Republic of the Philippines domiciliary administrator did not comply with the order, and on February 11, 1964,

with the order, and on February 11, 1964, the ancillary

SUPREME COURT
Manila
EN BANC
G.R. No. L-23145 November 29, 1968
TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG, ancillary
administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.
Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the domiciliary administrator, the County
Trust Company of New York, United States of America, of the estate of the deceased Idonah
Slade Perkins, who died in New York City on March 27, 1960, to surrender to the ancillary
administrator in the Philippines the stock certificates owned by her in a Philippine corporation,
Benguet Consolidated, Inc., to satisfy the legitimate claims of local creditors, the lower court,
then presided by the Honorable Arsenio Santos, now retired, issued on May 18, 1964, an order
of this tenor: "After considering the motion of the ancillary administrator, dated February 11,
1964, as well as the opposition filed by the Benguet Consolidated, Inc., the Court hereby (1)
considers as lost for all purposes in connection with the administration and liquidation of the
Philippine estate of Idonah Slade Perkins the stock certificates covering the 33,002 shares of
stock standing in her name in the books of the Benguet Consolidated, Inc., (2) orders said
certificates cancelled, and (3) directs said corporation to issue new certificates in lieu thereof, the
same to be delivered by said corporation to either the incumbent ancillary administrator or to the
Probate Division of this Court."1
administrator petitioned the court to "issue an order declaring the certificate or certificates of
stocks covering the 33,002 shares issued in the name of Idonah Slade Perkins by Benguet
Consolidated, Inc., be declared [or] considered as lost."3
It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is immaterial" as
far as it is concerned as to "who is entitled to the possession of the stock certificates in question;
appellant opposed the petition of the ancillary administrator because the said stock certificates
are in existence, they are today in the possession of the domiciliary administrator, the County
Trust Company, in New York, U.S.A...."4
It is its view, therefore, that under the circumstances, the stock certificates cannot be declared or
considered as lost. Moreover, it would allege that there was a failure to observe certain
requirements of its by-laws before new stock certificates could be issued. Hence, its appeal.
As was made clear at the outset of this opinion, the appeal lacks merit. The challenged order
constitutes an emphatic affirmation of judicial authority sought to be emasculated by the wilful
conduct of the domiciliary administrator in refusing to accord obedience to a court decree. How,
then, can this order be stigmatized as illegal?
As is true of many problems confronting the judiciary, such a response was called for by the
realities of the situation. What cannot be ignored is that conduct bordering on wilful defiance, if it
had not actually reached it, cannot without undue loss of judicial prestige, be condoned or
tolerated. For the law is not so lacking in flexibility and resourcefulness as to preclude such a
solution, the more so as deeper reflection would make clear its being buttressed by indisputable
principles and supported by the strongest policy considerations.
It can truly be said then that the result arrived at upheld and vindicated the honor of the judiciary
no less than that of the country. Through this challenged order, there is thus dispelled the
atmosphere of contingent frustration brought about by the persistence of the domiciliary
administrator to hold on to the stock certificates after it had, as admitted, voluntarily submitted
itself to the jurisdiction of the lower court by entering its appearance through counsel on June 27,
1963, and filing a petition for relief from a previous order of March 15, 1963.

From such an order, an appeal was taken to this Court not by the domiciliary administrator, the
Thus did the lower court, in the order now on appeal, impart vitality and effectiveness to what
County Trust Company of New York, but by the Philippine corporation, the Benguet
was decreed. For without it, what it had been decided would be set at naught and nullified.
Consolidated, Inc. The appeal cannot possibly prosper. The challenged order represents a
Unless such a blatant disregard by the domiciliary administrator, with residence abroad, of what
response and expresses a policy, to paraphrase Frankfurter, arising out of a specific problem,
was previously ordained by a court order could be thus remedied, it would have entailed, insofar
addressed to the attainment of specific ends by the use of specific remedies, with full and ample
as this matter was concerned, not a partial but a well-nigh complete paralysis of judicial
support from legal doctrines of weight and significance.
authority.

The facts will explain why. As set forth in the brief of appellant Benguet Consolidated, Inc.,
1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee ancillary
Idonah Slade Perkins, who died on March 27, 1960 in New York City, left among others, two
administrator to gain control and possession of all assets of the decedent within the jurisdiction
stock certificates covering 33,002 shares of appellant, the certificates being in the possession of
of the Philippines. Nor could it. Such a power is inherent in his duty to settle her estate and
the County Trust Company of New York, which as noted, is the domiciliary administrator of the
satisfy the claims of local creditors.5 As Justice Tuason speaking for this Court made clear, it is a
estate of the deceased.2 Then came this portion of the appellant's brief: "On August 12, 1960,
"general rule universally recognized" that administration, whether principal or ancillary, certainly
Prospero Sanidad instituted ancillary administration proceedings in the Court of First Instance of
"extends to the assets of a decedent found within the state or country where it was granted," the
Manila; Lazaro A. Marquez was appointed ancillary administrator, and on January 22, 1963, he
corollary being "that an administrator appointed in one state or country has no power over
was substituted by the appellee Renato D. Tayag. A dispute arose between the domiciary
property in another state or country."6
administrator in New York and the ancillary administrator in the Philippines as to which of them
was entitled to the possession of the stock certificates in question. On January 27, 1964, the
Court of First Instance of Manila ordered the domiciliary administrator, County Trust Company, It is to be noted that the scope of the power of the ancillary administrator was, in an earlier case,
to "produce and deposit" them with the ancillary administrator or with the Clerk of Court. The set forth by Justice Malcolm. Thus: "It is often necessary to have more than one administration

1
of an estate. When a person dies intestate owning property in the country of his domicile as well
as in a foreign country, administration is had in both countries. That which is granted in the
jurisdiction of decedent's last domicile is termed the principal administration, while any other
administration is termed the ancillary administration. The reason for the latter is because a grant
of administration does not ex proprio vigore have any effect beyond the limits of the country in
which it is granted. Hence, an administrator appointed in a foreign state has no authority in the
[Philippines]. The ancillary administration is proper, whenever a person dies, leaving in a country
other than that of his last domicile, property to be administered in the nature of assets of the
deceased liable for his individual debts or to be distributed among his heirs." 7
It would follow then that the authority of the probate court to require that ancillary administrator's
right to "the stock certificates covering the 33,002 shares ... standing in her name in the books of
[appellant] Benguet Consolidated, Inc...." be respected is equally beyond question. For appellant
is a Philippine corporation owing full allegiance and subject to the unrestricted jurisdiction of
local courts. Its shares of stock cannot therefore be considered in any wise as immune from
lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue8 finds application.
"In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation
being domiciled [here]." To the force of the above undeniable proposition, not even appellant is
insensible. It does not dispute it. Nor could it successfully do so even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in a rather conclusive fashion for the
legality of the challenged order, how does appellant, Benguet Consolidated, Inc. propose to
carry the extremely heavy burden of persuasion of precisely demonstrating the contrary? It
would assign as the basic error allegedly committed by the lower court its "considering as lost
the stock certificates covering 33,002 shares of Benguet belonging to the deceased Idonah
Slade Perkins, ..."9 More specifically, appellant would stress that the "lower court could not
"consider as lost" the stock certificates in question when, as a matter of fact, his Honor the trial
Judge knew, and does know, and it is admitted by the appellee, that the said stock certificates
are in existence and are today in the possession of the domiciliary administrator in New York." 10
There may be an element of fiction in the above view of the lower court. That certainly does not
suffice to call for the reversal of the appealed order. Since there is a refusal, persistently
adhered to by the domiciliary administrator in New York, to deliver the shares of stocks of
appellant corporation owned by the decedent to the ancillary administrator in the Philippines,
there was nothing unreasonable or arbitrary in considering them as lost and requiring the
appellant to issue new certificates in lieu thereof. Thereby, the task incumbent under the law on
the ancillary administrator could be discharged and his responsibility fulfilled.
Any other view would result in the compliance to a valid judicial order being made to depend on
the uncontrolled discretion of the party or entity, in this case domiciled abroad, which thus far
has shown the utmost persistence in refusing to yield obedience. Certainly, appellant would not
be heard to contend in all seriousness that a judicial decree could be treated as a mere scrap of
paper, the court issuing it being powerless to remedy its flagrant disregard.
It may be admitted of course that such alleged loss as found by the lower court did not
correspond exactly with the facts. To be more blunt, the quality of truth may be lacking in such a
conclusion arrived at. It is to be remembered however, again to borrow from Frankfurter, "that
fictions which the law may rely upon in the pursuit of legitimate ends have played an important
part in its development."11
Speaking of the common law in its earlier period, Cardozo could state fictions "were devices to
advance the ends of justice, [even if] clumsy and at times offensive."12 Some of them have
persisted even to the present, that eminent jurist, noting "the quasi contract, the adopted child,
the constructive trust, all of flourishing vitality, to attest the empire of "as if" today." 13 He likewise
noted "a class of fictions of another order, the fiction which is a working tool of thought, but which
at times hides itself from view till reflection and analysis have brought it to the light." 14
What cannot be disputed, therefore, is the at times indispensable role that fictions as such
played in the law. There should be then on the part of the appellant a further refinement in the
catholicity of its condemnation of such judicial technique. If ever an occasion did call for the
employment of a legal fiction to put an end to the anomalous situation of a valid judicial order
being disregarded with apparent impunity, this is it. What is thus most obvious is that this
particular alleged error does not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by its
invoking one of the provisions of its by-laws which would set forth the procedure to be followed
in case of a lost, stolen or destroyed stock certificate; it would stress that in the event of a
contest or the pendency of an action regarding ownership of such certificate or certificates of
stock allegedly lost, stolen or destroyed, the issuance of a new certificate or certificates would
await the "final decision by [a] court regarding the ownership [thereof]." 15
Such reliance is misplaced. In the first place, there is no such occasion to apply such by-law. It is
admitted that the foreign domiciliary administrator did not appeal from the order now in question.
Moreover, there is likewise the express admission of appellant that as far as it is concerned, "it is
immaterial ... who is entitled to the possession of the stock certificates ..." Even if such were not
the case, it would be a legal absurdity to impart to such a provision conclusiveness and finality.
Assuming that a contrariety exists between the above by-law and the command of a court
decree, the latter is to be followed.
It is understandable, as Cardozo pointed out, that the Constitution overrides a statute, to which,
however, the judiciary must yield deference, when appropriately invoked and deemed
applicable. It would be most highly unorthodox, however, if a corporate by-law would be
accorded such a high estate in the jural order that a court must not only take note of it but yield
to its alleged controlling force.
The fear of appellant of a contingent liability with which it could be saddled unless the appealed
order be set aside for its inconsistency with one of its by-laws does not impress us. Its
obedience to a lawful court order certainly constitutes a valid defense, assuming that such
apprehension of a possible court action against it could possibly materialize. Thus far, nothing in
the circumstances as they have developed gives substance to such a fear. Gossamer
possibilities of a future prejudice to appellant do not suffice to nullify the lawful exercise of
judicial authority.
4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught with
implications at war with the basic postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an artificial being created by
operation of law...."16 It owes its life to the state, its birth being purely dependent on its will. As
Berle so aptly stated: "Classically, a corporation was conceived as an artificial person, owing its
existence through creation by a sovereign power."17 As a matter of fact, the statutory language
employed owes much to Chief Justice Marshall, who in the Dartmouth College decision defined
a corporation precisely as "an artificial being, invisible, intangible, and existing only in
contemplation of law."18
2
The well-known authority Fletcher could summarize the matter thus: "A corporation is not in fact It is bad enough as the Viloria decision made patent for our judiciary to accept as final and
and in reality a person, but the law treats it as though it were a person by process of fiction, or by conclusive, determinations made by foreign governmental agencies. It is infinitely worse if
regarding it as an artificial person distinct and separate from its individual stockholders.... It owes through the absence of any coercive power by our courts over juridical persons within our
its existence to law. It is an artificial person created by law for certain specific purposes, the jurisdiction, the force and effectivity of their orders could be made to depend on the whim or
extent of whose existence, powers and liberties is fixed by its charter."19Dean Pound's terse caprice of alien entities. It is difficult to imagine of a situation more offensive to the dignity of the
summary, a juristic person, resulting from an association of human beings granted legal bench or the honor of the country.
personality by the state, puts the matter neatly.20
Yet that would be the effect, even if unintended, of the proposition to which appellant Benguet
There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which to quote Consolidated seems to be firmly committed as shown by its failure to accept the validity of the
from Friedmann, "is the reality of the group as a social and legal entity, independent of state order complained of; it seeks its reversal. Certainly we must at all pains see to it that it does not
recognition and concession."21 A corporation as known to Philippine jurisprudence is a creature succeed. The deplorable consequences attendant on appellant prevailing attest to the necessity
without any existence until it has received the imprimatur of the state according to law. It is of negative response from us. That is what appellant will get.
logically inconceivable therefore that it will have rights and privileges of a higher priority than that
of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state
That is all then that this case presents. It is obvious why the appeal cannot succeed. It is always
organs, certainly not excluding the judiciary, whenever called upon to do so.
easy to conjure extreme and even oppressive possibilities. That is not decisive. It does not settle
the issue. What carries weight and conviction is the result arrived at, the just solution obtained,
As a matter of fact, a corporation once it comes into being, following American law still of grounded in the soundest of legal doctrines and distinguished by its correspondence with what a
persuasive authority in our jurisdiction, comes more often within the ken of the judiciary than the sense of realism requires. For through the appealed order, the imperative requirement of justice
other two coordinate branches. It institutes the appropriate court action to enforce its right. according to law is satisfied and national dignity and honor maintained.
Correlatively, it is not immune from judicial control in those instances, where a duty under the
law as ascertained in an appropriate legal proceeding is cast upon it.
WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the Court of
First Instance, dated May 18, 1964, is affirmed. With costs against oppositor-appelant Benguet
To assert that it can choose which court order to follow and which to disregard is to confer upon Consolidated, Inc.
it not autonomy which may be conceded but license which cannot be tolerated. It is to argue that
it may, when so minded, overrule the state, the source of its very existence; it is to contend that
Republic of the Philippines
what any of its governmental organs may lawfully require could be ignored at will. So
extravagant a claim cannot possibly merit approval.
SUPREME COURT
22
5. One last point. In Viloria v. Administrator of Veterans Affairs, it was shown that in a
guardianship proceedings then pending in a lower court, the United States Veterans Manila
Administration filed a motion for the refund of a certain sum of money paid to the minor under
guardianship, alleging that the lower court had previously granted its petition to consider the
deceased father as not entitled to guerilla benefits according to a determination arrived at by its FIRST DIVISION
main office in the United States. The motion was denied. In seeking a reconsideration of such
order, the Administrator relied on an American federal statute making his decisions "final and G.R. No. 120138 September 5, 1997
conclusive on all questions of law or fact" precluding any other American official to examine the
matter anew, "except a judge or judges of the United States court."23 Reconsideration was
denied, and the Administrator appealed. MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS, RODOLFO L. JOCSON, JR.,
MELVIN S. JURISPRUDENCIA, AUGUSTUS CESAR AZURA and EDGARDO D. PABALAN,
petitioners,
In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of the
opinion that the appeal should be rejected. The provisions of the U.S. Code, invoked by the
appellant, make the decisions of the U.S. Veterans' Administrator final and conclusive when vs.
made on claims property submitted to him for resolution; but they are not applicable to the
present case, where the Administrator is not acting as a judge but as a litigant. There is a great COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, TORMIL REALTY &
difference between actions against the Administrator (which must be filed strictly in accordance DEVELOPMENT CORPORATION, ANTONIO P. TORRES, JR., MA. CRISTINA T. CARLOS,
with the conditions that are imposed by the Veterans' Act, including the exclusive review by MA. LUISA T. MORALES and DANTE D. MORALES, respondents.
United States courts), and those actions where the Veterans' Administrator seeks a remedy from
our courts and submits to their jurisdiction by filing actions therein. Our attention has not been
called to any law or treaty that would make the findings of the Veterans' Administrator, in actions
where he is a party, conclusive on our courts. That, in effect, would deprive our tribunals of
judicial discretion and render them mere subordinate instrumentalities of the Veterans'
Administrator."

3
KAPUNAN, J.: In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an "estate
planning" scheme under which he assigned to Tormil Realty & Development Corporation (Tormil
for brevity) various real properties he owned and his shares of stock in other corporations in
exchange for 225,972 Tormil Realty shares. Hence, on various dates in July and August of
1984, ten (10) deeds of assignment were executed by the late Judge Torres:
In this petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioners
seek to annul the decision of the Court of Appeals in CA-G.R. SP. No. 31748 dated 23 May
1994 and its subsequent resolution dated 10 May 1995 denying petitioners' motion for
reconsideration.
ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION SHARES TO
BE

ISSUED
The present case involves two separate but interrelated conflicts. The facts leading to the first
controversy are as follows:

1. July 13, 1984 TCT 81834 Quezon City 13,252

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority stockholder of Tormil
Realty & Development Corporation while private respondents who are the children of Judge TCT 144240 Quezon City
Torres' deceased brother Antonio A. Torres, constituted the minority stockholders. In particular,
their respective shareholdings and positions in the corporation were as follows:

2. July 13, 1984 TCT 77008 Manila

Name of Stockholder Number of Percentage Position(s)

TCT 65689 Manila 78,493

Shares
TCT 109200 Manila

Manuel A. Torres, Jr. 100,120 57.21 Dir./Pres./Chair

3. July 13, 1984 TCT 374079 Makati 8,307

Milagros P. Torres 33,430 19.10 Dir./Treasurer

Josefina P. Torres 8,290 4.73 Dir./Ass. Cor-Sec.

4. July 24, 1984 TCT 41527 Pasay

Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec.

TCT 41528 Pasay 9,855

Antonio P. Torres, Jr. 8,290 4.73 Director

TCT 41529 Pasay

Ma. Jacinta P. Torres 8,290 4.73 Director

Ma. Luisa T. Morales 7,790 4.45 Director

5. Aug. 06, 1984 El Hogar Filipino Stocks 2,000

Dante D. Morales 500 .28 Director 1

6. Aug. 06, 1984 Manila Jockey Club Stocks 48,737

4
7. Aug. 07, 1984 San Miguel Corp. Stocks 50,283 Noting the disappearance of the Makati and Pasay City properties from the corporation's
inventory of assets and financial records private respondents, on 31 March 1987, were
constrained to file a complaint with the Securities and Exchange Commission (SEC) docketed as
SEC Case No. 3153 to compel Judge Torres to deliver to Tormil corporation the two (2) deeds of
assignment covering the aforementioned Makati and Pasay City properties which he had
8. Aug. 07, 1984 China banking Corp. Stocks 6,300 unilaterally revoked and to cause the registration of the corresponding titles in the name of
Tormil. Private respondents alleged that following the disappearance of the properties from the
corporation's inventory of assets, they found that on October 24, 1986, Judge Torres, together
with Edgardo Pabalan and Graciano Tobias, then General Manager and legal counsel,
respectively, of Tormil, formed and organized a corporation named "Torres-Pabalan Realty and
9. Aug. 20, 1984 Ayala Corp. Stocks 7,468 Development Corporation" and that as part of Judge Torres' contribution to the new corporation,
he executed in its favor a Deed of Assignment conveying the same Makati and Pasay City
properties he had earlier transferred to Tormil.

10. Aug. 29, 1984 Ayala Fund Stocks 1,322

The second controversy involving the same parties concerned the election of the 1987
corporate board of directors.

225,972 2 The 1987 annual stockholders meeting and election of directors of Tormil corporation was
scheduled on 25 March 1987 in compliance with the provisions of its by-laws.

