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Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 108576 January 20, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP., respondents.

MARTINEZ, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of
Appeals (CA) 1 which affirmed the ruling of the Court of Tax Appeals (CTA) 2 that private respondent A.
Soriano Corporation's (hereinafter ANSCOR) redemption and exchange of the stocks of its foreign
stockholders cannot be considered as "essentially equivalent to a distribution of taxable dividends"
under, Section 83(b) of the 1939 Internal Revenue Act. 3

The undisputed facts are as follows:

Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the
corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into
10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the
family of Don Andres, who are all non-resident aliens. 4 In 1937, Don Andres subscribed to 4,963 shares
of the 5,000 shares originally issued. 5

On September 12, 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00 divided into
25,000 common shares with the same par value of the additional 15,000 shares, only 10,000 was issued
which were all subscribed by Don Andres, after the other stockholders waived in favor of the former their
pre-emptive rights to subscribe to the new issues. 6 This increased his subscription to 14,963 common
shares. 7 A month later, 8 Don Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr.,
as their initial investments in ANSCOR. 9 Both sons are foreigners. 10

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949
and December 20, 1963. 11 On December 30, 1964 Don Andres died. As of that date, the records revealed
that he has a total shareholdings of 185,154 shares 12 — 50,495 of which are original issues and the
balance of 134.659 shares as stock dividend declarations. 13 Correspondingly, one-half of that
shareholdings or 92,577 14 shares were transferred to his wife, Doña Carmen Soriano, as her conjugal
share. The other half formed part of his estate. 15

A day after Don Andres died, ANSCOR increased its capital stock to P20M 16 and in 1966 further
increased it to P30M. 17 In the same year (December 1966), stock dividends worth 46,290 and 46,287
shares were respectively received by the Don Andres estate 18 and Doña Carmen from ANSCOR. Hence,
increasing their accumulated shareholdings to 138,867 and 138,864 19 common shares each. 20

On December 28, 1967, Doña Carmen requested a ruling from the United States Internal Revenue Service
(IRS), inquiring if an exchange of common with preferred shares may be considered as a tax avoidance
scheme 21 under Section 367 of the 1954 U.S. Revenue Act. 22 By January 2, 1968, ANSCOR reclassified its
existing 300,000 common shares into 150,000 common and 150,000 preferred shares. 23

In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme
and not tax avoidance. 24 Consequently, 25 on March 31, 1968 Doña Carmen exchanged her whole
138,864 common shares for 138,860 of the newly reclassified preferred shares. The estate of Don Andres
in turn, exchanged 11,140 of its common shares, for the remaining 11,140 preferred shares, thus
reducing its (the estate) common shares to 127,727. 26

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the
Don Andres' estate. By November 1968, the Board further increased ANSCOR's capital stock to P75M
divided into 150,000 preferred shares and 600,000 common shares. 27 About a year later, ANSCOR again
redeemed 80,000 common shares from the Don Andres' estate, 28 further reducing the latter's common
shareholdings to 19,727. As stated in the Board Resolutions, ANSCOR's business purpose for both
redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the
company's foreign exchange remittances in case cash dividends are declared. 29

In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a report
proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and
54 of the 1939 Revenue Code, 30 for the year 1968 and the second quarter of 1969 based on the
transactions of exchange 31 and redemption of stocks. 31 The Bureau of Internal Revenue (BIR) made the
corresponding assessments despite the claim of ANSCOR that it availed of the tax amnesty under
Presidential Decree
(P.D.) 23 32 which were amended by P.D.'s 67 and 157. 33 However, petitioner ruled that the invoked
decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under which
ANSCOR was assessed. 34 ANSCOR's subsequent protest on the assessments was denied in 1983 by
petitioner. 35

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the
redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioner's ruling, after
finding sufficient evidence to overcome the prima facie correctness of the questioned assessments. 36 In a
petition for review the CA as mentioned, affirmed the ruling of the CTA. 37 Hence, this petition.

The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue
Act 38 which provides:

Sec. 83. Distribution of dividends or assets by corporations. —

(b) Stock dividends — A stock dividend representing the transfer of surplus to capital
account shall not be subject to tax. However, if a corporation cancels or redeems stock issued
as a dividend at such time and in such manner as to make the distribution and cancellation
or redemption, in whole or in part, essentially equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption or cancellation of the stock shall be
considered as taxable income to the extent it represents a distribution of earnings or profits
accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied)

Specifically, the issue is whether ANSCOR's redemption of stocks from its stockholder as well as
the exchange of common with preferred shares can be considered as "essentially equivalent to the
distribution of taxable dividend" making the proceeds thereof taxable under the provisions of the
above-quoted law.

Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section 83(b)
making the proceeds thereof taxable. It also argues that the Section applies to stock dividends which is
the bulk of stocks that ANSCOR redeemed. Further, petitioner claims that under the "net effect test," the
estate of Don Andres gained from the redemption. Accordingly, it was the duty of ANSCOR to withhold
the tax-at-source arising from the two transactions, pursuant to Section 53 and 54 of the 1939 Revenue
Act. 39

ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres estate or
from Doña Carmen based on the two transactions, because the same were done for legitimate business
purposes which are (a) to reduce its foreign exchange remittances in the event the company would
declare cash dividends, 40 and to (b) subsequently "filipinized" ownership of ANSCOR, as allegedly,
envisioned by Don Andres. 41 It likewise invoked the amnesty provisions of P.D. 67.

