Corporation of possession of the parcels of land and their corresponding
certificates of title. Hence, the suit necessarily affects the title to or right of possession of the real
property sought to be reconveyed. The Rules of Court
[17]
allows the annotation of a notice of lis
pendens in actions affecting the title or right of possession of real property.
[18]
Thus, the Court of Appeals
was correct in reversing the SEC Order for the cancellation of the notice of lis pendens.
The fact that respondents are not stockholders of the Mactan Realty Development Corporation and
the Lapu-Lapu Real Estate Corporation does not make them non-parties to this case. To repeat, the
jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the
Complaint. In this case, it is alleged that the aforementioned corporations are mere alter egos of the
directors-petitioners, and that the former acquired the properties sought to be reconveyed to FGSRC in
violation of the directors-petitioners fiduciary duty to FGSRC. The notion of corporate entity will be
pierced or disregarded and the individuals composing it will be treated as identical
[19]
if, as alleged in the
present case, the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification
for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders.
Effect of RA 8799

While we sustain the appellate court, the case can no longer be remanded to the SEC. As earlier
stated, RA 8799, which became effective on August 8, 2000, transferred SECs jurisdiction over cases
involving intra-corporate disputes to courts of general jurisdiction or to the regional trial courts.
[20]
Section
5.2 thereof reads as follows:
5.2. The Commissions 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 Commission shall retain jurisdiction
over pending cases involving intra-corporate disputes submitted for final resolution which should be
174

resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction
over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.
In the light of the Resolution issued by this Court in AM No. 00-8-10-SC,
[21]
the Court Administrator
and the Securities and Exchange Commission should be directed to cause the transfer of the records of
SEC Case No. 02-94-4674 to the appropriate court of general jurisdiction.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED, subject to the
modification that the case be remanded to the proper regional trial court. The December 9, 1994 Order of
Securities and Exchange Commission hearing officer dismissing the Complaint and directing the
cancellation of the notice of lis pendens, as well as the March 3, 1995 Order denying complainants
motion for reconsideration are REVERSED and SET ASIDE. Pursuant to AM No. 00-8-10-SC, the Office
of the Court Administrator and the SEC are DIRECTED to cause the actual transfer of the records of SEC
Case No. 02-94-4674 to the appropriate regional trial court.
SO ORDERED.