Consequently, the aforelisted properties were duly recorded in the inventory of assets of Tormil
Realty and the revenues generated by the said properties were correspondingly entered in the
corporation's books of account and financial records.
Pursuant thereto, Judge Torres assigned from his own shares, one (l) share each to petitioners
Tobias, Jocson, Jurisprudencia, Azura and Pabalan. These assigned shares were in the nature
of "qualifying shares," for the sole purpose of meeting the legal requirement to be able to elect
them (Tobias and company) to the Board of Directors as Torres' nominees.

Likewise, all the assigned parcels of land were duly registered with the respective Register of
Deeds in the name of Tormil Realty, except for the ones located in Makati and Pasay City.
The assigned shares were covered by corresponding Tormil Stock Certificates Nos. 030, 029,
028, 027, 026 and at the back of each certificate the following inscription is found:

At the time of the assignments and exchange, however, only 225,000 Tormil Realty shares
remained unsubscribed, all of which were duly issued to and received by Judge Torres (as
evidenced by stock certificates Nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25). 3 The present certificate and/or the one share it represents, conformably to the purpose and
intention of the Deed of Assignment dated March 6, 1987, is not held by me under any claim of
ownership and I acknowledge that I hold the same merely as trustee of Judge Manuel A. Torres,
Jr. and for the sole purpose of qualifying me as Director;
Due to the insufficient number of shares of stock issued to Judge Torres and the alleged refusal
of private respondents to approve the needed increase in the corporation's authorized capital
stock (to cover the shortage of 972 shares due to Judge Torres under the "estate planning"
scheme), on 11 September 1986, Judge Torres revoked the two (2) deeds of assignment (Signature of Assignee) 5
covering the properties in Makati and Pasay City. 4

5
 Mr. Pabalan suggested that the opinion of the SEC representatives be asked on the propriety of
suspending the meeting but Antonio Torres, Jr. objected reasoning out that we were just
observers.
The reason behind the aforestated action was to remedy the "inequitable lopsided set-up
obtaining in the corporation, where, notwithstanding his controlling interest in the corporation, the
late Judge held only a single seat in the nine-member Board of Directors and was, therefore, at
the mercy of the minority, a combination of any two (2) of whom would suffice to overrule the
majority stockholder in the Board's decision making functions." 6
When the Chairman called for the election of directors, the Secretary refused to write down the
names of nominees prompting Atty. Azura to initiate the appointment of Atty. Jocson, Jr. as
Acting Secretary.

On 25 March 1987, the annual stockholders meeting was held as scheduled. What transpired
therein was ably narrated by Attys. Benito Cataran and Bayani De los Reyes, the official
representatives dispatched by the SEC to observe the proceedings (upon request of the late
Antonio Torres, Jr. nominated the present members of the Board. At this juncture, Milagros
Judge Torres) in their report dated 27 March 1987:
Torres cried out and told the group of Manuel Torres, Jr. to leave the house.

xxx xxx xxx

Manuel Torres, Jr., together with his lawyers-stockholders went to the residence of Ma. Jacinta
Torres in San Miguel Village, Makati, Metro Manila. The undersigned joined them since the
group with Manuel Torres, Jr. the one who requested for S.E.C. observers, represented the
majority of the outstanding capital stock and still constituted a quorum.
The undersigned arrived at 1:55 p.m. in the place of the meeting, a residential bungalow in
Urdaneta Village, Makati, Metro Manila. Upon arrival, Josefina Torres introduced us to the
stockholders namely: Milagros Torres, Antonio Torres, Jr., Ma. Luisa Morales, Ma. Cristina
Carlos and Ma. Jacinta Torres. Antonio Torres, Jr. questioned our authority and personality to
At the resumption of the meeting, the following were nominated and elected as directors for the
appear in the meeting claiming subject corporation is a family and private firm. We explained
year 1987-1988:
that our appearance there was merely in response to the request of Manuel Torres, Jr. and that
SEC has jurisdiction over all registered corporations. Manuel Torres, Jr., a septuagenarian,
argued that as holder of the major and controlling shares, he approved of our attendance in the
meeting.
1. Manuel Torres, Jr.

At about 2:30 p.m., a group composed of Edgardo Pabalan, Atty. Graciano Tobias, Atty. Rodolfo
Jocson, Jr., Atty. Melvin Jurisprudencia, and Atty. Augustus Cesar Azura arrived. Atty. Azura
told the body that they came as counsels of Manuel Torres, Jr. and as stockholders having 2. Ma. Jacinta Torres
assigned qualifying shares by Manuel Torres, Jr.

3. Edgardo Pabalan
The stockholders' meeting started at 2:45 p.m. with Mr. Pabalan presiding after verbally
authorized by Manuel Torres, Jr., the President and Chairman of the Board. The secretary when
asked about the quorum, said that there was more than a quorum. Mr. Pabalan distributed
copies of the president's report and the financial statements. Antonio Torres, Jr. requested time
to study the said reports and brought out the question of auditing the finances of the corporation 4. Graciano Tobias
which he claimed was approved previously by the board. Heated arguments ensued which also
touched on family matters. Antonio Torres, Jr. moved for the suspension of the meeting but
Manuel Torres, Jr. voted for the continuation of the proceedings.
5. Rodolfo Jocson, Jr.

6
6. Melvin Jurisprudencia WHEREFORE, premises considered, judgment is hereby rendered as follows:

7. Augustus Cesar Azura 1. Ordering and directing the respondents, particularly respondent Manuel A. Torres, Jr.,
to turn over and deliver to TORMIL through its Corporate Secretary, Ma. Cristina T. Carlos: (a)
the originals of the Deeds of Assignment dated July 13 and 24, 1984 together with the owner's
duplicates of Transfer Certificates of Title Nos. 374079 of the Registry of Deeds for Makati, and
41527, 41528 and 41529 of the Registry of Deeds for Pasay City and/or to cause the formal
8. Josefina Torres registration and transfer of title in and over such real properties in favor of TORMIL with the
proper government agency; (b) all corporate books of account, records and papers as may be
necessary for the conduct of a comprehensive audit examination, and to allow the examination
and inspection of such accounting books, papers and records by any or all of the corporate
directors, officers and stockholders and/or their duly authorized representatives or auditors;
9. Dante Morales

2. Declaring as permanent and final the writ of preliminary injunction issued by the
After the election, it was resolved that after the meeting, the new board of directors shall Hearing Panel on February 13, 1989;
convene for the election of officers.

3. Declaring as null and void the election and appointment of respondents to the Board
xxx xxx xxx 7 of Directors and executive positions of TORMIL held on March 25, 1987, and all their acts and
resolutions made for and in behalf of TORMIL by authority of and pursuant to such invalid
appointment & election held on March 25, 1987;

Consequently, on 10 April 1987, private respondents instituted a complaint with the SEC (SEC
Case No. 3161) praying in the main, that the election of petitioners to the Board of Directors be
annulled. 4. Ordering the respondents jointly and severally, to pay the complainants the sum of
ONE HUNDRED THOUSAND PESOS (P100,000.00) as and by way of attorney's fees. 8

Private respondents alleged that the petitioners-nominees were not legitimate stockholders of
Tormil because the assignment of shares to them violated the minority stockholders' right of pre-
emption as provided in the corporation's articles and by-laws.
Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC No. 339). Thereafter,
on 3 April 1991, during the pendency of said appeal, petitioner Manuel A. Torres, Jr. died.
However, notice thereof was brought to the attention of the SEC not by petitioners' counsel but
by private respondents in a Manifestation dated 24 April 1991. 9

Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were consolidated for joint hearing
and adjudication.
On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a decision in favor of
private respondents. The dispositive portion thereof states, thus:
On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on grounds that no
administrator or legal representative of the late Judge Torres' estate has yet been appointed by
the Regional Trial Court of Makati where Sp. Proc. No. M-1768 ("In Matter of the Issuance of the
Last Will and Testament of Manuel A Torres, Jr.") was pending. Two similar motions for
suspension were filed by petitioners on 28 June 1993 and 9 July 1993.

7
 From the said decision, petitioners filed a motion for reconsideration which was denied in a
resolution issued by the Court of Appeals dated 10 May 1995. 13
On 19 July 1993, the SEC en banc issued an Order denying petitioners' aforecited motions on
the following ground:

Insisting on their cause, petitioners filed the present petition for review alleging that the Court of
Appeals committed the following errors in its decision:
Before the filing of these motions, the Commission en banc had already completed all
proceedings and had likewise ruled on the merits of the appealed cases. Viewed in this light, we
thus feel that there is nothing left to be done except to deny these motions to suspend
proceedings. 10
(1)

On the same date, the SEC en banc rendered a decision, the dispositive portion of which reads,
WHEN IT RENDERED THE MAY 23, 1994 DECISION, WHICH IS A FULL LENGTH DECISION,
thus:
WITHOUT THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. AC NO. 339 BEING
PROPERLY BROUGHT BEFORE IT FOR REVIEW AND RE-EXAMINATION, AN OMISSION
RESULTING IN A CLEAR TRANSGRESSION OR CURTAILMENT OF THE RIGHTS OF THE
HEREIN PETITIONERS TO PROCEDURAL DUE PROCESS;
WHEREFORE, premises considered, the appealed decision of the hearing panel is hereby
affirmed and all motions pending before us incident to this appealed case are necessarily
DISMISSED.
(2)

SO ORDERED. 11
WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF THE RESPONDENT S.E.C.,
WHICH IS VOID FOR HAVING BEEN RENDERED WITHOUT THE PROPER SUBSTITUTION
OF THE DECEASED PRINCIPAL PARTY-RESPONDENT IN S.E.C.-AC NO. 339 AND
CONSEQUENTLY, FOR WANT OF JURISDICTION OVER THE SAID DECEASED'S TESTATE
Undaunted, on 10 August 1993, petitioners proceeded to plead its cause to the Court of Appeals
ESTATE, AND MOREOVER, WHEN IT SOUGHT TO JUSTIFY THE NON-SUBSTITUTION BY
by way of a petition for review (docketed as CA-G.R. SP No. 31748).
ITS APPLICATION OF THE CIVIL LAW CONCEPT OF NEGOTIORUM GESTIO;

On 23 May 1994, the Court of Appeals rendered a decision, the dispositive portion of which
(3)
states:

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE ORIGINAL

WHEREFORE, the petition for review is DISMISSED and the appealed decision is accordingly
RECORD OF S.E.C. AC NO. 339 NOT HAVING ACTUALLY BEEN RE-EXAMINED, THAT
affirmed.
S.E.C. CASE NO. 3153 INVOLVED A SITUATION WHERE PERFORMANCE WAS
IMPOSSIBLE (AS CONTEMPLATED UNDER ARTICLE 1191 OF THE CIVIL CODE) AND WAS
NOT A MERE CASE OF LESION OR INADEQUACY OF CAUSE (UNDER ARTICLE 1355 OF
THE CIVIL CODE) AS SO ERRONEOUSLY CHARACTERIZED BY THE RESPONDENT
S.E.C.; and,
SO ORDERED. 12

8
(4)
WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE ORIGINAL
RECORD OF S.E.C. AC NO. 339 NOT HAVING ACTUALLY BEEN EXAMINED, THAT THE
RECORDING BY THE LATE JUDGE MANUEL A. TORRES, JR. OF THE QUESTIONED
ASSIGNMENT OF QUALIFYING SHARES TO HIS NOMINEES, WAS AFFIRMED IN THE
STOCK AND TRANSFER BOOK BY AN ACTING CORPORATE SECRETARY AND
MOREOVER, THAT ACTUAL NOTICE OF SAID ASSIGNMENT WAS TIMELY MADE TO THE
OTHER STOCKHOLDERS. 14
We shall resolve the issues in seriatim.
I
Petitioners insist that the failure to transmit the original records to the Court of Appeals deprived
them of procedural due process. Without the evidence and the original records of the
proceedings before the SEC, the Court of Appeals, petitioners adamantly state, could not have
possibly made a proper appreciation and correct determination of the issues, particularly the
factual issues, they had raised on appeal. Petitioners also assert that since the Court of Appeals
allegedly gave due course to their petition, the original records should have been forwarded to
said court.
Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91 (dated 27 February
1991) which provides that:
8. WHEN PETITION GIVEN DUE COURSE. The Court of Appeals shall give due
course to the petition only when it shows prima facie that the court, commission, board, office or
agency concerned has committed errors of fact or law that would warrant reversal or
modification of the order, ruling or decision sought to be reviewed. The findings of fact of the
court commission, board, office or agency concerned when supported by substantial evidence
shall be final.
xxx xxx xxx
11. TRANSMITTAL OF RECORD. Within fifteen (15) days from notice that the petition
has been given due course, the court, commission, board, office or agency concerned shall
transmit to the Court of Appeals the original or a certified copy of the entire record of the
proceeding under review. The record to be transmitted may be abridged by agreement of all
parties to the proceeding. The Court of Appeals may require or permit subsequent correction or
addition to the record.
Petitioners contend that the Court of Appeals had given due course to their petition as allegedly
indicated by the following acts:
a) it granted the restraining order applied for by the herein petitioners, and after hearing,
also the writ of preliminary injunction sought by them; under the original SC Circular No. 1-91, a
petition for review may be given due course at the onset (paragraph 8) upon a mere prima facie
finding of errors of fact or law having been committed, and such prima facie finding is but
consistent with the grant of the extra-ordinary writ of preliminary injunction;
b) it required the parties to submit "simultaneous memoranda" in its resolution dated
October 15, 1993 (this is in addition to the comment required to be filed by the respondents) and
furthermore declared in the same resolution that the petition will be decided "on the merits,"
instead of outrightly dismissing the same;
c) it rendered a full length decision, wherein: (aa) it expressly declared the respondent
S.E.C. as having erred in denying the pertinent motions to suspend proceedings; (bb) it declared
the supposed error as having become a non-issue when the respondent C.A. "proceeded to
hear (the) appeal"; (cc) it formulated and applied its own theory of negotiorum gestio in justifying
the non-substitution of the deceased principal party in S.E.C. AC No. 339 and moreover, its
theory of di minimis non curat lex (this, without first determining the true extent of and the correct
legal characterization of the so-called "shortage" of Tormil shares;
and, (dd) it expressly affirmed the assailed decision of respondent S.E.C. 15
Petitioners' contention is unmeritorious.
There is nothing on record to show that the Court of Appeals gave due course to the petition.
The fact alone that the Court of Appeals issued a restraining order and a writ of preliminary
injunction and required the parties to submit their respective memoranda does not indicate that
the petition was given due course. The office of an injunction is merely to preserve the status
quo pending the disposition of the case. The court can require the submission of memoranda in
9
support of the respective claims and positions of the parties without necessarily giving due
course to the petition. The matter of whether or not to give due course to a petition lies in the
discretion of the court.
Sec. 17. Death of party. After a party dies and the claim is not thereby extinguished, the
court shall order, upon proper notice, the legal representative of the deceased to appear and to
be substituted for the deceased, within a period of thirty (30) days, or within such time as may be
granted. If the legal representative fails to appear within said time, the court may order the
opposing party to procure the appointment of a legal representative of the deceased within a
It is worthy to mention that SC Circular No. 1-91 has been replaced by Revised Administrative
time to be specified by the court, and the representative shall immediately appear for and on
Circular No. 1-95 (which took effect on 1 June 1995) wherein the procedure for appeals from
behalf of the interest of the deceased. The court charges involved in procuring such
quasi-judicial agencies to the Court of Appeals was clarified thus:
appointment, if defrayed by the opposing party, may be recovered as costs. The heirs of the
deceased may be allowed to be substituted for the deceased, without requiring the appointment
of an executor or administrator and the court may appoint guardian ad litem for the minor heirs.

10. Due course. If upon the filing of the comment or such other pleadings or documents
as may be required or allowed by the Court of Appeals or upon the expiration of the period for
the filing thereof, and on the bases of the petition or the record the Court of Appeals finds prima
Petitioners insist that the SEC en banc should have granted the motions to suspend they filed
facie that the court or agency concerned has committed errors of fact or law that would warrant
based as they were on the ground that the Regional Trial Court of Makati, where the probate of
reversal or modification of the award, judgment, final order or resolution sought to be reviewed, it
the late Judge Torres' will was pending, had yet to appoint an administrator or legal
may give due course to the petition; otherwise, it shall dismiss the same. The findings of fact of
representative of his estate.
the court or agency concerned, when supported by substantial evidence, shall be binding on the
Court of Appeals.

We are not unaware of the principle underlying the aforequoted provision:

11. Transmittal of record. Within fifteen (15) days from notice that the petition has been
given due course, the Court of Appeals may require the court or agency concerned to transmit
the original or a legible certified true copy of the entire record of the proceeding under review.
The record to be transmitted may be abridged by agreement of all parties to the proceeding. The
It has been held that when a party dies in an action that survives, and no order is issued by the
Court of Appeals may require or permit subsequent correction of or addition to the record.
Court for the appearance of the legal representative or of the heirs of the deceased to be
(Emphasis ours.)
substituted for the deceased, and as a matter of fact no such substitution has ever been
effected, the trial held by the court without such legal representative or heirs, and the judgment
rendered after such trial, are null and void because the court acquired no jurisdiction over the
persons of the legal representative or of the heirs upon whom the trial and the judgment are not
binding. 16
The aforecited circular now formalizes the correct practice and clearly states that in resolving
appeals from quasi judicial agencies, it is within the discretion of the Court of Appeals to have
the original records of the proceedings under review be transmitted to it. In this connection
petitioners' claim that the Court of Appeals could not have decided the case on the merits
without the records being brought before it is patently lame. Indubitably, the Court of Appeals
As early as 8 April 1988, Judge Torres instituted Special Proceedings No. M-1768 before the
decided the case on the basis of the uncontroverted facts and admissions contained in the
Regional Trial Court of Makati for the ante-mortem probate of his holographic will which he had
pleadings, that is, the petition, comment, reply, rejoinder, memoranda, etc. filed by the parties.
executed on 31 October 1986. Testifying in the said proceedings, Judge Torres confirmed his
appointment of petitioner Edgardo D. Pabalan as the sole executor of his will and administrator
of his estate. The proceedings, however, were opposed by the same parties, herein private
respondents Antonio P. Torres, Jr., Ma. Luisa T. Morales and Ma. Cristina T. Carlos, 17 who are
nephew and nieces of Judge Torres, being the children of his late brother Antonio A. Torres.
II

It can readily be observed therefore that the parties involved in the present controversy are
Petitioners contend that the decisions of the SEC and the Court of Appeals are null and void for
virtually the same parties fighting over the representation of the late Judge Torres' estate. It
being rendered without the necessary substitution of parties (for the deceased petitioner Manuel
should be recalled that the purpose behind the rule on substitution of parties is the protection of
A. Torres, Jr.) as mandated by Sec. 17, Rule 3 of the Revised Rules of Court, which provides as
the right of every party to due process. It is to ensure that the deceased party would continue to
follows:
be properly represented in the suit through the duly appointed legal representative of his estate.