We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances of
each case.42 The findings of facts of a special court (CTA) exercising particular expertise on the subject of
tax, generally binds this Court, 43 considering that it is substantially similar to the findings of the CA
which is the final arbiter of questions of facts. 44 The issue in this case does not only deal with facts but
whether the law applies to a particular set of facts. Moreover, this Court is not necessarily bound by the
lower courts' conclusions of law drawn from such facts. 45

AMNESTY:

We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 46 provides:

1. In all cases of voluntary disclosures of previously untaxed income and/or wealth such as
earnings, receipts, gifts, bequests or any other acquisitions from any source whatsoever
which are taxable under the National Internal Revenue Code, as amended, realized here or
abroad by any taxpayer, natural or judicial; the collection of all internal revenue taxes
including the increments or penalties or account of non-payment as well as all civil,
criminal or administrative liabilities arising from or incident to such disclosures under the
National Internal Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt
Practices Act, the Revised Administrative Code, the Civil Service laws and regulations, laws
and regulations on Immigration and Deportation, or any other applicable law or
proclamation, are hereby condoned and, in lieu thereof, a tax of ten (10%) per centum on
such previously untaxed income or wealth, is hereby imposed, subject to the following
conditions: (conditions omitted) [Emphasis supplied].

The decree condones "the collection of all internal revenue taxes including the increments or
penalties or account of non-payment as well as all civil, criminal or administrative liable arising
from or incident to" (voluntary) disclosures under the NIRC of previously untaxed income and/or
wealth "realized here or abroad by any taxpayer, natural or juridical."

May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? An
income taxpayer covers all persons who derive taxable income. 47 ANSCOR was assessed by petitioner for
deficiency withholding tax under Section 53 and 54 of the 1939 Code. As such, it is being held liable in its
capacity as a withholding agent and not its personality as a taxpayer.

In the operation of the withholding tax system, the withholding agent is the payor, a separate entity
acting no more than an agent of the government for the collection of the tax 48 in order to ensure its
payments; 49 the payer is the taxpayer — he is the person subject to tax impose by law; 50 and the payee
is the taxing authority. 51 In other words, the withholding agent is merely a tax collector, not a taxpayer.
Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent)
liability is direct and independent from the taxpayer, 52 because the income tax is still impose on and due
from the latter. The agent is not liable for the tax as no wealth flowed into him — he earned no income.
The Tax Code only makes the agent personally liable for the tax 53 arising from the breach of its legal duty
to withhold as distinguish from its duty to pay tax since:

the government's cause of action against the withholding is not for the collection of income
tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code,
compliance with which is imposed on the withholding agent and not upon the taxpayer. 54

Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not protected by the
amnesty under the decree.

Codal provisions on withholding tax are mandatory and must be complied with by the withholding
agent. 55 The taxpayer should not answer for the non-performance by the withholding agent of its legal
duty to withhold unless there is collusion or bad faith. The former could not be deemed to have evaded
the tax had the withholding agent performed its duty. This could be the situation for which the amnesty
decree was intended. Thus, to curtail tax evasion and give tax evaders a chance to reform, 56 it was
deemed administratively feasible to grant tax amnesty in certain instances. In addition, a "tax amnesty,
much like a tax exemption, is never favored nor presumed in law and if granted by a statute, the term of
the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in
favor of the taxing authority.57 The rule on strictissimi juris equally applies. 58 So that, any doubt in the
application of an amnesty law/decree should be resolved in favor of the taxing authority.

Furthermore, ANSCOR's claim of amnesty cannot prosper. The implementing rules of P.D.
370 which expanded amnesty on previously untaxed income under P.D. 23 is very explicit,
to wit:

Sec. 4. Cases not covered by amnesty. — The following cases are not covered by the
amnesty subject of these regulations:

xxx xxx xxx

(2) Tax liabilities with or without assessments, on withholding tax at source provided
under Section 53 and 54 of the National Internal Revenue Code, as amended; 59
ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision
of law, it is not covered by the amnesty.

TAX ON STOCK DIVIDENDS

General Rule

Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code of 1928. 60 It
laid down the general rule known as the proportionate test 61 wherein stock dividends once issued form
part of the capital and, thus, subject to income tax.62 Specifically, the general rule states that:

A stock dividend representing the transfer of surplus to capital account shall not be subject
to tax.

Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under
the US Revenue Code, this provision originally referred to "stock dividends" only, without any exception.
Stock dividends, strictly speaking, represent capital and do not constitute income to its
recipient. 63 So that the mere issuance thereof is not yet subject to income tax 64 as they are nothing but
an "enrichment through increase in value of capital
investment." 65 As capital, the stock dividends postpone the realization of profits because the "fund
represented by the new stock has been transferred from surplus to capital and no longer available for
actual distribution." 66 Income in tax law is "an amount of money coming to a person within a specified
time, whether as payment for services, interest, or profit from investment." 67 It means cash or its
equivalent. 68 It is gain derived and severed from capital, 69 from labor or from both combined 70 — so
that to tax a stock dividend would be to tax a capital increase rather than the income. 71 In a loose sense,
stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to
income tax until that gain has been realized. Before the realization, stock dividends are nothing but a
representation of an interest in the corporate properties. 72 As capital, it is not yet subject to income tax.
It should be noted that capital and income are different. Capital is wealth or fund; whereas income is
profit or gain or the flow of wealth.73 The determining factor for the imposition of income tax is whether
any gain or profit was derived from a transaction. 74

The Exception

However, if a corporation cancels or redeems stock issued as a dividend at such time and in
such manner as to make the distribution and cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to the extent
it represents a distribution of earnings or profits accumulated after March first, nineteen
hundred and thirteen. (Emphasis supplied).

In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber 75 (that pro
rata stock dividends are not taxable income), the exempting clause above quoted was added because
provision corporation found a loophole in the original provision. They resorted to devious means to
circumvent the law and evade the tax. Corporate earnings would be distributed under the guise of its
initial capitalization by declaring the stock dividends previously issued and later redeem said dividends
by paying cash to the stockholder. This process of issuance-redemption amounts to a distribution of
taxable cash dividends which was lust delayed so as to escape the tax. It becomes a convenient technical
strategy to avoid the effects of taxation.

Thus, to plug the loophole — the exempting clause was added. It provides that the redemption or
cancellation of stock dividends, depending on the "time" and "manner" it was made, is essentially
equivalent to a distribution of taxable dividends," making the proceeds thereof "taxable income" "to the
extent it represents profits". The exception was designed to prevent the issuance and cancellation or
redemption of stock dividends, which is fundamentally not taxable, from being made use of as a device
for the actual distribution of cash dividends, which is taxable. 76Thus,

the provision had the obvious purpose of preventing a corporation from avoiding dividend
tax treatment by distributing earnings to its shareholders in two transactions — a pro
rata stock dividend followed by a pro rata redemption — that would have the same
economic consequences as a simple dividend. 77

Although redemption and cancellation are generally considered capital transactions, as such. they
are not subject to tax. However, it does not necessarily mean that a shareholder may not realize a
taxable gain from such transactions. 78 Simply put, depending on the circumstances, the proceeds
of redemption of stock dividends are essentially distribution of cash dividends, which when paid
becomes the absolute property of the stockholder. Thereafter, the latter becomes the exclusive
owner thereof and can exercise the freedom of choice. 79 Having realized gain from that
redemption, the income earner cannot escape income tax. 80

As qualified by the phrase "such time and in such manner," the exception was not intended to
characterize as taxable dividend every distribution of earnings arising from the redemption of stock
dividend. 81 So that, whether the amount distributed in the redemption should be treated as the
equivalent of a "taxable dividend" is a question of fact, 82 which is determinable on "the basis of the
particular facts of the transaction in question. 83 No decisive test can be used to determine the application
of the exemption under Section 83(b). The use of the words "such manner" and "essentially equivalent"
negative any idea that a weighted formula can resolve a crucial issue — Should the distribution be
treated as taxable dividend. 84 On this aspect, American courts developed certain recognized criteria,
which includes the following: 85

1) the presence or absence of real business purpose,

2) the amount of earnings and profits available for the declaration of a


regular dividends and the corporation's past record with respect to the
declaration of dividends,

3) the effect of the distribution, as compared with the declaration of regular


dividend,

4) the lapse of time between issuance and redemption, 86

5) the presence of a substantial surplus 87 and a generous supply of cash


which invites suspicion as does a meager policy in relation both to current
earnings and accumulated surplus, 88
REDEMPTION AND CANCELLATION

For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there is
redemption or cancellation; (b) the transaction involves stock dividends and (c) the "time and
manner" of the transaction makes it "essentially equivalent to a distribution of taxable dividends."
Of these, the most important is the third.

Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock 89 in exchange
for property, whether or not the acquired stock is cancelled, retired or held in the treasury. 90Essentially,
the corporation gets back some of its stock, distributes cash or property to the shareholder in payment
for the stock, and continues in business as before. The redemption of stock dividends previously issued is
used as a veil for the constructive distribution of cash dividends. In the instant case, there is no dispute
that ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000 and 80,000
common shares). But where did the shares redeemed come from? If its source is the original capital
subscriptions upon establishment of the corporation or from initial capital investment in an existing
enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec.
83(b) under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the
redeemed shares are from stock dividend declarations other than as initial capital investment, the
proceeds of the redemption is additional wealth, for it is not merely a return of capital but a gain thereon.

It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends.
Here, it is undisputed that at the time of the last redemption, the original common shares owned by the
estate were only 25,247.5 91 This means that from the total of 108,000 shares redeemed from the estate,
the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock dividends. Besides, in the
absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate
property, in whole or in part, is made out of corporate profits 92such as stock dividends. The capital
cannot be distributed in the form of redemption of stock dividends without violating the trust fund
doctrine — wherein the capital stock, property and other assets of the corporation are regarded as equity
in trust for the payment of the corporate creditors. 93 Once capital, it is always capital. 94 That doctrine
was intended for the protection of corporate creditors. 95

With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier.
The time alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine
taxability. It is a must to consider the factual circumstances as to the manner of both the issuance and the
redemption. The "time" element is a factor to show a device to evade tax and the scheme of cancelling or
redeeming the same shares is a method usually adopted to accomplish the end sought. 96 Was this
transaction used as a "continuing plan," "device" or "artifice" to evade payment of tax? It is necessary to
determine the "net effect" of the transaction between the shareholder-income taxpayer and the acquiring
(redeeming) corporation. 97 The "net effect" test is not evidence or testimony to be considered; it is
rather an inference to be drawn or a conclusion to be reached. 98 It is also important to know whether the
issuance of stock dividends was dictated by legitimate business reasons, the presence of which might
negate a tax evasion plan. 99

The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not
related, for the redemption to be considered a legitimate tax scheme. 100Redemption cannot be used as a
cloak to distribute corporate earnings. 101 Otherwise, the apparent intention to avoid tax becomes
doubtful as the intention to evade becomes manifest. It has been ruled that:
[A]n operation with no business or corporate purpose — is a mere devise which put on the
form of a corporate reorganization as a disguise for concealing its real character, and the
sole object and accomplishment of which was the consummation of a preconceived plan,
not to reorganize a business or any part of a business, but to transfer a parcel of corporate
shares to a stockholder. 102

Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if
the redeemed shares were issued with bona fide business purpose, 103which is judged after each and
every step of the transaction have been considered and the whole transaction does not amount to a tax
evasion scheme.

ANSCOR invoked two reasons to justify the redemptions — (1) the alleged "filipinization" program and
(2) the reduction of foreign exchange remittances in case cash dividends are declared. The Court is not
concerned with the wisdom of these purposes but on their relevance to the whole transaction which can
be inferred from the outcome thereof. Again, it is the "net effect rather than the motives and plans of the
taxpayer or his corporation" 104 that is the fundamental guide in administering Sec. 83(b). This tax
provision is aimed at the result. 105 It also applies even if at the time of the issuance of the stock dividend,
there was no intention to redeem it as a means of distributing profit or avoiding tax on dividends.106 The
existence of legitimate business purposes in support of the redemption of stock dividends is immaterial
in income taxation. It has no relevance in determining "dividend equivalence". 107 Such purposes may be
material only upon the issuance of the stock dividends. The test of taxability under the exempting clause,
when it provides "such time and manner" as would make the redemption "essentially equivalent to the
distribution of a taxable dividend", is whether the redemption resulted into a flow of wealth. If no wealth
is realized from the redemption, there may not be a dividend equivalence treatment. In the metaphor
of Eisner v. Macomber, income is not deemed "realize" until the fruit has fallen or been plucked from the
tree.