10
In the present case, this purpose has been substantially fulfilled (despite the lack of formal
substitution) in view of the peculiar fact that both proceedings involve practically the same
parties. Both parties have been fiercely fighting in the probate proceedings of Judge Torres'
holographic will for appointment as legal representative of his estate. Since both parties claim
interests over the estate, the rights of the estate were expected to be fully protected in the
proceedings before the SEC en banc and the Court of Appeals. In either case, whoever shall be
appointed legal representative of Judge Torres' estate (petitioner Pabalan or private
respondents) would no longer be a stranger to the present case, the said parties having
voluntarily submitted to the jurisdiction of the SEC and the Court of Appeals and having
thoroughly participated in the proceedings.
The foregoing rationate finds support in the recent case of Vda. de Salazar v. CA, 18 wherein
the Court expounded thus:
The need for substitution of heirs is based on the right to due process accruing to every party in
any proceeding. The rationale underlying this requirement in case a party dies during the
pendency of proceedings of a nature not extinguished by such death, is that . . . the exercise of
judicial power to hear and determine a cause implicitly presupposes in the trial court, amongst
other essentials, jurisdiction over the persons of the parties. That jurisdiction was inevitably
impaired upon the death of the protestee pending the proceedings below such that unless and
until a legal representative is for him duly named and within the jurisdiction of the trial court, no
adjudication in the cause could have been accorded any validity or binding effect upon any
party, in representation of the deceased, without trenching upon the fundamental right to a day
in court which is the very essence of the constitutionally enshrined guarantee of due process.
We are not unaware of several cases where we have ruled that a party having died in an action
that survives, the trial held by the court without appearance of the deceased's legal
representative or substitution of heirs and the judgment rendered after such trial, are null and
void because the court acquired no jurisdiction over the persons of the legal representatives or
of the heirs upon whom the trial and the judgment would be binding. This general rule
notwithstanding, in denying petitioner's motion for reconsideration, the Court of Appeals correctly
ruled that formal substitution of heirs is not necessary when the heirs themselves voluntarily
appeared, participated in the case and presented evidence in defense of deceased defendant.
Attending the case at bench, after all, are these particular circumstances which negate
petitioner's belated and seemingly ostensible claim of violation of her rights to due process. We
should not lose sight of the principle underlying the general rule that formal substitution of heirs
must be effectuated for them to be bound by a subsequent judgment. Such had been the
general rule established not because the rule on substitution of heirs and that on appointment of
a legal representative are jurisdictional requirements per se but because non-compliance
therewith results in the undeniable violation of the right to due process of those who, though not
duly notified of the proceedings, are substantially affected by the decision rendered therein . . . .
It is appropriate to mention here that when Judge Torres died on April 3, 1991, the SEC en banc
had already fully heard the parties and what remained was the evaluation of the evidence and
rendition of the judgment.
Further, petitioners filed their motions to suspend proceedings only after more than two (2) years
from the death of Judge Torres. Petitioners' counsel was even remiss in his duty under Sec. 16,
Rule 3 of the Revised Rules of Court. 19 Instead, it was private respondents who informed the
SEC of Judge Torres' death through a manifestation dated 24 April 1991.
For the SEC en banc to have suspended the proceedings to await the appointment of the legal
representative by the estate was impractical and would have caused undue delay in the
proceedings and a denial of justice. There is no telling when the probate court will decide the
issue, which may still be appealed to the higher courts.
In any case, there has been no final disposition of the properties of the late Judge Torres before
the SEC. On the contrary, the decision of the SEC en banc as affirmed by the Court of Appeals
served to protect and preserve his estate. Consequently, the rule that when a party dies, he
should be substituted by his legal representative to protect the interests of his estate in
observance of due process was not violated in this case in view of its peculiar situation where
the estate was fully protected by the presence of the parties who claim interests therein either as
directors, stockholders or heirs.
Finally, we agree with petitioners' contention that the principle of negotiorum gestio 20 does not
apply in the present case. Said principle explicitly covers abandoned or neglected property or
business.
III
Petitioners find legal basis for Judge Torres' act of revoking the assignment of his properties in
Makati and Pasay City to Tormil corporation by relying on Art. 1191 of the Civil Code which
provides that:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
11
 The general rule is that rescission of a contract will not be permitted for a slight or carnal breach,
but only for such substantial and fundamental breach as would defeat the very object of the
parties in making the agreement.
The injured party may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

The shortage of 972 shares definitely is not substantial and fundamental breach as would defeat
the very object of the parties in entering into contract. Art. 1355 of the Civil Code also provides:
"Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract,
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
unless there has been fraud, mistake or undue influences." There being no fraud, mistake or
a period.
undue influence exerted on respondent Torres by TORMIL and the latter having already issued
to the former of its 225,000 unissued shares, the most logical course of action is to declare as
null and void the deed of revocation executed by respondent Torres. (Rollo, pp. 45-46.) 21

This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
The aforequoted Civil Code provision does not apply in this particular situation for the obvious
reason that a specific number of shares of stock (as evidenced by stock certificates) had already
been issued to the late Judge Torres in exchange for his Makati and Pasay City properties. The
records thus disclose:
Petitioners' contentions cannot be sustained. We see no justifiable reason to disturb the findings
of SEC, as affirmed by the Court of Appeals:

DATE OF PROPERTY LOCATION NO. OF SHARES ORDER OF

We sustain the ruling of respondent SEC in the decision appealed from (Rollo, pp. 45-46) that
ASSIGNMENT ASSIGNED TO BE ISSUED COMPLIANCE*

. . . the shortage of 972 shares would not be valid ground for respondent Torres to unilaterally
revoke the deeds of assignment he had executed on July 13, 1984 and July 24, 1984 wherein 1. July 13, 1984 TCT 81834 Quezon City) 13,252 3rd
he voluntarily assigned to TORMIL real properties covered by TCT No. 374079 (Makati) and
TCT No. 41527, 41528 and 41529 (Pasay) respectively.
TCT 144240 Quezon City)

A comparison of the number of shares that respondent Torres received from TORMIL by virtue
2. July 13, 1984 TCT 77008 Manila)
of the "deeds of assignment" and the stock certificates issued by the latter to the former readily
shows that TORMIL had substantially performed what was expected of it. In fact, the first two
issuances were in satisfaction to the properties being revoked by respondent Torres. Hence, the TCT 65689 Manila) 78,493 2nd
shortage of 972 shares would never be a valid ground for the revocation of the deeds covering
Pasay and Quezon City properties.
TCT 102200 Manila)

In Universal Food Corp. vs. CA, the Supreme Court held:

3. July 13, 1984 TCT 374079 Makati 8,307 1st

12
4. July 24, 1984 TCT 41527 Pasay but should have been applied logically to the last assignment of property Judge Torres' Ayala
Fund shares which was executed on 29 August 1984. 23
TCT 41528 Pasay) 9,855 4th

TCT 41529 Pasay)

IV

5. August 6, 1984 El Hogar Filipino Stocks 2,000 7th

Petitioners insist that the assignment of "qualifying shares" to the nominees of the late Judge
Torres (herein petitioners) does not partake of the real nature of a transfer or conveyance of
shares of stock as would call for the "imposition of stringent requirements (with respect to the)
recording of the transfer of said shares." Anyway, petitioners add, there was substantial
6. August 6, 1984 Manila Jockey Club Stocks 48,737 5th compliance with the above-stated requirement since said assignments were entered by the late
Judge Torres himself in the corporation's stock and transfer book on 6 March 1987, prior to the
25 March 1987 annual stockholders meeting and which entries were confirmed on 8 March 1987
by petitioner Azura who was appointed Assistant Corporate Secretary by Judge Torres.

7. August 7, 1984 San Miguel Corp. Stocks 50,238 8th

Petitioners further argue that:

8. August 7, 1984 China Banking Corp. Stocks 6,300 6th

10.10. Certainly, there is no legal or just basis for the respondent S.E.C. to penalize the late
Judge Torres by invalidating the questioned entries in the stock and transfer book, simply
9. August 20, 1984 Ayala Corp. Stocks 7,468.2) 9th because he initially made those entries (they were later affirmed by an acting corporate
secretary) and because the stock and transfer book was in his possession instead of the elected
corporate secretary, if the background facts herein-before narrated and the serious animosities
that then reigned between the deceased Judge and his relatives are to be taken into account;

10. August 29, 1984 Ayala Fund Stocks 1,322.1)

xxx xxx xxx

TOTAL 225,972.3 10.12. Indeed it was a practice in the corporate respondent, a family corporation with only a
measly number of stockholders, for the late judge to have personal custody of corporate records;
as president, chairman and majority stockholder, he had the prerogative of designating an acting
corporate secretary or to himself make the needed entries, in instances where the regular
secretary, who is a mere subordinate, is unavailable or intentionally defaults, which was the
*Order of stock certificate issuances by TORMIL to respondent Torres relative to the Deeds of situation that obtained immediately prior to the 1987 annual stockholders meeting of Tormil, as
Assignment he executed sometime in July and August, 1984. 22 (Emphasis ours.) the late Judge Torres had so indicated in the stock and transfer book in the form of the entries
now in question;

Moreover, we agree with the contention of the Solicitor General that the shortage of shares
should not have affected the assignment of the Makati and Pasay City properties which were
executed in 13 and 24 July 1984 and the consideration for which have been duly paid or fulfilled
13
10.13. Surely, it would have been futile nay foolish for him to have insisted under those
circumstances, for the regular secretary, who was then part of a group ranged against him, to
make the entries of the assignments in favor of his nominees; 24
Petitioners' contentions lack merit.
It is precisely the brewing family discord between Judge Torres and private respondents his
nephew and nieces that should have placed Judge Torres on his guard. He should have been
more careful in ensuring that his actions (particularly the assignment of qualifying shares to his
nominees) comply with the requirements of the law. Petitioners cannot use the flimsy excuse
that it would have been a vain attempt to force the incumbent corporate secretary to register the
aforestated assignments in the stock and transfer book because the latter belonged to the
opposite faction. It is the corporate secretary's duty and obligation to register valid transfers of
stocks and if said corporate officer refuses to comply, the transferor-stockholder may rightfully
bring suit to compel performance. 25 In other words, there are remedies within the law that
petitioners could have availed of, instead of taking the law in their own hands, as the cliche
goes.
Thus, we agree with the ruling of the SEC en banc as affirmed by the Court of Appeals:
We likewise sustain respondent SEC when it ruled, interpreting Section 74 of the Corporation
Code, as follows (Rollo, p. 45):
In the absence of (any) provision to the contrary, the corporate secretary is the custodian of
corporate records. Corollarily, he keeps the stock and transfer book and makes proper and
necessary entries therein.
Contrary to the generally accepted corporate practice, the stock and transfer book of TORMIL
was not kept by Ms. Maria Cristina T. Carlos, the corporate secretary but by respondent Torres,
the President and Chairman of the Board of Directors of TORMIL. In contravention to the above
cited provision, the stock and transfer book was not kept at the principal office of the corporation
either but at the place of respondent Torres.
These being the obtaining circumstances, any entries made in the stock and transfer book on
March 8, 1987 by respondent Torres of an alleged transfer of nominal shares to Pabalan and
Co. cannot therefore be given any valid effect. Where the entries made are not valid, Pabalan
and Co. cannot therefore be considered stockholders of record of TORMIL. Because they are
not stockholders, they cannot therefore be elected as directors of TORMIL. To rule otherwise
would not only encourage violation of clear mandate of Sec. 74 of the Corporation Code that
stock and transfer book shall be kept in the principal office of the corporation but would likewise
open the flood gates of confusion in the corporation as to who has the proper custody of the
stock and transfer book and who are the real stockholders of records of a certain corporation as
any holder of the stock and transfer book, though not the corporate secretary, at pleasure would
make entries therein.
The fact that respondent Torres holds 81.28% of the outstanding capital stock of TORMIL is of
no moment and is not a license for him to arrogate unto himself a duty lodged to (sic) the
corporate secretary. 26
All corporations, big or small, must abide by the provisions of the Corporation Code. Being a
simple family corporation is not an exemption. Such corporations cannot have rules and
practices other than those established by law.
WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED.
SO ORDERED.
SECOND DIVISION
[G.R. No. 125469. October 27, 1997]
PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs. THE HONORABLE COURT OF
APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL LAND, INC.,
respondents.
DECISION
TORRES, JR., J.:
The Securities and Exchange Commission is the government agency, under the direct general
supervision of the Office of the President,[1] with the immense task of enforcing the Revised
14
Securities Act, and all other duties assigned to it by pertinent laws. Among its inumerable
functions, and one of the most important, is the supervision of all corporations, partnerships or
associations, who are grantees or primary franchise and/or a license or permit issued by the
government to operate in the Philippines.[2] Just how far this regulatory authority extends,
particularly, with regard to the Petitioner Philippine Stock Exchange, Inc. is the issue in the case
at bar.
In this Petition for Review of Certiorari, petitioner assails the resolution of the respondent Court
of Appeals, dated June 27, 1996, which affirmed the decision of the Securities and Exchange
Commission ordering the petitioner Philippine Stock Exchange, Inc. to allow the private
respondent Puerto Azul Land, Inc. to be listed in its stock market, thus paving the way for the
public offering of PALIs shares.
The facts of the case are undisputed, and are hereby restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its
shares to the public in order to raise funds allegedly to develop its properties and pay its loans
with several banking institutions. In January, 1995, PALI was issued a Permit to Sell its shares to
the public by the Securities and Exchange Commission (SEC). To facilitate the trading of its
shares among investors, PALI sought to course the trading of its shares through the Philippine
Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock exchange an
application to list its shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALIs application,
recommended to the PSEs Board of Governors the approval of PALIs listing application.
On February 14, 1996, before it could act upon PALIs application, the Board of Governors of
PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the late President
Marcos was the legal and beneficial owner of certain properties forming part of the Puerto Azul
Beach Hotel and Resort Complex which PALI claims to be among its assets and that the
Ternate Development Corporation, which is among the stockholders of PALI, likewise appears to
have been held and continue to be held in trust by one Rebecco Panlilio for then President
Marcos and now, effectively for his estate, and requested PALIs application to be deferred. PALI
was requested to comment upon the said letter.
PALIs answer stated that the properties forming part of Puerto Azul Beach Hotel and Resort
Complex were not claimed by PALI as its assets. On the contrary, the resort is actually owned
by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities distinct from PALI.
Furthermore, the Ternate Development Corporation owns only 1.20% of PALI. The Marcoses
responded that their claim is not confined to the facilities forming part of the Puerto Azul Hotel
and Resort Complex, thereby implying that they are also asserting legal and beneficial
ownership of other properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential
Commission on Good Government (PCGG) requesting for comments on the letter of the PALI
and the Marcoses. On March 4, 1996, the PSE was informed that the Marcoses received a
Temporary Restraining Order on the same date, enjoining the Marcoses from, among others,
further impeding, obstructing, delaying or interfering in any manner by or any means with the
consideration, processing and approval by the PSE of the initial public offering of PALI. The TRO
was issued by Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case
No. 65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its
decision to reject PALIs application, citing the existence of serious claims, issues and
circumstances surrounding PALIs ownership over its assets that adversely affect the suitability
of listing PALIs shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman,
Perfecto R. Yasay, Jr., bringing to the SECs attention the action taken by the PSE in the
application of PALI for the listing of its shares with the PSE, and requesting that the SEC, in the
exercise of its supervisory and regulatory powers over stock exchanges under Section 6(j) of
P.D. No. 902-A, review the PSEs action on PALIs listing application and institute such measures
as are just and proper and under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of
PALI and directing the PSE to file its comments thereto within five days from its receipt and for
its authorized representative to appear for an inquiry on the matter. On April 22, 1996, the PSE
submitted a letter to the SEC containing its comments to the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSEs decision. The dispositive
portion of the said order reads:
WHEREFORE, premises considered, and invoking the Commissioners authority and jurisdiction
under Section 3 of the Revised Securities Act, in conjunction with Section 3, 6(j) and 6(m) of the
Presidential Decree No. 902-A, the decision of the Board of Governors of the Philippine Stock
Exchange denying the listing of shares of Puerto Azul Land, Inc., is hereby set aside, and the
15
PSE is hereby ordered to immediately cause the listing of the PALI shares in the Exchange,
without prejudice to its authority to require PALI to disclose such other material information it
deems necessary for the protection of the investing public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however
denied by the Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no compelling reason to consider its
order dated April 24, 1996, and in the light of recent developments on the adverse claim against
the PALI properties, PSE should require PALI to submit full disclosure of material facts and
information to protect the investing public. In this regard, PALI is hereby ordered to amend its
registration statements filed with the Commission to incorporate the full disclosure of these
material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition
for Review (with application for Writ of Preliminary Injunction and Temporary Restraining Order),
assailing the above mentioned orders of the SEC, submitting the following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN ISSUING
THE ASSAILED ORDERS WITHOUT POWER, JURISDICTION, OR AUTHORITY; SEC HAS
NO POWER TO ORDER THE LISTING AND SALE OF SHARES OF PALI WHOSE ASSETS
ARE SEQUESTERED AND TO REVIEW AND SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN FINDING
THAT PSE ACTED IN AN ARBITRARY AND ABUSIVE MANNER IN DISAPPROVING PALIS
LISTING APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR ALLOWING FURTHER
DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM PART OF
NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY PROMULGATED AND ITS
IMPLEMENTATION AND APPLICATION IN THIS CASE VIOLATES THE DUE PROCESS
CLAUSE OF THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a
Comment and Motion to Dismiss. On June 10, 1996, PSE filed its Reply to Comment and
Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSEs Petition
for Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction and authority to look into the
decision of the petitioner PSE, pursuant to Section 3[3] of the Revised Securities Act in relation
to Section 6(j) and 6(m)[4] of P.D. No. 902-A, and Section 38(b)[5] of the Revised Securities Act,
and for the purpose of ensuring fair administration of the exchange. Both as a corporation and
as a stock exchange, the petitioner is subject to public respondents jurisdiction, regulation and
control. Accepting the argument that the public respondent has the authority merely to supervise
or regulate, would amount to serious consequences, considering that the petitioner is a stock
exchange whose business is impressed with public interest. Abuse is not remote if the public
respondent is left without any system of control. If the securities act vested the public respondent
with jurisdiction and control over all corporations; the power to authorize the establishment of
stock exchanges; the right to supervise and regulate the same; and the power to alter and
supplement rules of the exchange in the listing or delisting of securities, then the law certainly
granted to the public respondent the plenary authority over the petitioner; and the power of
review necessarily comes within its authority.
All in all, the court held that PALI complied with all the requirements for public listing, affirming
the SECs ruling to the effect that:
x x x the Philippine Stock Exchange has acted in an arbitrary and abusive manner in
disapproving the application of PALI for listing of its shares in the face of the following
considerations:
16
1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure
requirements of the Exchange;
2. In applying its clear and reasonable standards on the suitability for listing of shares, PSE has
failed to justify why it acted differently on the application of PALI, as compared to the IPOs of
other companies similarly that were allowed listing in the Exchange;
3. It appears that the claims and issues on the title to PALIs properties were even less serious
than the claims against the assets of the other companies in that, the assertions of the Marcoses
that they are owners of the disputed properties were not substantiated enough to overcome the
strength of a title to properties issued under the Torrens System as evidence of ownership
thereof;
4. No action has been filed in any court of competent jurisdiction seeking to nullify PALIs
ownership over the disputed properties, neither has the government instituted recovery
proceedings against these properties. Yet the import of PSEs decision in denying PALIs
application is that it would be PALI, not the Marcoses, that must go to court to prove the legality
of its ownership on these properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the Military/Naval Reservation does
not inspire belief. The point is, the PALI properties are now titled. A property losses its public
character the moment it is covered by a title. As a matter of fact, the titles have long been settled
by a final judgment; and the final decree having been registered, they can no longer be re-
opened considering that the one year period has already passed. Lastly, the determination of
what standard to apply in allowing PALIs application for listing, whether the discretion method or
the system of public disclosure adhered to by the SEC, should be addressed to the Securities
Commission, it being the government agency that exercises both supervisory and regulatory
authority over all corporations.
On August 15, 1996, the PSE, after it was granted an extension, filed an instant Petition for
Review on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals.
Respondent PALI filed its Comment to the petition on October 17, 1996. On the same date, the
PCGG filed a Motion for Leave to file a Petition for Intervention. This was followed up by the
PCGGs Petition for Intervention on October 21, 1996. A supplemental Comment was filed by
PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC and the
Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to the PCGGs
motion for leave to file petition for intervention, PALI filed its Comment thereto on January 17,
1997, whereas the PSE filed its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent
PALI (October 17, 1996) and the Solicitor General (December 26, 1996). On may 16, 1997,
PALI filed its Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the
PSE to list the shares of PALI in the stock exchange. Under presidential decree No. 902-A, the
powers of the SEC over stock exchanges are more limited as compared to its authority over
ordinary corporations. In connection with this, the powers of the SEC over stock exchanges
under the Revised Securities Act are specifically enumerated, and these do not include the
power to reverse the decisions of the stock exchange. Authorities are in abundance even in the
United States, from which the countrys security policies are patterned, to the effect of giving the
Securities Commission less control over stock exchanges, which in turn are given more lee-way
in making the decision whether or not to allow corporations to offer their stock to the public
through the stock exchange. This is in accord with the business judgment rule whereby the SEC
and the courts are barred from intruding into business judgments of corporations, when the
same are made in good faith. The said rule precludes the reversal of the decision of the PSE to
deny PALIs listing application, absent a showing a bad faith on the part of the PSE. Under the
listing rule of the PSE, to which PALI had previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing. Thus, even if an issuer has complied with
the PSE listing rules and requirements, PSE retains the discretion to accept or reject the issuers
listing application if the PSE determines that the listing shall not serve the interests of the
investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor with
corporations whose properties are under sequestration. A reading of Republic of the Philippines
vs. Sandiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the properties of PALI,
which were derived from the Ternate Development Corporation (TDC) and the Monte del Sol
Development Corporation (MSDC), are under sequestration by the PCGG, and the subject of
forfeiture proceedings in the Sandiganbayan. This ruling of the Court is the law of the case
between the Republic and the TDC and MSDC. It categorically declares that the assets of these
corporations were sequestered by the PCGG on March 10, 1986 and April 4, 1988.
It is, likewise, intimidated that the Court of Appeals sanction that PALIs ownership over its
properties can no longer be questioned, since certificates of title have been issued to PALI and
more than one year has since lapsed, is erroneous and ignores well settled jurisprudence on
land titles. That a certificate of title issued under the Torrens System is a conclusive evidence of
ownership is not an absolute rule and admits certain exceptions. It is fundamental that forest
lands or military reservations are non-alienable. Thus, when a title covers a forest reserve or a
government reservation, such title is void.
PSE, likewise, assails the SECs and the Court of Appeals reliance on the alleged policy of full
disclosure to uphold the listing of the PALIs shares with the PSE, in the absence of a clear
mandate for the effectivity of such policy. As it is, the case records reveal the truth that PALI did
not comply with the listing rules and disclosure requirements. In fact, PALIs documents
17
supporting its application contained misrepresentations and misleading statements, and
concealed material information. The matter of sequestration of PALIs properties and the fact that
the same form part of military/naval/forest reservations were not reflected in PALIs application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is
clothed with the marking of a corporate entity, its functions as the primary channel through which
the vessels of capital trade ply. The PSEs relevance to the continued operation and filtration of
the securities transactions in the country gives it a distinct color of importance such that
government intervention in its affairs becomes justified, if not necessary. Indeed, as the only
operational stock exchange in the country today, the PSE enjoys a monopoly of securities
transactions, and as such, it yields an immense influence upon the countrys economy.
Due to this special nature of stock exchanges, the countrys lawmakers has seen it wise to give
special treatment to the administration and regulation of stock exchanges.[6]
These provisions, read together with the general grant of jurisdiction, and right of supervision
and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the special mandate
to be vigilant in the supervision of the affairs of stock exchanges so that the interests of the
investing public may be fully safeguarded.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SECs
challenged control authority over the petitioner PSE even as it provides that the Commission
shall have absolute jurisdiction, supervision, and control over all corporations, partnerships or
associations, who are the grantees of primary franchises and/or a license or permit issued by the
government to operate in the Philippines The SECs regulatory authority over private
corporations encompasses a wide margin of areas, touching nearly all of a corporations
concerns. This authority springs from the fact that a corporation owes its existence to the
concession of its corporate franchise from the state.
The SECs power to look into the subject ruling of the PSE, therefore, may be implied from or be
considered as necessary or incidental to the carrying out of the SECs express power to insure
fair dealing in securities traded upon a stock exchange or to ensure the fair administration of
such exchange.[7] It is, likewise, observed that the principal function of the SEC is the
supervision and control over corporations, partnerships and associations with the end in view
that investment in these entities may be encouraged and protected, and their activities pursued
for the promotion of economic development.[8]
Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the
PSE to deny the application for listing in the stock exchange of the private respondent PALI. The
SECs action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether or not securities,
including shares of stock of a corporation, may be traded or not in the stock exchange. This is in
line with the SECs mission to ensure proper compliance with the laws, such as the Revised
Securities Act and to regulate the sale and disposition of securities in the country.[9] As the
appellate court explains:
Paramount policy also supports the authority of the public respondent to review petitioners
denial of the listing. Being a stock exchange, the petitioner performs a function that is vital to the
national economy, as the business is affected with public interest. As a matter of fact, it has
often been said that the economy moves on the basis of the rise and fall of stocks being traded.
By its economic power, the petitioner certainly can dictate which and how many users are
allowed to sell securities thru the facilities of a stock exchange, if allowed to interpret its own
rules liberally as it may please. Petitioner can either allow or deny the entry to the market of
securities. To repeat, the monopoly, unless accompanied by control, becomes subject to abuse;
hence, considering public interest, then it should be subject to government regulation.
The role of the SEC in our national economy cannot be minimized. The legislature, through the
Revised Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has entrusted
to it the serious responsibility of enforcing all laws affecting corporations and other forms of
associations not otherwise vested in some other government office.[10]
This is not to say, however, that the PSEs management prerogatives are under the absolute
control of the SEC. The PSE is, after all, a corporation authorized by its corporate franchise to
engage in its proposed and duly approved business. One of the PSEs main concerns, as such,
is still the generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining
to corporations, including the right to sue and be sued, to hold property in its own name, to enter
(or not to enter) into contracts with third persons, and to perform all other legal acts within its
allocated express or implied powers.
A corporation is but an association of individuals, allowed to transact under an assumed
corporate name, and with a distinct legal personality. In organizing itself as a collective body, it
waives no constitutional immunities and perquisites appropriate to such body.[11] As to its
corporate and management decisions, therefore, the state will generally not interfere with the
same. Questions of policy and of management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to substitute their judgment for the
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.[12]
18
 material fact or to omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. (Idem).
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority
to reverse the PSEs decision in matters of application for listing in the market, the SEC may
exercise such power only if the PSEs judgment is attended by bad faith. In board of Liquidators
vs. Kalaw,[13] it was held that bad faith does not simply connote bad judgment or negligence. It
Also, as the primary market for securities, the PSE has established its name and goodwill, and it
imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a
has the right to protect such goodwill by maintaining a reasonable standard of propriety in the
breach of a known duty through some motive or interest of ill will, partaking of the nature of
entities who choose to transact through its facilities. It was reasonable for PSE, therefore, to
fraud.
exercise its judgment in the manner it deems appropriate for its business identity, as long as no
rights are trampled upon, and public welfare is safeguarded.

In reaching its decision to deny the application for listing of PALI, the PSE considered important
facts, which in the general scheme, brings to serious question the qualification of PALI to sell its
In this connection, it is proper to observe that the concept of government absolutism in a thing of
shares to the public through the stock exchange. During the time for receiving objections to the
the past, and should remain so.
application, the PSE heard from the representative of the late President Ferdinand E. Marcos
and his family who claim the properties of the private respondent to be part of the Marcos estate.
In time, the PCGG confirmed this claim. In fact, an order of sequestration has been issued
covering the properties of PALI, and suit for reconveyance to the state has been filed in the
Sandiganbayan Court. How the properties were effectively transferred, despite the sequestration
order, from the TDC and MSDC to Rebecco Panlilio, and to the private respondent PALI, in only The observation that the title of PALI over its properties is absolute and can no longer be
a short span of time, are not yet explained to the Court, but it is clear that such circumstances assailed is of no moment. At this juncture, there is the claim that the properties were owned by
the TDC and MSDC and were transferred in violation of sequestration orders, to Rebecco
give rise to serious doubt as to the integrity of PALI as a stock issuer. The petitioner was in the
right when it refused application of PALI, for a contrary ruling was not to the best interest of the Panlilio and later on to PALI, besides the claim of the Marcoses that such properties belong to
general public. The purpose of the Revised Securities Act, after all, is to give adequate and Marcos estate, and were held only in trust by Rebecco Panlilio. It is also alleged by the petitioner
that these properties belong to naval and forest reserves, and therefore beyond private
effective protection to the investing public against fraudulent representations, or false promises,
and the imposition of worthless ventures.[14] dominion. If any of these claims is established to be true, the certificates of title over the subject
properties now held by PALI may be disregarded, as it is an established rule that a registration
of a certificate of title does not confer ownership over the properties described therein to the
person named as owner. The inscription in the registry, to be effective, must be made in good
faith. The defense of indefeasibility of a Torrens Title does not extend to a transferee who takes
the certificate of title with notice of a flaw.
It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts
detrimental to legitimate business, thus:

In any case, for the purpose of determining whether PSE acted correctly in refusing the
application of PALI, the true ownership of the properties of PALI need not be determined as an
The Securities Act, often referred to as the truth in securities Act, was designed not only to
absolute fact. What is material is that the uncertainty of the properties ownership and alienability
provide investors with adequate information upon which to base their decisions to buy and sell
exists, and this puts to question the qualification of PALIs public offering. In sum, the Court finds
securities, but also to protect legitimate business seeking to obtain capital through honest
that the SEC had acted arbitrarily in arrogating unto itself the discretion of approving the
presentation against competition form crooked promoters and to prevent fraud in the sale of
application for listing in the PSE of the private respondent PALI, since this is a matter addressed
securities. (Tenth Annual Report, U.S. Securities and Exchange Commission, p. 14).
to the sound discretion of the PSE, a corporate entity, whose business judgments are respected
in the absence of bad faith.

As has been pointed out, the effects of such an act are chiefly (1) prevention of excesses and
fraudulent transactions, merely by requirement of that details be revealed; (2) placing the market
The question as to what policy is, or should be relied upon in approving the registration and sale
during the early stages of the offering of a security a body of information, which operating
of securities in the SEC is not for the Court to determine, but is left to the sound discretion of the
indirectly through investment services and expert investors, will tend to produce a more accurate
Securities and Exchange Commission. In mandating the SEC to administer the Revised
appraisal of a security. x x x. Thus, the Commission may refuse to permit a registration
Securities Act, and in performing its other functions under pertinent laws, the Revised Securities
statement to become effective if it appears on its face to be incomplete or inaccurate in any
Act, under Section 3 thereof, gives the SEC the power to promulgate such rules and regulations
material respect, and empower the Commission to issue a stop order suspending the
as it may consider appropriate in the public interest for the enforcement of the said laws. The
effectiveness of any registration statement which is found to include any untrue statement of a
second paragraph of Section 4 of the said law, on the other hand, provides that no security,

19
unless exempt by law, shall be issued, endorsed, sold, transferred or in any other manner
conveyed to the public, unless registered in accordance with the rules and regulations that shall
be promulgated in the public interest and for the protection of investors by the Commission.
(v) is in any was dishonest of is not of good repute; or
Presidential Decree No. 902-A, on the other hand, provides that the SEC, as regulatory agency,
has supervision and control over all corporations and over the securities market as a whole, and
as such, is given ample authority in determining appropriate policies. Pursuant to this regulatory
authority, the SEC has manifested that it has adopted the policy of full material disclosure where
all companies, listed or applying for listing, are required to divulge truthfully and accurately, all
material information about themselves and the securities they sell, for the protection of the (vi) does not conduct its business in accordance with law or is engaged in a business that is
investing public, and under pain of administrative, criminal and civil sanctions. In connection with illegal or contrary or government rules and regulations.
this, a fact is deemed material if it tends to induce or otherwise effect the sale or purchase of its
securities.[15] While the employment of this policy is recognized and sanctioned by laws,
nonetheless, the Revised Securities Act sets substantial and procedural standards which a
proposed issuer of securities must satisfy.[16] Pertinently, Section 9 of the Revised Securities
Act sets forth the possible Grounds for the Rejection of the registration of a security: (3) The enterprise or the business of the issuer is not shown to be sound or to be based on
sound business principles;

- - The Commission may reject a registration statement and refuse to issue a permit to sell the
securities included in such registration statement if it finds that - - (4) An officer, member of the board of directors, or principal stockholder of the issuer is
disqualified to such officer, director or principal stockholder; or

(1) The registration statement is on its face incomplete or inaccurate in any material respect or
includes any untrue statement of a material fact or omits to state a material facts required to be (5) The issuer or registrant has not shown to the satisfaction of the Commission that the sale of
stated therein or necessary to make the statements therein not misleading; or its security would not work to the prejudice to the public interest or as a fraud upon the
purchaser or investors. (Emphasis Ours)

(2) The issuer or registrant - -

(i) is not solvent or not is sound financial condition;
(ii) has violated or has not complied with the provisions of this Act, or the rules promulgated
pursuant thereto, or any order of the Commission;
(iii) has failed to comply with any of the applicable requirements and conditions that the
Commission may, in the public interest and for the protection of investors, impose before the
security can be registered;
(iv) had been engaged or is engaged or is about to engaged in fraudulent transactions;
A reading of the foregoing grounds reveals the intention of the lawmakers to make the
registration and issuance of securities dependent, to a certain extent, on the merits of the
securities themselves, and of the issuer, to be determined by the Securities and Exchange
Commission. This measure was meant to protect the interest of the investing public against
fraudulent and worthless securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The absolute reliance on the full
disclosure method in the registration of securities is, therefore, untenable. At it is, the Court finds
that the private respondent PALI, on at least two points (nos. 1 and 5) has failed to support the
propriety of the issue of its shares with unfailing clarity, thereby lending support to the conclusion
that the PSE acted correctly in refusing the listing of PALI in its stock exchange. This does not
discount the effectivity of whatever method the SEC, in the exercise of its vested authority,
chooses in setting the standard for public offerings of corporations wishing to do so. However,
the SEC must recognize and implement the mandate of the law, particularly the Revised
Securities Act, the provisions of which cannot be amended or supplanted my mere
administrative issuance.
In resum, the Court finds that the PSE has acted with justified circumspection, discounting,
therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in
refusing to allow the listing of PALI in the stock exchange is justified by the law and by the
circumstances attendant to this case.

20

ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the Petition
for Review on Certiorari. The decisions of the Court of Appeals and the Securities and Exchage
Commission dated July 27, 1996 and April 24, 1996, respectively, are hereby REVERSED and
SET ASIDE, and a new Judgment is hereby ENTERED, affirming the decision of the Philippine
Stock Exchange to deny the application for listing of the private respondent Puerto Azul Land,
Inc.
SO ORDERED.
[G.R. No. 147402. January 14, 2004]
ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan
Water District (LMWD), Tacloban City, petitioner, vs. COMMISSION ON AUDIT, Chairman
CELSO D. GANGAN, Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and
Regional Director of COA Region VIII, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorari[1] to annul the Commission on Audits (COA) Resolution dated 3
January 2000 and the Decision dated 30 January 2001 denying the Motion for Reconsideration.
The COA denied petitioner Ranulfo C. Felicianos request for COA to cease all audit services,
and to stop charging auditing fees, to Leyte Metropolitan Water District (LMWD). The COA also
denied petitioners request for COA to refund all auditing fees previously paid by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD.
Subsequently, LMWD received a letter from COA dated 19 July 1999 requesting payment of
auditing fees. As General Manager of LMWD, petitioner sent a reply dated 12 October 1999
informing COAs Regional Director that the water district could not pay the auditing fees.
Petitioner cited as basis for his action Sections 6 and 20 of Presidential Decree 198 (PD 198)[2],
as well as Section 18 of Republic Act No. 6758 (RA 6758). The Regional Director referred
petitioners reply to the COA Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all
auditing fees LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution dated 3
January 2000 denying his requests. Petitioner filed a motion for reconsideration on 31 March
2000, which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions
of the Visayas Association of Water Districts (VAWD) and the Philippine Association of Water
Districts (PAWD) supporting the petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COAs audit jurisdiction over local water
districts in Davao City Water District v. Civil Service Commission and Commission on Audit,[3]
as follows:
The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught
petitioners contention that they are private corporations. It is clear therefrom that the power to
appoint the members who will comprise the members of the Board of Directors belong to the
local executives of the local subdivision unit where such districts are located. In contrast, the
members of the Board of Directors or the trustees of a private corporation are elected from
among members or stockholders thereof. It would not be amiss at this point to emphasize that a
private corporation is created for the private purpose, benefit, aim and end of its members or
stockholders. Necessarily, said members or stockholders should be given a free hand to choose
who will compose the governing body of their corporation. But this is not the case here and this
clearly indicates that petitioners are not private corporations.
The COA also denied petitioners request for COA to stop charging auditing fees as well as
petitioners request for COA to refund all auditing fees already paid.
21