The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the
gain or profit is realized or received, actually or constructively, 108 and (3) it is not exempted by law or
treaty from income tax. Any business purpose as to why or how the income was earned by the taxpayer is
not a requirement. Income tax is assessed on income received from any property, activity or service that
produces the income because the Tax Code stands as an indifferent neutral party on the matter of where
income comes
from. 109

As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was
realized through the redemption of stock dividends. The redemption converts into money the stock
dividends which become a realized profit or gain and consequently, the stockholder's separate
property. 110 Profits derived from the capital invested cannot escape income tax. As realized income, the
proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence
of any business purpose for the redemption. Otherwise, to rule that the said proceeds are exempt from
income tax when the redemption is supported by legitimate business reasons would defeat the very
purpose of imposing tax on income. Such argument would open the door for income earners not to pay
tax so long as the person from whom the income was derived has legitimate business reasons. In other
words, the payment of tax under the exempting clause of Section 83(b) would be made to depend not on
the income of the taxpayer, but on the business purposes of a third party (the corporation herein) from
whom the income was earned. This is absurd, illogical and impractical considering that the Bureau of
Internal Revenue (BIR) would be pestered with instances in determining the legitimacy of business
reasons that every income earner may interposed. It is not administratively feasible and cannot therefore
be allowed.

The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed shares are the
equivalent of dividend only if the shares were not issued for genuine business purposes", 111 or the
"redeemed shares have been issued by a corporation bona fide" 112 bears no relevance in determining the
non-taxability of the proceeds of redemption ANSCOR, relying heavily and applying said cases, argued
that so long as the redemption is supported by valid corporate purposes the proceeds are not subject to
tax. 113 The adoption by the courts below 114 of such argument is misleading if not misplaced. A review of
the cited American cases shows that the presence or absence of "genuine business purposes" may be
material with respect to the issuance or declaration of stock dividends but not on its subsequent
redemption. The issuance and the redemption of stocks are two different transactions. Although the
existence of legitimate corporate purposes may justify a corporation's acquisition of its own shares under
Section 41 of the Corporation Code, 115 such purposes cannot excuse the stockholder from the effects of
taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion plan and
thus, without legitimate business reasons, the redemption becomes suspicious which exempting clause.
The substance of the whole transaction, not its form, usually controls the tax consequences. 116

The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax liability. First,
the alleged "filipinization" plan cannot be considered legitimate as it was not implemented until the BIR
started making assessments on the proceeds of the redemption. Such corporate plan was not stated in
nor supported by any Board Resolution but a mere afterthought interposed by the counsel of ANSCOR.
Being a separate entity, the corporation can act only through its Board of Directors. 117 The Board
Resolutions authorizing the redemptions state only one purpose — reduction of foreign exchange
remittances in case cash dividends are declared. Not even this purpose can be given credence. Records
show that despite the existence of enormous corporate profits no cash dividend was ever declared by
ANSCOR from 1945 until the BIR started making assessments in the early 1970's. Although a corporation
under certain exceptions, has the prerogative when to issue dividends, yet when no cash dividends was
issued for about three decades, this circumstance negates the legitimacy of ANSCOR's alleged purposes.
Moreover, to issue stock dividends is to increase the shareholdings of ANSCOR's foreign stockholders
contrary to its "filipinization" plan. This would also increase rather than reduce their need for foreign
exchange remittances in case of cash dividend declaration, considering that ANSCOR is a family
corporation where the majority shares at the time of redemptions were held by Don Andres' foreign
heirs.

Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid
excuse for the imposition of tax. Otherwise, the taxpayer's liability to pay income tax would be made to
depend upon a third person who did not earn the income being taxed. Furthermore, even if the said
purposes support the redemption and justify the issuance of stock dividends, the same has no bearing
whatsoever on the imposition of the tax herein assessed because the proceeds of the redemption are
deemed taxable dividends since it was shown that income was generated therefrom.

Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of the redeemed stock dividends
would be to impose on such stock an undisclosed lien and would be extremely unfair to intervening
purchase, i.e. those who buys the stock dividends after their issuance. 118 Such argument, however, bears
no relevance in this case as no intervening buyer is involved. And even if there is an intervening buyer, it
is necessary to look into the factual milieu of the case if income was realized from the transaction. Again,
we reiterate that the dividend equivalence test depends on such "time and manner" of the transaction
and its net effect. The undisclosed lien 119 may be unfair to a subsequent stock buyer who has no capital
interest in the company. But the unfairness may not be true to an original subscriber like Don Andres,
who holds stock dividends as gains from his investments. The subsequent buyer who buys stock
dividends is investing capital. It just so happen that what he bought is stock dividends. The effect of its
(stock dividends) redemption from that subsequent buyer is merely to return his capital subscription,
which is income if redeemed from the original subscriber.

After considering the manner and the circumstances by which the issuance and redemption of stock
dividends were made, there is no other conclusion but that the proceeds thereof are essentially
considered equivalent to a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it
is part of the "entire income" subject to tax under Section 22 in relation to Section 21 120 of the 1939
Code. Moreover, under Section 29(a) of said Code, dividends are included in "gross income". As income, it
is subject to income tax which is required to be withheld at source. The 1997 Tax Code may have altered
the situation but it does not change this disposition.