The Issues
Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess
of jurisdiction by auditing LMWD and requiring it to pay auditing fees. Petitioner raises the
following issues for resolution:
1. Whether a Local Water District (LWD) created under PD 198, as amended, is a government-
owned or controlled corporation subject to the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public accountants from
auditing local water districts; and
3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and
controlled corporations auditing fees.
The Ruling of the Court
The petition lacks merit.
The Constitution and existing laws[4] mandate COA to audit all government agencies, including
government-owned and controlled corporations (GOCCs) with original charters. An LWD is a
GOCC with an original charter. Section 2(1), Article IX-D of the Constitution provides for COAs
audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses
of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or
equity, directly or indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity. However, where
the internal control system of the audited agencies is inadequate, the Commission may adopt
such measures, including temporary or special pre-audit, as are necessary and appropriate to
correct the deficiencies. It shall keep the general accounts of the Government and, for such
period as may be provided by law, preserve the vouchers and other supporting papers
pertaining thereto. (Emphasis supplied)
The COAs audit jurisdiction extends not only to government agencies or instrumentalities, but
also to government-owned and controlled corporations with original charters as well as other
government-owned or controlled corporations without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine
backed by a long line of cases culminating in Davao City Water District v. Civil Service
Commission[5] and just recently reiterated in De Jesus v. Commission on Audit.[6] Petitioner
maintains that LWDs are not government-owned and controlled corporations with original
charters. Petitioner even argues that LWDs are private corporations. Petitioner asks the Court to
consider certain interpretations of the applicable laws, which would give a new perspective to the
issue of the true character of water districts.[7]
Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration
(LWUA) and not the LWDs. Petitioner claims that LWDs are created pursuant to and not created
directly by PD 198. Thus, petitioner concludes that PD 198 is not an original charter that would
place LWDs within the audit jurisdiction of COA as defined in Section 2(1), Article IX-D of the
Constitution. Petitioner elaborates that PD 198 does not create LWDs since it does not expressly
direct the creation of such entities, but only provides for their formation on an optional or
voluntary basis.[8] Petitioner adds that the operative act that creates an LWD is the approval of
the Sanggunian Resolution as specified in PD 198.
Petitioners contention deserves scant consideration.
22
We begin by explaining the general framework under the fundamental law. The Constitution
recognizes two classes of corporations. The first refers to private corporations created under a
general law. The second refers to government-owned or controlled corporations created by
special charters. Section 16, Article XII of the Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations. Government-owned or controlled corporations may be
created or established by special charters in the interest of the common good and subject to the
test of economic viability.
The Constitution emphatically prohibits the creation of private corporations except by a general
law applicable to all citizens.[9] The purpose of this constitutional provision is to ban private
corporations created by special charters, which historically gave certain individuals, families or
groups special privileges denied to other citizens.[10]
In short, Congress cannot enact a law creating a private corporation with a special charter. Such
legislation would be unconstitutional. Private corporations may exist only under a general law. If
the corporation is private, it must necessarily exist under a general law. Stated differently, only
corporations created under a general law can qualify as private corporations. Under existing
laws, that general law is the Corporation Code,[11] except that the Cooperative Code governs
the incorporation of cooperatives.[12]
The Constitution authorizes Congress to create government-owned or controlled corporations
through special charters. Since private corporations cannot have special charters, it follows that
Congress can create corporations with special charters only if such corporations are
government-owned or controlled.
Obviously, LWDs are not private corporations because they are not created under the
Corporation Code. LWDs are not registered with the Securities and Exchange Commission.
Section 14 of the Corporation Code states that [A]ll corporations organized under this code shall
file with the Securities and Exchange Commission articles of incorporation x x x. LWDs have no
articles of incorporation, no incorporators and no stockholders or members. There are no
stockholders or members to elect the board directors of LWDs as in the case of all corporations
registered with the Securities and Exchange Commission. The local mayor or the provincial
governor appoints the directors of LWDs for a fixed term of office. This Court has ruled that
LWDs are not created under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from the coverage of
the CSC are those corporations created pursuant to the Corporation Code. Significantly,
petitioners are not created under the said code, but on the contrary, they were created pursuant
to a special law and are governed primarily by its provision.[13] (Emphasis supplied)
LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the
Constitution only government-owned or controlled corporations may have special charters,
LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs are
private corporations with a special charter is to admit that their existence is constitutionally
infirm.
Unlike private corporations, which derive their legal existence and power from the Corporation
Code, LWDs derive their legal existence and power from PD 198. Sections 6 and 25 of PD
198[14] provide:
Section 6. Formation of District. This Act is the source of authorization and power to form and
maintain a district. For purposes of this Act, a district shall be considered as a quasi-public
corporation performing public service and supplying public wants. As such, a district shall
exercise the powers, rights and privileges given to private corporations under existing laws, in
addition to the powers granted in, and subject to such restrictions imposed, under this Act.
(a) The name of the local water district, which shall include the name of the city, municipality, or
province, or region thereof, served by said system, followed by the words Water District.
(b) A description of the boundary of the district. In the case of a city or municipality, such
boundary may include all lands within the city or municipality. A district may include one or more
municipalities, cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or sewerage facilities
managed, operated by or under the control of such city, municipality or province to such district
upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is formed, which shall include those
purposes outlined in Section 5 above.
23
 The phrase government-owned and controlled corporations with original charters means GOCCs
created under special laws and not under the general incorporation law. There is no difference
between the term original charters and special charters. The Court clarified this in National
(e) The names of the initial directors of the district with the date of expiration of term of office for
Service Corporation v. NLRC[15] by citing the deliberations in the Constitutional Commission, as
each.
follows:

(f) A statement that the district may only be dissolved on the grounds and under the conditions
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
set forth in Section 44 of this Title.

Commissioner Romulo is recognized.

(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of
this Title.

MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now
read as follows: including government-owned or controlled corporations WITH ORIGINAL
Nothing in the resolution of formation shall state or infer that the local legislative body has the
CHARTERS. The purpose of this amendment is to indicate that government corporations such
power to dissolve, alter or affect the district beyond that specifically provided for in this Act.
as the GSIS and SSS, which have original charters, fall within the ambit of the civil service.
However, corporations which are subsidiaries of these chartered agencies such as the Philippine
Airlines, Manila Hotel and Hyatt are excluded from the coverage of the civil service.

If two or more cities, municipalities or provinces, or any combination thereof, desire to form a
single district, a similar resolution shall be adopted in each city, municipality and province.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?

xxx
MR. FOZ. Just one question, Mr. Presiding Officer. By the term original charters, what exactly do
we mean?

Sec. 25. Authorization. The district may exercise all the powers which are expressly granted by
this Title or which are necessarily implied from or incidental to the powers and purposes herein
stated. For the purpose of carrying out the objectives of this Act, a district is hereby granted the
MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special
power of eminent domain, the exercise thereof shall, however, be subject to review by the
law.
Administration. (Emphasis supplied)

MR. FOZ. And not under the general corporation law.

Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on LWDs
corporate powers. Section 6 of PD 198 provides that LWDs shall exercise the powers, rights and
privileges given to private corporations under existing laws. Without PD 198, LWDs would have
no corporate powers. Thus, PD 198 constitutes the special enabling charter of LWDs. The
ineluctable conclusion is that LWDs are government-owned and controlled corporations with a
MR. ROMULO. That is correct. Mr. Presiding Officer.
special charter.

24
MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out.
MR. ROMULO. That is correct. (Emphasis supplied)
Again, in Davao City Water District v. Civil Service Commission,[16] the Court reiterated the
meaning of the phrase government-owned and controlled corporations with original charters in
this wise:
By government-owned or controlled corporation with original charter, We mean government
owned or controlled corporation created by a special law and not under the Corporation Code of
the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170
SCRA 79, 82), We held:
The Court, in National Service Corporation (NASECO) v. National Labor Relations Commission,
G.R. No. 69870, promulgated on 29 November 1988, quoting extensively from the deliberations
of the 1986 Constitutional Commission in respect of the intent and meaning of the new phrase
with original charter, in effect held that government-owned and controlled corporations with
original charter refer to corporations chartered by special law as distinguished from corporations
organized under our general incorporation statute the Corporation Code. In NASECO, the
company involved had been organized under the general incorporation statute and was a
subsidiary of the National Investment Development Corporation (NIDC) which in turn was a
subsidiary of the Philippine National Bank, a bank chartered by a special statute. Thus,
government-owned or controlled corporations like NASECO are effectively, excluded from the
scope of the Civil Service. (Emphasis supplied)
Petitioners contention that the Sangguniang Bayan resolution creates the LWDs assumes that
the Sangguniang Bayan has the power to create corporations. This is a patently baseless
assumption. The Local Government Code[17] does not vest in the Sangguniang Bayan the
power to create corporations.[18] What the Local Government Code empowers the Sangguniang
Bayan to do is to provide for the establishment of a waterworks system subject to existing laws.
Thus, Section 447(5)(vii) of the Local Government Code provides:
SECTION 447. Powers, Duties, Functions and Compensation. (a) The sangguniang bayan, as
the legislative body of the municipality, shall enact ordinances, approve resolutions and
appropriate funds for the general welfare of the municipality and its inhabitants pursuant to
Section 16 of this Code and in the proper exercise of the corporate powers of the municipality as
provided for under Section 22 of this Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation, maintenance, and repair
of an efficient waterworks system to supply water for the inhabitants; regulate the construction,
maintenance, repair and use of hydrants, pumps, cisterns and reservoirs; protect the purity and
quantity of the water supply of the municipality and, for this purpose, extend the coverage of
appropriate ordinances over all territory within the drainage area of said water supply and within
one hundred (100) meters of the reservoir, conduit, canal, aqueduct, pumping station, or
watershed used in connection with the water service; and regulate the consumption, use or
wastage of water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only in accordance with the
provisions of PD 198. The Sangguniang Bayan has no power to create a corporate entity that
will operate its waterworks system. However, the Sangguniang Bayan may avail of existing
enabling laws, like PD 198, to form and incorporate a water district. Besides, even assuming for
the sake of argument that the Sangguniang Bayan has the power to create corporations, the
LWDs would remain government-owned or controlled corporations subject to COAs audit
jurisdiction. The resolution of the Sangguniang Bayan would constitute an LWDs special charter,
making the LWD a government-owned and controlled corporation with an original charter. In any
event, the Court has already ruled in Baguio Water District v. Trajano[19] that the Sangguniang
Bayan resolution is not the special charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is still necessary for the final creation of a
district, this Court is of the opinion that said resolution cannot be considered as its charter, the
same being intended only to implement the provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC in order that it
may have an original charter. In short, petitioner argues that one special law cannot serve as
enabling law for several GOCCs but only for one GOCC. Section 16, Article XII of the
Constitution mandates that Congress shall not, except by general law,[20] provide for the
25
creation of private corporations. Thus, the Constitution prohibits one special law to create one
private corporation, requiring instead a general law to create private corporations. In contrast,
the same Section 16 states that Government-owned or controlled corporations may be created
or established by special charters. Thus, the Constitution permits Congress to create a GOCC
with a special charter. There is, however, no prohibition on Congress to create several GOCCs
of the same class under one special enabling charter.
The rationale behind the prohibition on private corporations having special charters does not
apply to GOCCs. There is no danger of creating special privileges to certain individuals, families
or groups if there is one special law creating each GOCC. Certainly, such danger will not exist
whether one special law creates one GOCC, or one special enabling law creates several
GOCCs. Thus, Congress may create GOCCs either by special charters specific to each GOCC,
or by one special enabling charter applicable to a class of GOCCs, like PD 198 which applies
only to LWDs.
Petitioner also contends that LWDs are private corporations because Section 6 of PD 198[21]
declares that LWDs shall be considered quasi-public in nature. Petitioners rationale is that only
private corporations may be deemed quasi-public and not public corporations. Put differently,
petitioner rationalizes that a public corporation cannot be deemed quasi-public because such
corporation is already public. Petitioner concludes that the term quasi-public can only apply to
private corporations. Petitioners argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs audit jurisdiction
depends on the governments ownership or control of a corporation. The nature of the
corporation, whether it is private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over government-owned and controlled
corporations with original charters, as well as government-owned or controlled corporations
without original charters. GOCCs with original charters are subject to COA pre-audit, while
GOCCs without original charters are subject to COA post-audit. GOCCs without original charters
refer to corporations created under the Corporation Code but are owned or controlled by the
government. The nature or purpose of the corporation is not material in determining COAs audit
jurisdiction. Neither is the manner of creation of a corporation, whether under a general or
special law.
The determining factor of COAs audit jurisdiction is government ownership or control of the
corporation. In Philippine Veterans Bank Employees Union-NUBE v. Philippine Veterans
Bank,[22] the Court even ruled that the criterion of ownership and control is more important than
the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B, Section 2(1) that the
Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the
Government, including government-owned or controlled corporations with original charters. As
the Bank is not owned or controlled by the Government although it does have an original charter
in the form of R.A. No. 3518,[23] it clearly does not fall under the Civil Service and should be
regarded as an ordinary commercial corporation. Section 28 of the said law so provides. The
consequence is that the relations of the Bank with its employees should be governed by the
labor laws, under which in fact they have already been paid some of their claims. (Emphasis
supplied)
Certainly, the government owns and controls LWDs. The government organizes LWDs in
accordance with a specific law, PD 198. There is no private party involved as co-owner in the
creation of an LWD. Just prior to the creation of LWDs, the national or local government owns
and controls all their assets. The government controls LWDs because under PD 198 the
municipal or city mayor, or the provincial governor, appoints all the board directors of an LWD for
a fixed term of six years.[24] The board directors of LWDs are not co-owners of the LWDs.
LWDs have no private stockholders or members. The board directors and other personnel of
LWDs are government employees subject to civil service laws[25] and anti-graft laws.[26]
While Section 8 of PD 198 states that [N]o public official shall serve as director of an LWD, it
only means that the appointees to the board of directors of LWDs shall come from the private
sector. Once such private sector representatives assume office as directors, they become public
officials governed by the civil service law and anti-graft laws. Otherwise, Section 8 of PD 198
would contravene Section 2(1), Article IX-B of the Constitution declaring that the civil service
includes government-owned or controlled corporations with original charters.
If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then
they would fall under the term agencies or instrumentalities of the government and thus still
subject to COAs audit jurisdiction. However, the stark and undeniable fact is that the government
owns LWDs. Section 45[27] of PD 198 recognizes government ownership of LWDs when
Section 45 states that the board of directors may dissolve an LWD only on the condition that
another public entity has acquired the assets of the district and has assumed all obligations and
liabilities attached thereto. The implication is clear that an LWD is a public and not a private
entity.
Petitioner does not allege that some entity other than the government owns or controls LWDs.
Instead, petitioner advances the theory that the Water Districts owner is the District itself.[28]
Assuming for the sake of argument that an LWD is self-owned,[29] as petitioner describes an
LWD, the government in any event controls all LWDs. First, government officials appoint all LWD
directors to a fixed term of office. Second, any per diem of LWD directors in excess of P50 is
subject to the approval of the Local Water Utilities Administration, and directors can receive no
other compensation for their services to the LWD.[30] Third, the Local Water Utilities
Administration can require LWDs to merge or consolidate their facilities or operations.[31] This
element of government control subjects LWDs to COAs audit jurisdiction.
26
 The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to
annul provisions of Presidential Decrees, like that of Section 20 of PD 198, that exempt GOCCs
from COA audit. The following exchange in the deliberations of the Constitutional Commission
Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the
elucidates this intent of the framers:
transfer of ownership of water facilities from local government units to their respective water
districts as mandated by PD 198. Petitioner is grasping at straws. Privatization involves the
transfer of government assets to a private entity. Petitioner concedes that the owner of the
assets transferred under Section 6 (c) of PD 198 is no other than the LWD itself.[32] The transfer
of assets mandated by PD 198 is a transfer of the water systems facilities managed, operated by
MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report
or under the control of such city, municipality or province to such (water) district.[33] In short, the
which reads: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE
transfer is from one government entity to another government entity. PD 198 is bereft of any
GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS
indication that the transfer is to privatize the operation and control of water systems.
OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.

Finally, petitioner claims that even on the assumption that the government owns and controls
May I explain my reasons on record.
LWDs, Section 20 of PD 198 prevents COA from auditing LWDs. [34] Section 20 of PD 198
provides:

We know that a number of entities of the government took advantage of the absence of a
legislature in the past to obtain presidential decrees exempting themselves from the jurisdiction
Sec. 20. System of Business Administration. The Board shall, as soon as practicable, prescribe
of the Commission on Audit, one notable example of which is the Philippine National Oil
and define by resolution a system of business administration and accounting for the district,
Company which is really an empty shell. It is a holding corporation by itself, and strictly on its
which shall be patterned upon and conform to the standards established by the Administration.
own account. Its funds were not very impressive in quantity but underneath that shell there were
Auditing shall be performed by a certified public accountant not in the government service. The
billions of pesos in a multiplicity of companies. The PNOC the empty shell under a presidential
Administration may, however, conduct annual audits of the fiscal operations of the district to be
decree was covered by the jurisdiction of the Commission on Audit, but the billions of pesos
performed by an auditor retained by the Administration. Expenses incurred in connection
invested in different corporations underneath it were exempted from the coverage of the
therewith shall be borne equally by the water district concerned and the Administration.[35]
Commission on Audit.
(Emphasis supplied)

Another example is the United Coconut Planters Bank. The Commission on Audit has
Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for
determined that the coconut levy is a form of taxation; and that, therefore, these funds attributed
that matter, from auditing LWDs. Petitioner asserts that this is the import of the second sentence
to the shares of 1,400,000 coconut farmers are, in effect, public funds. And that was, I think, the
of Section 20 of PD 198 when it states that [A]uditing shall be performed by a certified public
basis of the PCGG in undertaking that last major sequestration of up to 94 percent of all the
accountant not in the government service.[36]
shares in the United Coconut Planters Bank. The charter of the UCPB, through a presidential
decree, exempted it from the jurisdiction of the Commission on Audit, it being a private
organization.

PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude
GOCCs like LWDs from COAs audit jurisdiction. Section 3, Article IX-C of the Constitution
outlaws any scheme or devise to escape COAs audit jurisdiction, thus:
So these are the fetuses of future abuse that we are slaying right here with this additional
section.

Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any
guise whatever, or any investment of public funds, from the jurisdiction of the Commission on
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING
Audit. (Emphasis supplied)
ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR
ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION
ON AUDIT.

27
THE PRESIDENT: May we know the position of the Committee on the proposed amendment of
Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we will
accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new amendment.
THE PRESIDENT: Commissioner de Castro is recognized.
MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople.
Is that not included in Section 2 (1) where it states: (c) government-owned or controlled
corporations and their subsidiaries? So that if these government-owned and controlled
corporations and their subsidiaries are subjected to the audit of the COA, any law exempting
certain government corporations or subsidiaries will be already unconstitutional.
So I believe, Madam President, that the proposed amendment is unnecessary.
MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the
point raised by Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the
past, because the same provision was in the 1973 Constitution and yet somehow a law or a
decree was passed where certain institutions were exempted from audit. We are just reaffirming,
emphasizing, the role of the Commission on Audit so that this problem will never arise in the
future.[37]
There is an irreconcilable conflict between the second sentence of Section 20 of PD 198
prohibiting COA auditors from auditing LWDs and Sections 2(1) and 3, Article IX-D of the
Constitution vesting in COA the power to audit all GOCCs. We rule that the second sentence of
Section 20 of PD 198 is unconstitutional since it violates Sections 2(1) and 3, Article IX-D of the
Constitution.
On the Legality of COAs
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit services violate the
prohibition in Section 18 of RA 6758,[38] which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. In
order to preserve the independence and integrity of the Commission on Audit (COA), its officials
and employees are prohibited from receiving salaries, honoraria, bonuses, allowances or other
emoluments from any government entity, local government unit, government-owned or
controlled corporations, and government financial institutions, except those compensation paid
directly by COA out of its appropriations and contributions.
Government entities, including government-owned or controlled corporations including financial
institutions and local government units are hereby prohibited from assessing or billing other
government entities, including government-owned or controlled corporations including financial
institutions or local government units for services rendered by its officials and employees as part
of their regular functions for purposes of paying additional compensation to said officials and
employees. (Emphasis supplied)
Claiming that Section 18 is absolute and leaves no doubt,[39] petitioner asks COA to discontinue
its practice of charging auditing fees to LWDs since such practice allegedly violates the law.
28
 and other operating expenses, depreciation on capital and equipment and out-of-pocket
expenses. In respect to the allowances and fringe benefits granted by the GOCCs to the COA
personnel assigned to the formers auditing units, the same shall be directly defrayed by COA
Petitioners claim has no basis.
from its own appropriations x x x. [41]

Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from
COA may charge GOCCs actual audit cost but GOCCs must pay the same directly to COA and
any government entity except compensation paid directly by COA out of its appropriations and
not to COA auditors. Petitioner has not alleged that COA charges LWDs auditing fees in excess
contributions. Thus, RA 6758 itself recognizes an exception to the statutory ban on COA
of COAs actual audit cost. Neither has petitioner alleged that the auditing fees are paid by LWDs
personnel receiving compensation from GOCCs. In Tejada v. Domingo,[40] the Court declared:
directly to individual COA auditors. Thus, petitioners contention must fail.

There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen
WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the
further the policy x x x to preserve the independence and integrity of the COA, by explicitly
Decision dated 30 January 2001 denying petitioners Motion for Reconsideration are AFFIRMED.
PROHIBITING: (1) COA officials and employees from receiving salaries, honoraria, bonuses,
The second sentence of Section 20 of Presidential Decree No. 198 is declared VOID for being
allowances or other emoluments from any government entity, local government unit, GOCCs
inconsistent with Sections 2 (1) and 3, Article IX-D of the Constitution. No costs.
and government financial institutions, except such compensation paid directly by the COA out of
its appropriations and contributions, and (2) government entities, including GOCCs, government
financial institutions and local government units from assessing or billing other government
entities, GOCCs, government financial institutions or local government units for services
rendered by the latters officials and employees as part of their regular functions for purposes of
SO ORDERED.
paying additional compensation to said officials and employees.

Republic of the Philippines

xxx

SUPREME COURT

Manila
The first aspect of the strategy is directed to the COA itself, while the second aspect is
addressed directly against the GOCCs and government financial institutions. Under the first,
COA personnel assigned to auditing units of GOCCs or government financial institutions can
receive only such salaries, allowances or fringe benefits paid directly by the COA out of its
appropriations and contributions. The contributions referred to are the cost of audit services
earlier mentioned which cannot include the extra emoluments or benefits now claimed by EN BANC
petitioners. The COA is further barred from assessing or billing GOCCs and government
financial institutions for services rendered by its personnel as part of their regular audit functions
for purposes of paying additional compensation to such personnel. x x x. (Emphasis supplied)
G.R. No. L-22619 December 2, 1924

In Tejada, the Court explained the meaning of the word contributions in Section 18 of RA 6758,
which allows COA to charge GOCCs the cost of its audit services:
NATIONAL COAL COMPANY, plaintiff-appellee,

vs.

x x x the contributions from the GOCCs are limited to the cost of audit services which are based
on the actual cost of the audit function in the corporation concerned plus a reasonable rate to THE COLLECTOR OF INTERNAL REVENUE, defendant-appellant.
cover overhead expenses. The actual audit cost shall include personnel services, maintenance

29
Attorney-General Villa-Real for appellant. I. The court below erred in holding that section 15 of Act No. 2719 does not refer to coal
lands owned by persons and corporations.
Perfecto J. Salas Rodriguez for appellee.

II. The court below erred in holding that the plaintiff was not subject to the tax prescribed
in section 1496 of the Administrative Code.

The question confronting us in this appeal is whether the plaintiff is subject to the taxes under
JOHNSON, J.:
section 15 of Act No. 2719, or to the specific taxes under section 1496 of the Administrative
Code.

This action was brought in the Court of First Instance of the City of Manila on the 17th day of
July, 1923, for the purpose of recovering the sum of P12,044.68, alleged to have been paid
The plaintiff corporation was created on the 10th day of March, 1917, by Act No. 2705, for the
under protest by the plaintiff company to the defendant, as specific tax on 24,089.3 tons of coal.
purpose of developing the coal industry in the Philippine Island, in harmony with the general plan
Said company is a corporation created by Act No. 2705 of the Philippine Legislature for the
of the Government to encourage the development of the natural resources of the country, and to
purpose of developing the coal industry in the Philippine Islands and is actually engaged in coal
provided facilities therefor. By said Act, the company was granted the general powers of a
mining on reserved lands belonging to the Government. It claimed exemption from taxes under
corporation "and such other powers as may be necessary to enable it to prosecute the business
the provision of sections 14 and 15 of Act No. 2719, and prayed for a judgment ordering the
of developing coal deposits in the Philippine Island and of mining, extracting, transporting and
defendant to refund to the plaintiff said sum of P12,044.68, with legal interest from the date of
selling the coal contained in said deposits." (Sec. 2, Act No. 2705.) By the same law (Act No.
the presentation of the complaint, and costs against the defendant.
2705) the Government of the Philippine Islands is made the majority stockholder, evidently in
order to insure proper government supervision and control, and thus to place the Government in
a position to render all possible encouragement, assistance and help in the prosecution and
furtherance of the company's business.
The defendant answered denying generally and specifically all the material allegations of the
complaint, except the legal existence and personality of the plaintiff. As a special defense, the
defendant alleged (a) that the sum of P12,044.68 was paid by the plaintiff without protests, and
(b) that said sum was due and owing from the plaintiff to the Government of the Philippine
On May 14, 1917, two months after the passage of Act No. 2705, creating the National Coal
Islands under the provisions of section 1496 of the Administrative Code and prayed that the
Company, the Philippine Legislature passed Act No. 2719 "to provide for the leasing and
complaint be dismissed, with costs against the plaintiff.
development of coal lands in the Philippine Islands." On October 18, 1917, upon petition of the
National Coal Company, the Governor-General, by Proclamation No. 39, withdrew "from
settlement, entry, sale or other disposition, all coal-bearing public lands within the Province of
Zamboanga, Department of Mindanao and Sulu, and the Island of Polillo, Province of Tayabas."
Almost immediately after the issuance of said proclamation the National Coal Company took
Upon the issue thus presented, the case was brought on for trial. After a consideration of the possession of the coal lands within the said reservation, with an area of about 400 hectares,
evidence adduced by both parties, the Honorable Pedro Conception, judge, held that the words without any further formality, contract or lease. Of the 30,000 shares of stock issued by the
"lands owned by any person, etc.," in section 15 of Act No. 2719 should be understood to mean company, the Government of the Philippine Islands is the owner of 29,809 shares, that is, of 99
"lands held in lease or usufruct," in harmony with the other provision of said Act; that the coal
1/3 per centum of the whole capital stock.
lands possessed by the plaintiff, belonging to the Government, fell within the provisions of
section 15 of Act No. 2719; and that a tax of P0.04 per ton of 1,016 kilos on each ton of coal
extracted therefrom, as provided in said section, was the only tax which should be collected from
the plaintiff; and sentenced the defendant to refund to the plaintiff the sum of P11,081.11 which
is the difference between the amount collected under section 1496 of the Administrative Code
If we understand the theory of the plaintiff-appellee, it is, that it claims to be the owner of the land
and the amount which should have been collected under the provisions of said section 15 of Act
from which it has mined the coal in question and is therefore subject to the provisions of section
No. 2719. From that sentence the defendant appealed, and now makes the following
15 of Act No. 2719 and not to the provisions of the section 1496 of the Administrative Code. That
assignments of error:
contention of the plaintiff leads us to an examination of the evidence upon the question of the
ownership of the land from which the coal in question was mined. Was the plaintiff the owner of

30
the land from which the coal in question was mined? If the evidence shows the affirmative, then as provided in this Act," thereby giving a clear indication that no "coal-bearing lands of the public
the judgment should be affirmed. If the evidence shows that the land does not belong to the domain" had been disposed of by virtue of said proclamation.
plaintiff, then the judgment should be reversed, unless the plaintiff's rights fall under section 3 of
said Act.

Neither is there any provision in Act No. 2705 creating the National Coal Company, nor in the
amendments thereof found in Act No. 2822, which authorizes the National Coal Company to
The only witness presented by the plaintiff upon the question of the ownership of the land in enter upon any of the reserved coal lands without first having obtained permission from the
question was Mr. Dalmacio Costas, who stated that he was a member of the board of directors Secretary of Agriculture and Natural Resources.lawphi1.net
of the plaintiff corporation; that the plaintiff corporation took possession of the land in question by
virtue of the proclamation of the Governor-General, known as Proclamation No. 39 of the year
1917; that no document had been issued in favor of the plaintiff corporation; that said
corporation had received no permission from the Secretary of Agriculture and Natural
Resources; that it took possession of said lands covering an area of about 400 hectares, from The following propositions are fully sustained by the facts and the law:
which the coal in question was mined, solely, by virtue of said proclamation (Exhibit B, No. 39).

(1) The National Coal Company is an ordinary private corporation organized under Act
Said proclamation (Exhibit B) was issued by Francis Burton Harrison, then Governor-General, No. 2705, and has no greater powers nor privileges than the ordinary private corporation, except
on the 18th day of October, 1917, and provided: "Pursuant to the provision of section 71 of Act those mentioned, perhaps, in section 10 of Act No. 2719, and they do not change the situation
No. 926, I hereby withdraw from settlement, entry, sale, or other disposition, all coal-bearing here.
public lands within the Province of Zamboanga, Department of Mindanao and Sulu, and the
Island of Polillo, Province of Tayabas." It will be noted that said proclamation only provided that
all coal-bearing public lands within said province and island should be withdrawn from
settlement, entry, sale, or other disposition. There is nothing in said proclamation which
authorizes the plaintiff or any other person to enter upon said reversations and to mine coal, and (2) It mined on public lands between the month of July, 1920, and the months of March,
no provision of law has been called to our attention, by virtue of which the plaintiff was entitled to 1922, 24,089.3 tons of coal.
enter upon any of the lands so reserved by said proclamation without first obtaining permission
therefor.

(3) Upon demand of the Collector of Internal Revenue it paid a tax of P0.50 a ton, as
taxes under the provisions of article 1946 of the Administrative Code on the 15th day of
The plaintiff is a private corporation. The mere fact that the Government happens to the majority December, 1922.
stockholder does not make it a public corporation. Act No. 2705, as amended by Act No. 2822,
makes it subject to all of the provisions of the Corporation Law, in so far as they are not
inconsistent with said Act (No. 2705). No provisions of Act No. 2705 are found to be inconsistent
with the provisions of the Corporation Law. As a private corporation, it has no greater rights,
powers or privileges than any other corporation which might be organized for the same purpose (4) It is admitted that it is neither the owner nor the lessee of the lands upon which said
under the Corporation Law, and certainly it was not the intention of the Legislature to give it a coal was mined.
preference or right or privilege over other legitimate private corporations in the mining of coal.
While it is true that said proclamation No. 39 withdrew "from settlement, entry, sale, or other
disposition of coal-bearing public lands within the Province of Zamboanga . . . and the Island of
Polillo," it made no provision for the occupation and operation by the plaintiff, to the exclusion of
other persons or corporations who might, under proper permission, enter upon the operate coal (5) The proclamation of Francis Burton Harrison, Governor-General, of the 18th day of
mines. October, 1917, by authority of section 1 of Act No. 926, withdrawing from settlement, entry, sale,
or other dispositon all coal-bearing public lands within the Province of Zamboanga and the
Island of Polillo, was not a reservation for the benefit of the National Coal Company, but for any
person or corporation of the Philippine Islands or of the United States.

On the 14th day of May, 1917, and before the issuance of said proclamation, the Legislature of
the Philippine Island in "an Act for the leasing and development of coal lands in the Philippine
Islands" (Act No. 2719), made liberal provision. Section 1 of said Act provides: "Coal-bearing
lands of the public domain in the Philippine Island shall not be disposed of in any manner except

31
(6) That the National Coal Company entered upon said land and mined said coal, so far persons, firms, associations, or corporation mentioned therein are holders or lessees of coal
as the record shows, without any lease or other authority from either the Secretary of Agriculture lands only, it is difficult to understand why the internal revenue duty and tax in said section was
and Natural Resources or any person having the power to grant a leave or authority. made different from the obligations mentioned in section 3 of said Act, imposed upon lessees or
holders.

From all of the foregoing facts we find that the issue is well defined between the plaintiff and the
defendant. The plaintiff contends that it was liable only to pay the internal revenue and other From all of the foregoing, it seems to be made plain that the plaintiff is neither a lessee nor an
fees and taxes provided for under section 15 of Act No. 2719; while the defendant contends, owner of coal-bearing lands, and is, therefore, not subject to any other provisions of Act No.
under the facts of record, the plaintiff is obliged to pay the internal revenue duty provided for in 2719. But, is the plaintiff subject to the provisions of section 1496 of the Administrative Code?
section 1496 of the Administrative Code. That being the issue, an examination of the provisions
of Act No. 2719 becomes necessary.

An examination of said Act (No. 2719) discloses the following facts important for consideration
here:
First. All "coal-bearing lands of the public domain in the Philippine Islands shall not be disposed
of in any manner except as provided in this Act." Second. Provisions for leasing by the Secretary
of Agriculture and Natural Resources of "unreserved, unappropriated coal-bearing public lands,"
and the obligation to the Government which shall be imposed by said Secretary upon the
lessee.lawphi1.net
Section 1496 of the Administrative Code provides that "on all coal and coke there shall be
collected, per metric ton, fifty centavos." Said section (1496) is a part of article, 6 which provides
for specific taxes. Said article provides for a specific internal revenue tax upon all things
manufactured or produced in the Philippine Islands for domestic sale or consumption, and upon
things imported from the United States or foreign countries. It having been demonstrated that the
plaintiff has produced coal in the Philippine Islands and is not a lessee or owner of the land from
which the coal was produced, we are clearly of the opinion, and so hold, that it is subject to pay
the internal revenue tax under the provisions of section 1496 of the Administrative Code, and is
not subject to the payment of the internal revenue tax under section 15 of Act No. 2719, nor to
any other provisions of said Act.

Therefore, the judgment appealed from is hereby revoked, and the defendant is hereby relieved
from all responsibility under the complaint. And, without any finding as to costs, it is so ordered.

Third. The internal revenue duty and tax which must be paid upon coal-bearing lands owned by
Republic of the Philippines
any person, firm, association or corporation.

SUPREME COURT

Manila
To repeat, it will be noted, first, that Act No. 2719 provides an internal revenue duty and tax upon
unreserved, unappropriated coal-bearing public lands which may be leased by the Secretary of
Agriculture and Natural Resources; and, second, that said Act (No. 2719) provides an internal
revenue duty and tax imposed upon any person, firm, association or corporation, who may be
the owner of "coal-bearing lands." A reading of said Act clearly shows that the tax imposed
FIRST DIVISION
thereby is imposed upon two classes of persons only lessees and owners.

G.R. No. 72807 September 9, 1991

The lower court had some trouble in determining what was the correct interpretation of section
15 of said Act, by reason of what he believed to be some difference in the interpretation of the
language used in Spanish and English. While there is some ground for confusion in the use of
the language in Spanish and English, we are persuaded, considering all the provisions of said
Act, that said section 15 has reference only to persons, firms, associations or corporations which
had already, prior to the existence of said Act, become the owners of coal lands. Section 15 MARILAO WATER CONSUMERS ASSOCIATION, INC., petitioners,
cannot certainty refer to "holders or lessees of coal lands' for the reason that practically all of the
other provisions of said Act has reference to lessees or holders. If section 15 means that the vs.