EXCHANGE OF COMMON WITH PREFERRED SHARES 121

Exchange is an act of taking or giving one thing for another involving 122 reciprocal transfer 123 and is
generally considered as a taxable transaction. The exchange of common stocks with preferred stocks, or
preferred for common or a combination of either for both, may not produce a recognized gain or loss, so
long as the provisions of Section 83(b) is not applicable. This is true in a trade between two (2) persons
as well as a trade between a stockholder and a corporation. In general, this trade must be parts of merger,
transfer to controlled corporation, corporate acquisitions or corporate reorganizations. No taxable gain
or loss may be recognized on exchange of property, stock or securities related to reorganizations. 124

Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and
preferred, and that parts of the common shares of the Don Andres estate and all of Doña Carmen's shares
were exchanged for the whole 150.000 preferred shares. Thereafter, both the Don Andres estate and
Doña Carmen remained as corporate subscribers except that their subscriptions now include preferred
shares. There was no change in their proportional interest after the exchange. There was no cash flow.
Both stocks had the same par value. Under the facts herein, any difference in their market value would be
immaterial at the time of exchange because no income is yet realized — it was a mere corporate paper
transaction. It would have been different, if the exchange transaction resulted into a flow of wealth, in
which case income tax may be imposed. 125

Reclassification of shares does not always bring any substantial alteration in the subscriber's
proportional interest. But the exchange is different — there would be a shifting of the balance of stock
features, like priority in dividend declarations or absence of voting rights. Yet neither the reclassification
nor exchange per se, yields realize income for tax purposes. A common stock represents the residual
ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without
extraordinary rights or privileges and entitles the shareholder to a pro rata division of
profits. 126Preferred stocks are those which entitle the shareholder to some priority on dividends and
asset distribution. 127

Both shares are part of the corporation's capital stock. Both stockholders are no different from ordinary
investors who take on the same investment risks. Preferred and common shareholders participate in the
same venture, willing to share in the profits and losses of the enterprise. 128 Moreover, under the doctrine
of equality of shares — all stocks issued by the corporation are presumed equal with the same privileges
and liabilities, provided that the Articles of Incorporation is silent on such differences. 129

In this case, the exchange of shares, without more, produces no realized income to the subscriber. There
is only a modification of the subscriber's rights and privileges — which is not a flow of wealth for tax
purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire interest
and not when there is still maintenance of proprietary interest. 130

WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that ANSCOR's
redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of
taxable dividends for which it is LIABLE for the withholding tax-at-source. The decision is AFFIRMED in
all other respects.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 183905 April 16, 2009

GOVERNMENT SERVICE, INSURANCE SYSTEM, Petitioner,


vs.
THE HON. COURT OF APPEALS, (8TH DIVISION), ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE
B. ALFONSO, JESUS F. FRANCISCO, CHRISTIAN S. MONSOD, ELPIDIO L. IBAÑEZ, and FRANCIS GILES
PUNO, Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 184275 April 16, 2009

SECURITIES AND EXCHANGE COMMISSION, COMMISSIONER JESUS ENRIQUE G. MARTINEZ IN HIS


CAPACITY AS OFFICER-IN-CHARGE OF THE SECURITIES AND EXCHANGE COMMISSION and HUBERT
G. GUEVARA IN HIS CAPACITY AS DIRECTOR OF THE COMPLIANCE AND ENFORCEMENT DEPT. OF
SECURITIES Petitioners,
vs.
ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE B. ALFONSO, JESUS F. FRANCISCO, CHRISTIAN S.
MONSOD, ELPIDIO L. IBAÑEZ, and FRANCIS GILES Respondents.

DECISION

TINGA, J.:

These are the undisputed facts.


The annual stockholders’ meeting (annual meeting) of the Manila Electric Company (Meralco) was
scheduled on 27 May 2008.1 In connection with the annual meeting, proxies2 were required to be
submitted on or before 17 May 2008, and the proxy validation was slated for five days later, or 22 May.3

In view of the resignation of Camilo Quiason,4 the position of corporate secretary of Meralco became
vacant.5 On 15 May 2008, the board of directors of Meralco designated Jose Vitug6 to act as corporate
secretary for the annual meeting.7 However, when the proxy validation began on 22 May, the proceedings
were presided over by respondent Anthony Rosete (Rosete), assistant corporate secretary and in-house
chief legal counsel of Meralco.8 Private respondents nonetheless argue that Rosete was the acting
corporate secretary of Meralco.9 Petitioner Government Service Insurance System (GSIS), a major
shareholder in Meralco, was distressed over the proxy validation proceedings, and the resulting
certification of proxies in favor of the Meralco management.10

On 23 May 2008, GSIS filed a complaint with the Regional Trial Court (RTC) of Pasay City, docketed as R-
PSY-08-05777-C4 seeking the declaration of certain proxies as invalid.11 Three days

later, on 26 May, GSIS filed a Notice with the RTC manifesting the dismissal of the complaint.12 On the
same day, GSIS filed an Urgent Petition13 with the Securities and Exchange Commission (SEC) seeking to
restrain Rosete from "recognizing, counting and tabulating, directly or indirectly, notionally or actually or
in whatever way, form, manner or means, or otherwise honoring the shares covered by" the proxies in
favor of respondents Manuel Lopez,14 Felipe Alfonso,15 Jesus Francisco,16 Oscar Lopez, Christian
Monsod,17 Elpidio Ibañez,18 Francisco Giles-Puno19 "or any officer representing MERALCO Management,"
and to annul and declare invalid said proxies.20 GSIS also prayed for the issuance of a Cease and Desist
Order (CDO) to restrain the use of said proxies during the annual meeting scheduled for the following
day.21 A CDO22 to that effect signed by SEC Commissioner Jesus Martinez was issued on 26 May 2008, the
same day the complaint was filed. During the annual meeting held on the following day, Rosete
announced that the meeting would push through, expressing the opinion that the CDO is null and void.23

On 28 May 2008, the SEC issued a Show Cause Order (SCO)24 against private respondents, ordering them
to appear before the Commission on 30 May 2008 and explain why they should not be cited in contempt.
On 29 May 2008, respondents filed a petition for certiorari with prohibition25 with the Court of Appeals,
praying that the CDO and the SCO be annulled. The petition was docketed as CA-G.R. SP No. 103692.

Many developments involving the Court of Appeals’ handling of CA-G.R. SP No. 103692 and the conduct of
several of its individual justices are recounted in our Resolution dated 9 September 2008 in A.M. No. 08-
8-11-CA (Re: Letter Of Presiding Justice Conrado M. Vasquez, Jr. On CA-G.R. SP No. 103692).26 On 23 July
2008, the Court of Appeals Eighth Division promulgated a decision in the case with the following
dispositive portion:

WHEREFORE, premises considered, the May 26, 2008 complaint filed by GSIS in the SEC is hereby
DISMISSED due to SEC’s lack of jurisdiction, due to forum shopping by respondent GSIS, and due to
splitting of causes of action by respondent GSIS. Consequently, the SEC’s undated cease and desist order
and the SEC’s May 28, 2008 show cause order are hereby DECLARED VOID AB INITIO and without legal
effect and their implementation are hereby permanently restrained.

The May 26, 2008 complaint filed by GSIS in the SEC is hereby barred from being considered, out of
equitable considerations, as an election contest in the RTC, because the prescriptive period of 15 days
from the May 27, 2008 Meralco election to file an election contest in the RTC had already run its course,
pursuant to Sec. 3, Rule 6 of the interim Rules of Procedure Governing Intra-Corporate Controversies
under R.A. No. 8799, due to deliberate act of GSIS in filing a complaint in the SEC instead of the RTC.

Let seventeen (17) copies of this decision be officially TRANSMITTED to the Office of the Chief Justice and
three (3) copies to the Office of the Court Administrator:

(1) for sanction by the Supreme Court against the "GSIS LAW OFFICE" for unauthorized practice of
law,

(2) for sanction and discipline by the Supreme Court of GSIS lawyers led by Atty. Estrella
Elamparo-Tayag, Atty. Marcial C. Pimentel, Atty. Enrique L. Tandan III, and other GSIS lawyers for
violation of Sec. 27 of Rule 138 of the Revised Rules of Court, pursuant to Santayana v. Alampay,
A.C. No. 5878, March 21, 2005 454 SCRA 1, and pursuant to Land Bank of the Philippines v.
Raymunda Martinez, G.R. No. 169008, August 14, 2007:

(a) for violating express provisions of law and defying public policy in deliberately
displacing the Office of the Government Corporate Counsel (OGCC) from its duty as the
exclusive lawyer of GSIS, a government owned and controlled corporation (GOCC), by
admittedly filing and defending cases as well as appearing as counsel for GSIS, without
authority to do so, the authority belonging exclusively to the OGCC;

(b) for violating the lawyer’s oath for failing in their duty to act as faithful officers of the
court by engaging in forum shopping;

(c) for violating express provisions of law most especially those on jurisdiction which are
mandatory; and

(d) for violating Sec. 3, Rule 2 of the 1997 Rules of Civil Procedure by deliberately splitting
causes of action in order to file multiple complaints: (i) in the RTC of Pasay City and (ii) in
the SEC, in order to ensure a favorable order.27

The promulgation of the said decision provoked a searing controversy, as detailed in our Resolution in
A.M. No. 08-8-11-CA. Nonetheless, the appellate court’s decision spawned three different actions
docketed with their own case numbers before this Court. One of them, G.R. No. 183933, was initiated by a
Motion for Extension of Time to File Petition for Review filed by the Office of the Solicitor General (OSG)
in behalf of the SEC, Commissioner Martinez in his capacity as officer-in-charge of the SEC, and Hubert
Guevarra in his capacity as Director of the Compliance and Enforcement Department of the
SEC.28 However, the OSG did not follow through with the filing of the petition for review adverted to;
thus, on 19 January 2009, the Court resolved to declare G.R. No. 183933 closed and terminated.29

The two remaining cases before us are docketed as G.R. No. 183905 and 184275. G.R. No. 183905
pertains to a petition for certiorari and prohibition filed by GSIS, against the Court of Appeals, and
respondents Rosete, Lopez, Alfonso, Francisco, Monsod, Ibañez and Puno, all of whom serve in different
corporate capacities with Meralco or First Philippines Holdings Corporation, a major stockholder of
Meralco and an affiliate of the Lopez Group of Companies. This petition seeks of the Court to declare the
23 July 2008 decision of the Court of Appeals null and void, affirm the SEC’s jurisdiction over the petition
filed before it by GSIS, and pronounce that the CDO and the SCO orders are valid. This petition was filed in
behalf of GSIS by the "GSIS Law Office;" it was signed by the Chief Legal Counsel and Assistant Legal
Counsel of GSIS, and three self-identified "Attorney[s]," presumably holding lawyer positions in GSIS.30

The OSG also filed the other petition, docketed as G.R. No. 184275. It identifies as its petitioners the SEC,
Commissioner Martinez in his capacity as OIC of the SEC, and Hubert Guevarra in his capacity as Director
of the Compliance and Enforcement Department of the SEC – the same petitioners in the aborted petition
for review initially docketed as G.R. No. 183933. Unlike what was adverted to in the motion for extension
filed by the same petitioners in G.R. No. 183933, the petition in G.R. No. 184275 is one for certiorari
under Rule 65 as indicated on page 3 thereof,31 and not a petition for review. Interestingly, save for the
first page which leaves the docket number blank, all 86 pages of this petition for certiorari carry a header
wrongly identifying the pleading as the non-existent petition for review under G.R. No. 183933. This
petition seeks the "reversal" of the assailed decision of the Court of Appeals, the recognition of the
jurisdiction of the SEC over the petition of GSIS, and the affirmation of the CDO and SCO.

II.

Private respondents seek the expunction of the petition filed by the SEC in G.R. No. 184275. We agree that
the petitioners therein, namely: the SEC, Commissioner Marquez and Guevarra, are not real parties-in-
interest to the dispute and thus bereft of capacity to file the petition. By way of simple illustration, to
argue otherwise is to say that the trial court judge, the National Labor Relations Commission, or any
quasi-judicial agency has the right to seek the review of an appellate court decision reversing any of their
rulings. That prospect, as any serious student of remedial law knows, is zero.