32
INTERMEDIATE APPELLATE COURT, MUNICIPALITY OF MARILAO, BULACAN,
SANGGUNIANG BAYAN, MARILAO, BULACAN, and MARILAO WATER DISTRICT,
respondents.
Magtanggol C. Gunigundo for petitioner.
Prospero A. Crescini for Marilao Water District.
NARVASA, J.:p
Involved in this appeal is the determination of which triburial has jurisdiction over the dissolution
of a water district organized and operating as a quasi-public corporation under the provisions of
Presidential Decree No. 198, as amended; 1 the Regional Trial Court, or the Securities &
Exchange Commission.
PD 198 authorizes the formation, lays down the powers and functions, and governs the
operation of water districts throughout the country; it is "the source of authorization and power to
form and maintain a (water) district." Once formed, it says, a district is subject to its provisions
and is not under the jurisdiction of any political subdivision. 2
Under PD 198, water districts may be created by the different local legislative bodies by the
passage of a resolution to this effect, subject to the terms of the decree. The primary function of
these water districts is to sell water to residents within their territory, under such schedules of
rates and charges as may be determined by their boards. 3 They shall manage, administer,
operate and maintain all watersheds within their territorial boundaries, safeguard and protect the
use of the waters therein, supervise and control structures within their service areas, and prohibit
any person from selling or otherwise disposing of water for public purposes within their service
areas where district facilities are available to provide such service. 4
The decree specifies the terms under which water districts may be formed and operate. It
prescribes, particularly
a) the name by which a water district shad be known, which shall be contained in the enabling
resolution, and shall include the name of the city, municipality, or province, or region thereof,
served by said system, followed by the words, 'Water District;' 5
b) the number and qualifications of the members of the boards of directors, with the date of
expiration of term of office for each; 6 the manner of their selection and initial appointment by the
head of the local political subdivision; 7 their terms of office (which shall be in staggered periods
of two, four and six years); 8 the manner of filling up vacancies in the board; 9 the compensation
and liabilities of members of the board. 10 The resolution shall contain a "statement that the
district may only be dissolved on the grounds and under the conditions set forth in Section 44" of
the law, but nothing in the resolution of formation, the decree adds, "shall state or infer that the
local legislative body has the power to dissolve, alter or affect the district beyond that specifically
provided for in this Act." 11
The juridical entities thus created and organized under PD 198 are considered quasi-public
corporations, performing public services and supplying public wants. They are authorized not
only to "exercise all the powers which are expressly granted" by said decree, and those "which
are necessarily implied from or incidental to" said powers, but also "the power of eminent
domain, the exercise .. (of which) shall however be subject to review by the Administration"
(LWUA). In addition to the powers granted in, and subject to such restrictions imposed under,
the Act, they may also exercise the powers, rights and privileges given to private corporations
under existing laws. 12
The decree also established a government corporation attached to the Office of the President,
known as the Local Water Utilities Administration (LWUA) 13 to function primarily as "a
specialized lending institution for the promotion development and financing of local water
utilities." It has the following specific powers and duties; 14
(1) prescribe minimum standards and regulations in order to assure acceptable standards
of construction materials and supplies, maintenance, operation, personnel training, accounting
and fiscal practices for local water utilities;
(2) furnish technical assistance and personnel training programs for local water utilities;
33
(3) monitor and evaluate local water standards; and
(4) effect systems integration, joint investment and operations, district annexation and
deannexation whenever economically warranted.
It was pursuant to the foregoing rules and norms that the Marilao Water District was formed by
Resolution of the Sangguniang Bayan of the Municipality of Marilao dated September 18, 1982,
which resolution was thereafter forwarded to the LWUA and "duly filed" by it on October 4, 1982
after ascertaining that it conformed to the requirements of the law. 15
The claim was thereafter made that the creation of the Marilao Water District in the manner
aforestated was defective and illegal. The claim was made by a non-stock, non-profit corporation
known as the Marilao Water Consumers Association, Inc., in a petition dated December 12,
1983 filed with the Regional Trial Court at Malolos, Bulacan. Impleaded as respondents were the
Marilao Water District, as well as the Municipality of Marilao, Bulacan; its Sangguniang Bayan;
and Mayor Nicanor V. GUILLERMO. The petition prayed for the dissolution of the water district
on the basis chiefly of the following allegations, to wit:
1) there had been no real, but only a "farcical" public hearing prior to the creation of the
Water District;
2) not only was the waterworks system turned over to the Water District without
compensation. but a subsidy was illegally authorized for it;
3) the Water District was being run with "negligence, apathy, indifference and
mismanagement," and was not providing adequate and efficient service to the community, but
this notwithstanding, the consumers were being billed in full and threatened with disconnection
for failure to pay bills on time; in fact, one of the consumers who complained had his water
service cut off;
4) the consumers were consequently "forced to organize themselves into a corporation
last October 3, 1983 ... for the purpose of demanding adequate and sufficient supply of water
and efficient management of the waterworks in Marilao, Bulacan. 16
Acting on the complaint, particularly on the application for temporary restraining order and
preliminary injunction set out therein, the Trial Court issued an Order on December 22, 1983
setting the application for preliminary hearing, requiring the respondents to answer the petition
and restraining them until further orders from collecting any water bill, disconnecting any water
service, transferring any property of the waterworks, or disbursing any amount in favor of any
person. The order was modified on January 6, 1984 to allow the respondents to pay the district's
outstanding obligations to Meralco, by way of exception to the restraining order.
On January 13, 1984 the Marilao Water District filed its Answer with Compulsory Counterclaim,
denying the material allegations of the petition and asserting as affirmative defenses (a) the
Court's lack of jurisdiction of the subject matter, and (b) the failure of the petition to state a cause
of action. The answer alleged that the matter of the water district's dissolution fell under the
original and exclusive jurisdiction of the Securities & Exchange Commission (SEC); and the
matter of the propriety of water rates, within the primary administrative jurisdiction of the LWUA
and the quasi-judicial jurisdiction of the National Water Resources Council. On the same date,
Marilao Water District filed a motion for admission of its third-party complaint against the officers
and directors of the petitioner corporation, it being claimed that they had instigated the filing of
the petition simply because one of them was a political adversary of the respondent Mayor.
The other respondents also filed their answer through the Provincial Fiscal of Bulacan, setting up
the same affirmative defense of lack of jurisdiction on the part of the Trial Court; and failure of
the petition to state a cause of action since it admitted that it was by resolution of the Marilao
Sangguniang Bayan that the Marilao Water District was constituted.
The petitioner the Marilao Consumers Association filed a reply, and an answer to the
counterclaim, on January 26, 1984. It averred that since the Marilao Water District had not been
organized under the Corporation Code, the SEC had no jurisdiction over a proceeding for its
dissolution; and that under Section 45 of PD 198, the proceeding to determine if the dissolution
of the water district is for the best interest of the people, is within the competence of a regular
court of justice, and neither the LWUA nor the National Water Resources Council is competent
to take cognizance of the matter of dissolution of the water district and recovery of its
waterworks system, or the exorbitant rates imposed by it. The Consumers Association also
opposed admission of the third-party complaint on the ground that its individual officers are not
personally amenable to suit for acts of the corporation, 17 which has a personality distinct from
theirs.
The Trial Court found for the respondents. It dismissed the Consumers Association's suit by
Order handed down on June 8, 1984 which pertinently reads as follows:
34
After a consideration of the arguments raised by the herein parties, the Court is more inclined to
take the position of the respondents that the Securities and Exchange Commission has the
exclusive and original jurisdiction over this case.
WHEREFORE, the instant petition, the third-party complaint, and the compulsory counterclaim
filed herein are hereby DISMISSED, for lack of jurisdiction.
Its motion for reconsideration having been denied, by Order dated September 20, 1984, the
Consumers Association filed with this Court a petition for review on certiorari, which was
docketed as G.R. No. 68742. The case was however referred to the Intermediate Appellate
Court by this Court's Second Division, in a Resolution dated November 19, 1984, where it was
docketed as AC-G.R. S.P. No. 04862.
But there in the Intermediate Appellate Court, the Consumers Association's cause also met with
failure. The Appellate Court, in its Decision promulgated on September 10, 1985, ruled that its
cause could not prosper because
1) it had availed of the wrong remedy, i.e., the special civil action of certiorari; the Order
of June 8, 1984 being a final order in the sense that it "left nothing else to be done in the case
the proper remedy was appeal under Rule 41 of the Rules of Court and not a certiorari suit
under Rule 65; and
2) even if the certiorari action be treated as an appeal, it was 14 unerringly clear that the
controversy ... falls within the competence of the SEC in virtue of P.D. 902-A 18 Which provides
that said agency "shall have original and exclusive jurisdiction to hear and decide cases
involving:
a) xxx xxx xxx
b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively;
and between such corporation, partnership or association and the state insofar as it concerns
their individual franchise or right to exist as such entity ...
The Appellate Court subsequently denied the petitioner's motion for reconsideration, by
Resolution dated November 4, 1985. Hence, the petition for review on certiorari at bar, in which
reversal of the Appellate Tribunal's decision is sought, the petitioner insisting that the remedy
resorted to by it was correct but misunderstood by the I.A.C. and that the law does indeed vest
exclusive jurisdiction over the subject matter of the case in the Regional Trial Court, not the
Securities and Exchange Commission.
Turning first to the adjective issue, it is quite evident that the Order of the Trial Court of June 8,
1984, dismissing the action of the Consumers Association, is really a final order; it finally
disposed of the proceeding and left nothing more to be done by the Court on the merits. Now,
the firmly settled principle is that the remedy against such a final order is the ordinary remedy of
an appeal, either solely on questions of law in which case the appeal may be taken only to
the Supreme Court or questions of fact and law in which event the appeal should be
brought to the Court of Appeals. The extraordinary remedy of a special civil action of certiorari or
prohibition is not the appropriate recourse because precisely, one of the conditions for availing of
it is that there should be "no appeal, nor any plain, speedy and adequate remedy in the ordinary
course of law. 19 A resort to the latter instead of the former would ordinarily be fatal, unless it
should appear in a given case that appeal would otherwise be an inefficacious or inadequate
remedy. 20
In holding that Marilao Water District had resorted to the wrong remedy against the Trial Court's
order dismissing its suit, i.e., the special civil action of certiorari, instead of an appeal, the
Intermediate Appellate Court quite overlooked the fact, not seriously disputed by the Marilao
Water District and its co-respondents, that the former had in fact availed of the remedy of appeal
by certiorari under Rule 45 of the Rules of Court, as required by paragraph 25 of the Interim
Rules & Guidelines of this Court, implementing Batas Pambansa Bilang 129; that before doing
so, it had first asked for and been granted an extension of thirty (30) days within which to file a
petition for review on certiorari; but that subsequently, by Resolution of this Court's Second
Division dated November 19, 1984, the case was referred to the Intermediate Appellate Court,
evidently because it was felt that certain factual issues had yet to be determined. In any case, all
things considered, the Court is not prepared to have the case at bar finally determined on this
procedural issue.
The juridical entities known as water districts created by PD 198, although considered as quasi-
public corporations and authorized to exercise the powers, rights and privileges given to private
corporations under existing laws 21 are entirely distinct from corporations organized under the
Corporation Code, PD 902-A, as amended. The Corporation Code has nothing whatever to do
with their formation and organization, all the terms and conditions for their organization and
operation being particularly spelled out in PD 198. The resolutions creating them, their charters,
in other words, are filed not with the Securities and Exchange Commission but with the LWUA. It
is these resolutions qua charters, and not articles of incorporation drawn up under the
Corporation Code, which set forth the name of the water districts, the number of their directors,
the manner of their selection and replacement, their powers, etc. The SEC which is charged with
enforcement of the Corporation Code as regards corporations, partnerships and associations
formed or operating under its provisions, has no power of supervision or control over the
35
activities of water districts. More particularly, the SEC has no power of oversight over such
activities of water districts as selling water, fuling the rates and charges therefor 22 or the
management, administration, operation and maintenance of watersheds within their territorial
boundaries, or the safeguarding and protection of the use of the waters therein, or the
supervision and control of structures within the service areas of the district, and the prohibition of
any person from selling or otherwise disposing of water for public purposes within their service
areas where district facilities are available to provide such service. 23 That function of
supervision or control over water districts is entrusted to the Local Water Utilities Administration.
24 Consequently, as regards the activities of water districts just mentioned, the SEC obviously
can have no claim to any expertise.
The "Provincial Water Utilities Act of 1973" has a specific provision governing dissolution of
water districts created thereunder This is Section 45 of PD 198 25 reading as follows:
SEC. 45. Dissolution. A district may be dissolved by resolution of its board of directors filed in
the manner of filing the resolution forming the district: Provided, however, That prior to the
adoption of any such resolution: (1) another public entity has acquired the assets of the district
and has assumed all obligations and liabilities attached thereto; (2) all bondholders and other
creditors have been notified and they consent to said transfer and dissolution; and (3) a court of
competent jurisdiction has found that said transfer and dissolution are in the best interest of the
public.
Under this provision, it is the LWUA which is the administrative body involved in the voluntary
dissolution of a water district; it is with it that the resolution of dissolution is filed, not the
Securities and Exchange Commission. And this provision is evidently quite distinct and different
from those on dissolution of corporations "formed or organized under the provisions of xx (the
Corporation) Code" set out in Sections 117 to 121, inclusive, of said Code, under which
dissolution may be voluntary (by vote of the stockholders or members), generally effected by the
filing of the corresponding resolution with the Securities and Exchange Commission, or
involuntary, commenced by the filing of a verified complaint also with the SEC.
All these argue against conceding jurisdiction in the Securities and Exchange Commission over
proceedings for the dissolution of water districts. For although described as quasipublic
corporations, and granted the same powers as private corporations, water districts are not really
corporations. They have no incorporators, stockholders or members, who have the right to vote
for directors, or amend the articles of incorporation or by-laws, or pass resolutions, or otherwise
perform such other acts as are authorized to stockholders or members of corporations by the
Corporation Code. In a word, there can be no such thing as a relation of corporation and
stockholders or members in a water district for the simple reason that in the latter there are no
stockholders or members. Between the water district and those who are recipients of its water
services there exists not the relationship of corporation-and-stockholder, but that of a service
agency and users or customers. There can therefore be no such thing in a water district as
"intra-corporate or partnership relations, between and among stockholders, members or
associates (or) between any or all of them and the corporation, partnership or association of
which they are stockholders, members or associates, respectively," within the contemplation of
Section 5 of the Corporation Code so as to bring controversies involving them within the
competence and cognizance of the SEC.
There can be even less debate about the fact that the SEC has no jurisdiction over the co-
respondents of the Marilao Water District the Municipality of Marilao, its Sangguniang Bayan
and its Mayor who are accused of a "conspiracy" with the water district in respect of the
anomalies described in the Consumer Associations' petition. 26
The controversy, therefore, between the Consumers Association, on the one hand, and Marilao
District and its co-respondents, on the other, is not within the jurisdiction of the SEC.
In their answer with counterclaim in the proceedings a quo, the respondents advocated the
theory that the case falls within the jurisdiction of the LWUA and/or the National Water
Resources Council.
The LWUA does not appear to have any adjudicatory functions. It is, as already pointed out,
"primarily a specialized lending institution for the promotion, development and financing of local
water utilities, 27 with power to prescribe minimum standards and regulations regarding
maintenance, operation, personnel training, accounting and fiscal practices for local water
utilities, to furnish technical assistance and personnel training programs therefor; monitor and
evaluate local water standards; and effect systems integration, joint investment and operations,
district annexation and deannexation whenever economically warranted. 28 The LWUA has
quasi-judicial power only as regards rates or charges fixed by water districts, which it may review
to establish compliance with the provisions of PD 198, without prejudice to appeal being taken
therefrom by a water concessionaire to the National Water Resources Council whose decision
thereon shall be appealable to the Office of the President. 29 The rates or charges established
by respondent Marilao Water District do not appear to be at issue in the controversy at bar.
The National Water Resources Council, on the other hand, is conferred "original jurisdiction over
all disputes relating to appropriation, utilization, exploitation, development, control, conservation
and protection of waters within the meaning and context of the provisions of ..." (the Code by
which said Council was created, Presidential Decree No. 1067, otherwise known as the Water
Code of the Philippines); 30 and its decision on water rights controversies may be appealed to
the Court of First Instance of the province where the subject matter of the controversy is
situated. 31 It also has authority to review questions of annexations and deannexations (addition
to or exclusion from the district of territory). Again it does not appear that the case at bar is a
water rights controversy or one involving annexation or deannexation.
36
What essentially is sought by the Consumers Association is the dissolution of the Marilao Water
District, on the ground that its formation was illegal and invalid; the waterworks system had been
turned over to it without compensation and a subsidy illegally authorized for it; and the Water
District was being run with "negligence, apathy, indifference and mismanagement," and was not
providing adequate and efficient service to the community. 32
Now, as already above stated, the dissolution of a water district is governed by Section 45 of PD
198, as amended, stating that it "may be dissolved by resolution of its board of directors filed in
the manner of filing the resolution forming the district," subject to enumerated pre-requisites. 33
The procedure for dissolution thus consists of the following steps:
1) the initiation by the board of directors of the water district motu proprio or at the
relation of an interested party, of proceedings for the dissolution of the water district, including:
a) the ascertainment by said board that
1) another public entity has acquired the assets of the district and has assumed all
obligations and liabilities attached thereto; and
2) all bondholders and other creditors have been notified and consent to said transfer
and dissolution;
b) the commencement by the water district in a court of competent jurisdiction of a proceeding to
obtain a declaration that "said transfer and dissolution are in the best interest of the public;
2) after compliance with the foregoing requisites, the adoption by the board of directors
of the water district of a resolution dissolving the water district and its submission to the
Sangguniang Bayan concerned for approval;
3) submission of the resolution of the Sangguniang Bayan dissolving the water district to
the head of the local government concerned for approval, and ultimately to the LWUA for final
approval and filing.
The Consumer Association's action therefore is, in fine, in the nature of a mandamus suit,
seeking to compel the board of directors of the Marilao Water District, and its alleged co-
conspirators, the Sangguniang Bayan and the Mayor of Marilao to go through the process above
described for the dissolution of the water district. In this sense, and indeed, taking account of the
nature of the proceedings for dissolution just described, it seems plain that the case does not fall
within the limited jurisdiction of the SEC., but within the general jurisdiction of Regional Trial
Courts.
WHEREFORE, the Decision of the Intermediate Appellate Court of September 10, 1985
affirming that of the Regional Trial Court of June 8, 1984 is REVERSED and SET ASIDE, and
the case is remanded to the Regional Trial Court for further proceedings and adjudication in
accordance with law. No costs.
SO ORDERED.
[G.R. No. 141735. June 8, 2005]
SAPPARI K. SAWADJAAN, petitioner, vs. THE HONORABLE COURT OF APPEALS, THE
CIVIL SERVICE COMMISSION and AL-AMANAH INVESTMENT BANK OF THE PHILIPPINES,
respondents.
DECISION
CHICO-NAZARIO, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court of the Decision[1] of the Court
of Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil
Service Commission (CSC) dated 11 August 1994 and 11 April 1995, respectively, which in turn
affirmed Resolution No. 2309 of the Board of Directors of the Al-Amanah Islamic Investment
Bank of the Philippines (AIIBP) dated 13 December 1993, finding petitioner guilty of Dishonesty
in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the
Service and dismissing him from the service, and its Resolution[2] of 15 December 1999
dismissing petitioners Motion for Reconsideration.
The records show that petitioner Sappari K. Sawadjaan was among the first employees of the
Philippine Amanah Bank (PAB) when it was created by virtue of Presidential Decree No. 264 on
02 August 1973. He rose through the ranks, working his way up from his initial designation as
37
security guard, to settling clerk, bookkeeper, credit investigator, project analyst, appraiser/
inspector, and eventually, loans analyst.[3]
In February 1988, while still designated as appraiser/investigator, Sawadjaan was assigned to
inspect the properties offered as collaterals by Compressed Air Machineries and Equipment
Corporation (CAMEC) for a credit line of Five Million Pesos (P5,000,000.00). The properties
consisted of two parcels of land covered by Transfer Certificates of Title (TCTs) No. N-130671
and No. C-52576. On the basis of his Inspection and Appraisal Report,[4] the PAB granted the
loan application. When the loan matured on 17 May 1989, CAMEC requested an extension of
180 days, but was granted only 120 days to repay the loan.[5]
In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July 1989.[6]
In January 1990, Congress passed Republic Act 6848 creating the AIIBP and repealing P.D. No.
264 (which created the PAB). All assets, liabilities and capital accounts of the PAB were
transferred to the AIIBP,[7] and the existing personnel of the PAB were to continue to discharge
their functions unless discharged.[8] In the ensuing reorganization, Sawadjaan was among the
personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension, the bank, now referred to as the AIIBP,
discovered that TCT No. N-130671 was spurious, the property described therein non-existent,
and that the property covered by TCT No. C-52576 had a prior existing mortgage in favor of one
Divina Pablico.
On 08 June 1993, the Board of Directors of the AIIBP created an Investigating Committee to
look into the CAMEC transaction, which had cost the bank Six Million Pesos (P6,000,000.00) in
losses.[9] The subsequent events, as found and decided upon by the Court of Appeals,[10] are
as follows:
On 18 June 1993, petitioner received a memorandum from Islamic Bank [AIIBP] Chairman
Roberto F. De Ocampo charging him with Dishonesty in the Performance of Official Duties
and/or Conduct Prejudicial to the Best Interest of the Service and preventively suspending him.
In his memorandum dated 8 September 1993, petitioner informed the Investigating Committee
that he could not submit himself to the jurisdiction of the Committee because of its alleged
partiality. For his failure to appear before the hearing set on 17 September 1993, after the
hearing of 13 September 1993 was postponed due to the Manifestation of even date filed by
petitioner, the Investigating Committee declared petitioner in default and the prosecution was
allowed to present its evidence ex parte.
On 08 December 1993, the Investigating Committee rendered a decision, the pertinent portions
of which reads as follows:
In view of respondent SAWADJAANS abject failure to perform his duties and assigned tasks as
appraiser/inspector, which resulted to the prejudice and substantial damage to the Bank,
respondent should be held liable therefore. At this juncture, however, the Investigating
Committee is of the considered opinion that he could not be held liable for the administrative
offense of dishonesty considering the fact that no evidence was adduced to show that he
profited or benefited from being remiss in the performance of his duties. The record is bereft of
any evidence which would show that he received any amount in consideration for his non-
performance of his official duties.
This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to
perform his official duties resulted to the prejudice and substantial damage to the Islamic Bank
for which he should be held liable for the administrative offense of CONDUCT PREJUDICIAL TO
THE BEST INTEREST OF THE SERVICE.
Premises considered, the Investigating Committee recommends that respondent SAPPARI
SAWADJAAN be meted the penalty of SIX (6) MONTHS and ONE (1) DAY SUSPENSION from
office in accordance with the Civil Service Commissions Memorandum Circular No. 30, Series of
1989.
On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP] adopted Resolution
No. 2309 finding petitioner guilty of Dishonesty in the Performance of Official Duties and/or
Conduct Prejudicial to the Best Interest of the Service and imposing the penalty of Dismissal
from the Service.
On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted the Resolution
No. 2332 on 20 February 1994 reducing the penalty imposed on petitioner from dismissal to
suspension for a period of six (6) months and one (1) day.
38
On 29 March 1994, petitioner filed a notice of appeal to the Merit System Protection Board
(MSPB).
On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the appeal for lack of
merit and affirming Resolution No. 2309 dated 13 December 1993 of the Board of Directors of
Islamic Bank.
On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying petitioners Motion for
Reconsideration.
On 16 June 1995, the instant petition was filed with the Honorable Supreme Court on the
following assignment of errors:
I. Public respondent Al-Amanah Islamic Investment Bank of the Philippines has committed a
grave abuse of discretion amounting to excess or lack of jurisdiction when it initiated and
conducted administrative investigation without a validly promulgated rules of procedure in the
adjudication of administrative cases at the Islamic Bank.
II. Public respondent Civil Service Commission has committed a grave abuse of discretion
amounting to lack of jurisdiction when it prematurely and falsely assumed jurisdiction of the case
not appealed to it, but to the Merit System Protection Board.
III. Both the Islamic Bank and the Civil Service Commission erred in finding petitioner Sawadjaan
of having deliberately reporting false information and therefore guilty of Dishonesty and Conduct
Prejudicial to the Best Interest of the Service and penalized with dismissal from the service.
On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to this Honorable
Court pursuant to Revised Administrative Circular No. 1-95, which took effect on 01 June 1995.
We do not find merit [in] the petition.
Anent the first assignment of error, a reading of the records would reveal that petitioner raises
for the first time the alleged failure of the Islamic Bank [AIIBP] to promulgate rules of procedure
governing the adjudication and disposition of administrative cases involving its personnel. It is a
rule that issues not properly brought and ventilated below may not be raised for the first time on
appeal, save in exceptional circumstances (Casolita, Sr. v. Court of Appeals, 275 SCRA 257)
none of which, however, obtain in this case. Granting arguendo that the issue is of such
exceptional character that the Court may take cognizance of the same, still, it must fail. Section
26 of Republic Act No. 6848 (1990) provides:
Section 26. Powers of the Board. The Board of Directors shall have the broadest powers to
manage the Islamic Bank, x x x The Board shall adopt policy guidelines necessary to carry out
effectively the provisions of this Charter as well as internal rules and regulations necessary for
the conduct of its Islamic banking business and all matters related to personnel organization,
office functions and salary administration. (Italics ours)
On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled Prescribing Procedure
and Sanctions to Ensure Speedy Disposition of Administrative Cases directs, all administrative
agencies to adopt and include in their respective Rules of Procedure provisions designed to
abbreviate administrative proceedings.
The above two (2) provisions relied upon by petitioner does not require the Islamic Bank [AIIBP]
to promulgate rules of procedure before administrative discipline may be imposed upon its
employees. The internal rules of procedures ordained to be adopted by the Board refers to that
necessary for the conduct of its Islamic banking business and all matters related to personnel
organization, office functions and salary administration. On the contrary, Section 26 of RA 6848
gives the Board of Directors of the Islamic Bank the broadest powers to manage the Islamic
Bank. This grant of broad powers would be an idle ceremony if it would be powerless to
discipline its employees.
The second assignment of error must likewise fail. The issue is raised for the first time via this
petition for certiorari. Petitioner submitted himself to the jurisdiction of the CSC. Although he
could have raised the alleged lack of jurisdiction in his Motion for Reconsideration of Resolution
No. 94-4483 of the CSC, he did not do so. By filing the Motion for Reconsideration, he is
estopped from denying the CSCs jurisdiction over him, as it is settled rule that a party who asks
for an affirmative relief cannot later on impugn the action of the tribunal as without jurisdiction
after an adverse result was meted to him. Although jurisdiction over the subject matter of a case
may be objected to at any stage of the proceedings even on appeal, this particular rule,
however, means that jurisdictional issues in a case can be raised only during the proceedings in
said case and during the appeal of said case (Aragon v. Court of Appeals, 270 SCRA 603). The
case at bar is a petition [for] certiorari and not an appeal.
39
But even on the merits the argument must falter. Item No. 1 of CSC Resolution No. 93-2387
dated 29 June 1993, provides:
Decisions in administrative cases involving officials and employees of the civil service
appealable to the Commission pursuant to Section 47 of Book V of the Code (i.e., Administrative
Code of 1987) including personnel actions such as contested appointments shall now be
appealed directly to the Commission and not to the MSPB.
In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was categorically held:
. . . The functions of the MSPB relating to the determination of administrative disciplinary cases
were, in other words, re-allocated to the Commission itself.
Be that as it may, (i)t is hornbook doctrine that in order `(t)o ascertain whether a court (in this
case, administrative agency) has jurisdiction or not, the provisions of the law should be inquired
into. Furthermore, `the jurisdiction of the court must appear clearly from the statute law or it will
not be held to exist.(Azarcon v. Sandiganbayan, 268 SCRA 747, 757) From the provision of law
abovecited, the Civil Service Commission clearly has jurisdiction over the Administrative Case
against petitioner.
Anent the third assignment of error, we likewise do not find merit in petitioners proposition that
he should not be liable, as in the first place, he was not qualified to perform the functions of
appraiser/investigator because he lacked the necessary training and expertise, and therefore,
should not have been found dishonest by the Board of Directors of Islamic Bank [AIIBP] and the
CSC. Petitioner himself admits that the position of appraiser/inspector is one of the most serious
[and] sensitive job in the banking operations. He should have been aware that accepting such a
designation, he is obliged to perform the task at hand by the exercise of more than ordinary
prudence. As appraiser/investigator, he is expected, among others, to check the authenticity of
the documents presented by the borrower by comparing them with the originals on file with the
proper government office. He should have made it sure that the technical descriptions in the
location plan on file with the Bureau of Lands of Marikina, jibe with that indicated in the TCT of
the collateral offered by CAMEC, and that the mortgage in favor of the Islamic Bank was duly
annotated at the back of the copy of the TCT kept by the Register of Deeds of Marikina. This,
petitioner failed to do, for which he must be held liable. That he did not profit from his false report
is of no moment. Neither the fact that it was not deliberate or willful, detracts from the nature of
the act as dishonest. What is apparent is he stated something to be a fact, when he really was
not sure that it was so.
WHEREFORE, above premises considered, the instant Petition is DISMISSED, and the assailed
Resolutions of the Civil Service Commission are hereby AFFIRMED.
On 24 March 1999, Sawadjaans counsel notified the court a quo of his change of address,[11]
but apparently neglected to notify his client of this fact. Thus, on 23 July 1999, Sawadjaan, by
himself, filed a Motion for New Trial[12] in the Court of Appeals based on the following grounds:
fraud, accident, mistake or excusable negligence and newly discovered evidence. He claimed
that he had recently discovered that at the time his employment was terminated, the AIIBP had
not yet adopted its corporate by-laws. He attached a Certification[13] by the Securities and
Exchange Commission (SEC) that it was only on 27 May 1992 that the AIIBP submitted its draft
by-laws to the SEC, and that its registration was being held in abeyance pending certain
corrections being made thereon. Sawadjaan argued that since the AIIBP failed to file its by-laws
within 60 days from the passage of Rep. Act No. 6848, as required by Sec. 51 of the said law,
the bank and its stockholders had already forfeited its franchise or charter, including its license
to exist and operate as a corporation,[14] and thus no longer have the legal standing and
personality to initiate an administrative case.
Sawadjaans counsel subsequently adopted his motion, but requested that it be treated as a
motion for reconsideration.[15] This motion was denied by the court a quo in its Resolution of 15
December 1999.[16]
Still disheartened, Sawadjaan filed the present petition for certiorari under Rule 65 of the Rules
of Court challenging the above Decision and Resolution of the Court of Appeals on the ground
that the court a quo erred: i) in ignoring the facts and evidences that the alleged Islamic Bank
has no valid by-laws; ii) in ignoring the facts and evidences that the Islamic Bank lost its juridical
personality as a corporation on 16 April 1990; iii) in ignoring the facts and evidences that the
alleged Islamic Bank and its alleged Board of Directors have no jurisdiction to act in the manner
they did in the absence of a valid by-laws; iv) in not correcting the acts of the Civil Service
Commission who erroneously rendered the assailed Resolutions No. 94-4483 and No. 95-2754
as a result of fraud, falsification and/or misrepresentations committed by Farouk A. Carpizo and
his group, including Roberto F. de Ocampo; v) in affirming an unconscionably harsh and/or
excessive penalty; and vi) in failing to consider newly discovered evidence and reverse its
decision accordingly.
Subsequently, petitioner Sawadjaan filed an Ex-parte Urgent Motion for Additional Extension of
Time to File a Reply (to the Comments of Respondent Al-Amanah Investment Bank of the
Philippines),[17] Reply (to Respondents Consolidated Comment,)[18] and Reply (to the Alleged
Comments of Respondent Al-Amanah Islamic Bank of the Philippines).[19] On 13 October 2000,
he informed this Court that he had terminated his lawyers services, and, by himself, prepared
and filed the following: 1) Motion for New Trial;[20] 2) Motion to Declare Respondents in Default
and/or Having Waived their Rights to Interpose Objection to Petitioners Motion for New Trial;[21]
3) Ex-Parte Urgent Motions to Punish Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G.
Reyes, Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in Contempt of Court & to Inhibit
them from Appearing in this Case Until they Can Present Valid Evidence of Legal Authority;[22]
40
4) Opposition/Reply (to Respondent AIIBPs Alleged Comment);[23] 5) Ex-Parte Urgent Motion to
Punish Atty. Reynaldo A. Pineda for Contempt of Court and the Issuance of a Commitment
Order/Warrant for His Arrest;[24] 6) Reply/Opposition (To the Formal Notice of Withdrawal of
Undersigned Counsel as Legal Counsel for the Respondent Islamic Bank with Opposition to
Petitioners Motion to Punish Undersigned Counsel for Contempt of Court for the Issuance of a
Warrant of Arrest);[25] 7) Memorandum for Petitioner;[26] 8) Opposition to SolGens Motion for
Clarification with Motion for Default and/or Waiver of Respondents to File their
Memorandum;[27] 9) Motion for Contempt of Court and Inhibition/Disqualification with
Opposition to OGCCs Motion for Extension of Time to File Memorandum;[28] 10) Motion for
Enforcement (In Defense of the Rule of Law);[29] 11) Motion and Opposition (Motion to Punish
OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G. Reyes, Odilon A. Diaz and
Dominador R. Isidoro, Jr., for Contempt of Court and the Issuance of a Warrant for their Arrest;
and Opposition to their Alleged Manifestation and Motion Dated February 5, 2002);[30] 12)
Motion for Reconsideration of Item (a) of Resolution dated 5 February 2002 with Supplemental
Motion for Contempt of Court;[31] 13) Motion for Reconsideration of Portion of Resolution Dated
12 March 2002;[32] 14) Ex-Parte Urgent Motion for Extension of Time to File Reply
Memorandum (To: CSC and AIIBPs Memorandum);[33] 15) Reply Memorandum (To: CSCs
Memorandum) With Ex-Parte Urgent Motion for Additional Extension of time to File Reply
Memorandum (To: AIIBPs Memorandum);[34] and 16) Reply Memorandum (To: OGCCs
Memorandum for Respondent AIIBP).[35]
Petitioners efforts are unavailing, and we deny his petition for its procedural and substantive
flaws.
The general rule is that the remedy to obtain reversal or modification of the judgment on the
merits is appeal. This is true even if the error, or one of the errors, ascribed to the court
rendering the judgment is its lack of jurisdiction over the subject matter, or the exercise of power
in excess thereof, or grave abuse of discretion in the findings of fact or of law set out in the
decision.[36]
The records show that petitioners counsel received the Resolution of the Court of Appeals
denying his motion for reconsideration on 27 December 1999. The fifteen day reglamentary
period to appeal under Rule 45 of the Rules of Court therefore lapsed on 11 January 2000. On
23 February 2000, over a month after receipt of the resolution denying his motion for
reconsideration, the petitioner filed his petition for certiorari under Rule 65.
It is settled that a special civil action for certiorari will not lie as a substitute for the lost remedy of
appeal,[37] and though there are instances[38] where the extraordinary remedy of certiorari may
be resorted to despite the availability of an appeal,[39] we find no special reasons for making out
an exception in this case.
Even if we were to overlook this fact in the broader interests of justice and treat this as a special
civil action for certiorari under Rule 65,[40] the petition would nevertheless be dismissed for
failure of the petitioner to show grave abuse of discretion. Petitioners recurrent argument,
tenuous at its very best, is premised on the fact that since respondent AIIBP failed to file its by-
laws within the designated 60 days from the effectivity of Rep. Act No. 6848, all proceedings
initiated by AIIBP and all actions resulting therefrom are a patent nullity. Or, in his words, the
AIIBP and its officers and Board of Directors,
. . . [H]ave no legal authority nor jurisdiction to manage much less operate the Islamic Bank, file
administrative charges and investigate petitioner in the manner they did and allegedly passed
Board Resolution No. 2309 on December 13, 1993 which is null and void for lack of an (sic)
authorized and valid by-laws. The CIVIL SERVICE COMMISSION was therefore affirming,
erroneously, a null and void Resolution No. 2309 dated December 13, 1993 of the Board of
Directors of Al-Amanah Islamic Investment Bank of the Philippines in CSC Resolution No. 94-
4483 dated August 11, 1994. A motion for reconsideration thereof was denied by the CSC in its
Resolution No. 95-2754 dated April 11, 1995. Both acts/resolutions of the CSC are erroneous,
resulting from fraud, falsifications and misrepresentations of the alleged Chairman and CEO
Roberto F. de Ocampo and the alleged Director Farouk A. Carpizo and his group at the alleged
Islamic Bank.[41]
Nowhere in petitioners voluminous pleadings is there a showing that the court a quo committed
grave abuse of discretion amounting to lack or excess of jurisdiction reversible by a petition for
certiorari. Petitioner already raised the question of AIIBPs corporate existence and lack of
jurisdiction in his Motion for New Trial/Motion for Reconsideration of 27 May 1997 and was
denied by the Court of Appeals. Despite the volume of pleadings he has submitted thus far, he
has added nothing substantial to his arguments.
The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts business,
has shareholders, corporate officers, a board of directors, assets, and personnel. It is, in fact,
here represented by the Office of the Government Corporate Counsel, the principal law office of
government-owned corporations, one of which is respondent bank.[42] At the very least, by its
failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation[43]
whose right to exercise corporate powers may not be inquired into collaterally in any private suit
to which such corporations may be a party.[44]
Moreover, a corporation which has failed to file its by-laws within the prescribed period does not
ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate
of Registration of Corporations,[45] details the procedures and remedies that may be availed of
before an order of revocation can be issued. There is no showing that such a procedure has
been initiated in this case.
41
In any case, petitioners argument is irrelevant because this case is not a corporate controversy,
but a labor dispute; and it is an employers basic right to freely select or discharge its employees,
if only as a measure of self-protection against acts inimical to its interest.[46] Regardless of
whether AIIBP is a corporation, a partnership, a sole proprietorship, or a sari-sari store, it is an
undisputed fact that AIIBP is the petitioners employer. AIIBP chose to retain his services during
its reorganization, controlled the means and methods by which his work was to be performed,
paid his wages, and, eventually, terminated his services.[47]
And though he has had ample opportunity to do so, the petitioner has not alleged that he is
anything other than an employee of AIIBP. He has neither claimed, nor shown, that he is a
stockholder or an officer of the corporation. Having accepted employment from AIIBP, and
rendered his services to the said bank, received his salary, and accepted the promotion given
him, it is now too late in the day for petitioner to question its existence and its power to terminate
his services. 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.[48]
Even if we were to consider the facts behind petitioner Sawadjaans dismissal from service, we
would be hard pressed to find error in the decision of the AIIBP.
As appraiser/investigator, the petitioner was expected to conduct an ocular inspection of the
properties offered by CAMEC as collaterals and check the copies of the certificates of title
against those on file with the Registry of Deeds. Not only did he fail to conduct these routine
checks, but he also deliberately misrepresented in his appraisal report that after reviewing the
documents and conducting a site inspection, he found the CAMEC loan application to be in
order. Despite the number of pleadings he has filed, he has failed to offer an alternative
explanation for his actions.
When he was informed of the charges against him and directed to appear and present his side
on the matter, the petitioner sent instead a memorandum questioning the fairness and
impartiality of the members of the investigating committee and refusing to recognize their
jurisdiction over him. Nevertheless, the investigating committee rescheduled the hearing to give
the petitioner another chance, but he still refused to appear before it.
Thereafter, witnesses were presented, and a decision was rendered finding him guilty of
dishonesty and dismissing him from service. He sought a reconsideration of this decision and
the same committee whose impartiality he questioned reduced their recommended penalty to
suspension for six months and one day. The board of directors, however, opted to dismiss him
from service.
On appeal to the CSC, the Commission found that Sawadjaans failure to perform his official
duties greatly prejudiced the AIIBP, for which he should be held accountable. It held that:
. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the performance
of his duties as appraiser/inspector. Had respondent performed his duties as
appraiser/inspector, he could have easily noticed that the property located at Balintawak,
Caloocan City covered by TCT No. C-52576 and which is one of the properties offered as
collateral by CAMEC is encumbered to Divina Pablico. Had respondent reflected such fact in his
appraisal/inspection report on said property the ISLAMIC BANK would not have approved
CAMECs loan of P500,000.00 in 1987 and CAMECs P5 Million loan in 1988, respondent
knowing fully well the Banks policy of not accepting encumbered properties as collateral.
Respondent SAWADJAANs reprehensible act is further aggravated when he failed to check and
verify from the Registry of Deeds of Marikina the authenticity of the property located at Mayamot,
Antipolo, Rizal covered by TCT No. N-130671 and which is one of the properties offered as
collateral by CAMEC for its P5 Million loan in 1988. If he only visited and verified with the
Register of Deeds of Marikina the authenticity of TCT No. N-130671 he could have easily
discovered that TCT No. N-130671 is fake and the property described therein non-existent.
...
This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to
perform his official duties resulted to the prejudice and substantial damage to the ISLAMIC
BANK for which he should be held liable for the administrative offense of CONDUCT
PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.[49]
From the foregoing, we find that the CSC and the court a quo committed no grave abuse of
discretion when they sustained Sawadjaans dismissal from service. Grave abuse of discretion
implies such capricious and whimsical exercise of judgment as equivalent to lack of jurisdiction,
or, in other words, where the power is exercised in an arbitrary or despotic manner by reason of
passion or personal hostility, and it must be so patent and gross as to amount to an evasion of
positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of
law.[50] The records show that the respondents did none of these; they acted in accordance with
the law.
WHEREFORE, the petition is DISMISSED. The Decision of the Court of Appeals of 30 March
1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission, and
its Resolution of 15 December 1999 are hereby AFFIRMED. Costs against the petitioner.
42
 PEREZ,
SO ORDERED.
MENDOZA, and