The Court, through the Resolution of the Third Division dated 2 September 2008, had resolved to treat
the petition in G.R. No. 184275 as a petition for review on certiorari, but withheld giving due course to
it.32 Under Section 1 of Rule 45, which governs appeals by certiorari, the right to file the appeal is
restricted to "a party," meaning that only the real parties-in-interest who litigated the petition for
certiorari before the Court of Appeals are entitled to appeal the same under Rule 45. The SEC and its two
officers may have been designated as respondents in the petition for certiorari filed with the Court of
Appeals, but under Section 5 of Rule 65 they are not entitled to be classified as real parties-in-interest.
Under the provision, the judge, court, quasi-judicial agency, tribunal, corporation, board, officer or person
to whom grave abuse of discretion is imputed (the SEC and its two officers in this case) are denominated
only as public respondents. The provision further states that "public respondents shall not appear in or
file an answer or comment to the petition or any pleading therein."33 Justice Regalado explains:

[R]ule 65 involves an original special civil action specifically directed against the person, court, agency or
party a quo which had committed not only a mistake of judgment but an error of jurisdiction, hence
should be made public respondents in that action brought to nullify their invalid acts. It shall, however be
the duty of the party litigant, whether in an appeal under Rule 45 or in a special civil action in Rule 65, to
defend in his behalf and the party whose adjudication is assailed, as he is the one interested in sustaining
the correctness of the disposition or the validity of the proceedings.

xxx The party interested in sustaining the proceedings in the lower court must be joined as a co-
respondent and he has the duty to defend in his own behalf and in behalf of the court which rendered the
questioned order. While there is nothing in the Rules that prohibit the presiding judge of the court
involved from filing his own answer and defending his questioned order, the Supreme Court has
reminded judges of the lower courts to refrain from doing so unless ordered by the Supreme
Court.34 The judicial norm or mode of conduct to be observed in trial and appellate courts is now
prescribed in the second paragraph of this section.

xxx

A person not a party to the proceedings in the trial court or in the Court of Appeals cannot
maintain an action for certiorari in the Supreme Court to have the judgment reviewed.35

Rule 65 does recognize that the SEC and its officers should have been designated as public respondents in
the petition for certiorari filed with the Court of Appeals. Yet their involvement in the instant petition is
not as original party-litigants, but as the quasi-judicial agency and officers exercising the adjudicative
functions over the dispute between the two contending factions within Meralco. From the onset, neither
the SEC nor Martinez or Guevarra has been considered as a real party-in-interest. Section 2, Rule 3 of the
1997 Rules of Civil Procedure provides that every action must be prosecuted or defended in the name of
the real party in interest, that is "the party who stands to be benefited or injured by the judgment in the
suit, or the party entitled to the avails of the suit." It would be facetious to assume that the SEC had any
real interest or stake in the intra-corporate dispute within Meralco.

We find our ruling in Hon. Santiago v. Court of Appeals36 quite apposite to the question at hand.
Petitioner therein, a trial court judge, had presided over an expropriation case. The litigants had arrived
at an amicable settlement, but the judge refused to approve the same, even declaring it invalid. The
matter was elevated to the Court of Appeals, which promptly reversed the trial court and approved the
amicable settlement. The judge took the extraordinary step of filing in his own behalf a petition for
review on certiorari with this Court, assailing the decision of the Court of Appeals which had reversed
him. In disallowing the judge’s petition, the Court explained:

While the issue in the Court of Appeals and that raised by petitioner now is whether the latter abused his
discretion in nullifying the deeds of sale and in proceeding with the expropriation proceeding, that
question is eclipsed by the concern of whether Judge Pedro T. Santiago may file this petition at all.

And the answer must be in the negative, Section 1 of Rule 45 allows a party to appeal by certiorari from a
judgment of the Court of Appeals by filing with this Court a petition for review on certiorari. But
petitioner judge was not a party either in the expropriation proceeding or in the certiorari proceeding in
the Court of Appeals. His being named as respondent in the Court of Appeals was merely to comply with
the rule that in original petitions for certiorari, the court or the judge, in his capacity as such, should be
named as party respondent because the question in such a proceeding is the jurisdiction of the court
itself (See Mayol v. Blanco, 61 Phil. 547 [19351, cited in Comments on the Rules of Court, Moran, Vol. II,
1979 ed., p. 471). "In special proceedings, the judge whose order is under attack is merely a nominal
party; wherefore, a judge in his official capacity, should not be made to appear as a party seeking reversal
of a decision that is unfavorable to the action taken by him. A decent regard for the judicial hierarchy bars
a judge from suing against the adverse opinion of a higher court,. . . ." (Alcasid v. Samson, 102 Phil. 785,
740 [1957])

ACCORDINGLY, this petition is DENIED for lack of legal capacity to sue by the petitioner.37

Justice Isagani Cruz added, in a Concurring Opinion in Santiago: "The judge is not an active combatant in
such proceeding and must leave it to the parties themselves to argue their respective positions and for
the appellate court to rule on the matter without his participation."38
Note that in Santiago, the Court recognized the good faith of the judge, who perceived the amicable
settlement "as a manifestly iniquitous and illegal contract."39 The SEC could have similarly felt in good
faith that the assailed Court of Appeals decision had unduly impaired its prerogatives or caused some
degree of hurt to it. Yet assuming that there are rights or prerogatives peculiar to the SEC itself that the
appellate court had countermanded, these can be vindicated in the petition for certiorari filed by GSIS,
whose legal capacity to challenge the Court of Appeals decision is without question. There simply is no
plausible reason for this Court to deviate from a time-honored rule that preserves the purity of our
judicial and quasi-judicial offices to accommodate the SEC’s distrust and resentment of the appellate
court’s decision. The expunction of the petition in G.R. No. 184275 is accordingly in order.