EN BANC SERENO, JJ.

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,
PABLITO V. SANIDAD and
VELASCO, JR.,
ARNO V. SANIDAD,
LEONARDO-DE CASTRO,
Petitioners-in-Intervention.
BRION,
Promulgated:
PERALTA,

BERSAMIN,
June 28, 2011
DEL CASTILLO,
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
ABAD,

VILLARAMA, JR.,
43
DECISION
CARPIO, J.:
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
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 decision4 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.
44
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 On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to
PTIC shares bore due diligence, transparency and conformity with existing legal procedures; Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the
and (b) First Pacifics intended acquisition of the governments 111,415 PTIC shares resulting in Court granted the motion and noted the Petition-in-Intervention.
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. 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
Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public government owned assets in [PLDT], unquestionably a public utility, in violation of the nationality
bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of restrictions of the Philippine Constitution.
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 The Issue
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:
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.

If and when the sale is completed, First Pacifics equity in PLDT will go up from 30.7 percent to The Ruling of the Court
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 The petition is partly meritorious.
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 Petition for declaratory relief treated as petition for mandamus
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 x7
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
Petitioner raises the following issues: (1) whether the consummation of the then impending sale for declaratory relief,10 injunction, and annulment of sale are not embraced within the original
of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of a jurisdiction of the Supreme Court. On this ground alone, the petition could have been dismissed
public utility; (2) whether public respondents committed grave abuse of discretion in allowing the outright.
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
45
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 national economy,
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.
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 in Salvacion:
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
Petitioner has locus standi
46
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
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
47
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 patrimony28 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.
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 and Pangilinan 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. Nazareno stressed
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) mootness of 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.
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 Memorandum37 dated 24 September 2007, the OSG also
limits its discussion on the supposed procedural defects of the petition, i.e. lack of standing, lack
48
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.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial
ownership and the controlling interest.
xxxx
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 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. Bienvenido F. 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.
xxxx
49

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.
xxxx
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
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 Philippines42 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;
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,
50
Article XII of the Constitution refers only to shares of stock that can vote in the election of
directors.

MR. VILLEGAS. Yes.48

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 xxxx
interest of a corporation, to wit:
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

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. The portion accepted by the Committee is the deletion of the phrase voting
stock or controlling interest.

MR. VILLEGAS. That is right.

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. 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. Yes.

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to
Law Center who provided us a draft. The phrase that is contained here which we adopted from be owned by citizens.
the UP draft is 60 percent of voting stock.

MR. VILLEGAS. That is right.

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

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
MR. VILLEGAS. That is right. 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. 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. 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. VILLEGAS. Yes, that is the understanding of the Committee.

MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied)

MR. NOLLEDO. Therefore, we need additional Filipino capital?

51

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 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 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.
52
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 Incorporation52 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 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 SIP58 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 x corporations 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.
53
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 of P10.00
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 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 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
54
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.

55