At this point, only one petition remains—the petition for certiorari filed by GSIS in G.R. No. 183905.
Casting off the uncritical and unimportant aspects, the two main issues for adjudication are as follows:
(1) whether the SEC has jurisdiction over the petition filed by GSIS against private respondents; and (2)
whether the CDO and SCO issued by the SEC are valid.

II.

It is our resolute inclination that this case, which raises interesting questions of law, be decided solely on
the merits, without regard to the personalities involved or the well-reported drama preceding the
petition. To that end, the Court has taken note of reports in the media that GSIS and the Lopez group have
taken positive steps to divest or significantly reduce their respective interests in Meralco.40 These are
developments that certainly ease the tension surrounding this case, not to mention reason enough for the
two groups to make an internal reassessment of their respective positions and interests in relation to this
case. Still, the key legal questions raised in the petition do not depend at all on the identity of any of the
parties, and would obtain the same denouement even if this case was lodged by unknowns as petitioners
against similarly obscure respondents.

With the objective to resolve the key questions of law raised in the petition, some of the issues raised
diminish as peripheral. For example, petitioners raise arguments tied to the behavior of individual
justices of the Court of Appeals, particularly former Justice Vicente Roxas, in relation to this case as it was
pending before the appellate court. The Court takes cognizance of our Resolution in A.M. No. 08-8-11-CA
dated 9 September 2008, which duly recited the various anomalous or unbecoming acts in relation to this
case performed by two of the justices who decided the case in behalf of the Court of Appeals—former
Justice Roxas (the ponente) and Justice Bienvenido L. Reyes (the Chairman of the 8th Division) – as well
as three other members of the Court of Appeals. At the same time, the consensus of the Court as it
deliberated on A.M. No. 08-8-11-CA was to reserve comment or conclusion on the assailed decision of the
Court of Appeals, in recognition of the reality that however stigmatized the actions and motivations of
Justice Roxas are, the decision is still the product of the Court of Appeals as a collegial judicial body, and
not of one or some rogue justices. The penalties levied by the Court on these appellate court justices, in
our estimation, redress the unwholesome acts which they had committed. At the same time, given the
jurisprudential importance of the questions of law raised in the petition, any result reached without
squarely addressing such questions would be unsatisfactory, perhaps derelict even.

III.

We now examine whether the SEC has jurisdiction over the petition filed by GSIS. To recall, SEC has
sought to enjoin the use and annul the validation, of the proxies issued in favor of several of the private
respondents, particularly in connection with the annual meeting.
A.

Jurisdiction is conferred by no other source but law. Both sides have relied upon provisions of Rep. Act
No. 8799, otherwise known as the Securities Regulation Code (SRC), its implementing rules (Amended
Implementing Rules or AIRR-SRC), and other related rules to support their competing contentions that
either the SEC or the trial courts has exclusive original jurisdiction over the dispute.

GSIS primarily anchors its argument on two correlated provisions of the SRC. These are Section 53.1 and
Section 20.1, which we cite:

SEC. 53. Investigations, Injunctions and Prosecution of Offenses . - 53.1. The Commission may, in its
discretion, make such investigations as it deems necessary to determine whether any person has
violated or is about to violate any provision of this Code, any rule, regulation or order thereunder,
or any rule of an Exchange, registered securities association, clearing agency, other self-
regulatory organization, and may require or permit any person to file with it a statement in writing,
under oath or otherwise, as the Commission shall determine, as to all facts and circumstances concerning
the matter to be investigated. The Commission may publish information concerning any such
violations, and to investigate any fact, condition, practice or matter which it may deem necessary
or proper to aid in the enforcement of the provisions of this Code, in the prescribing of rules and
regulations thereunder, or in securing information to serve as a basis for recommending further
legislation concerning the matters to which this Code relates: xxx (emphasis supplied)

SEC. 20. Proxy Solicitations. – 20.1. Proxies must be issued and proxy solicitation must be made in
accordance with rules and regulations to be issued by the Commission;

The argument, stripped of extravagance, is that since proxy solicitations following Section 20.1 have to be
made in accordance with rules and regulations issued by the SEC, it is the SEC under Section 53.1 that has
the jurisdiction to investigate alleged violations of the rules on proxy solicitations. The GSIS petition
invoked AIRR-AIRR-SRC Rule 20, otherwise known as "The Proxy Rule," which enumerates the
requirements as to form of proxy and delivery of information to security holders. According to GSIS, the
information statement Meralco had filed with the SEC in connection with the annual meeting did not
contain any proxy form as required under AIRR-SRC Rule 20.

On the other hand, private respondents argue before us that under Section 5.2 of the SRC, the SEC’s
jurisdiction over all cases enumerated in Section 5 of Presidential Decree No. 902-A was transferred to
the courts of general jurisdiction or the appropriate regional trial court. The two particular classes of
cases in the enumeration under Section 5 of Presidential Decree No. 902-A which private respondents
especially refer to are as follows:

xxx

(2) Controversies arising out of intra-corporate, partnership, or association relations, between and
among stockholders, members, or associates; or association of which they are stockholders, members, or
associates, respectively;

3) Controversies in the election or appointment of directors, trustees, officers or managers of


corporations, partnerships, or associations;
xxx

In addition, private respondents cite the Interim Rules on Intra-Corporate Controversies (Interim Rules)
promulgated by this Court in 2001, most pertinently, Section 2 of Rule 6 (on Election Contests), which
defines "election contests" as follows:

SEC. 2. Definition. – An election contest refers to any controversy or dispute involving title or claim to any
elective office in a stock or nonstock corporation, the validation of proxies, the manner and validity of
elections and the qualifications of candidates, including the proclamation of winners, to the office of
director, trustee or other officer directly elected by the stockholders in a close corporation or by
members of a nonstock corporation where the articles of incorporation or bylaws so provide. (emphasis
supplied)

The correct answer is not clear-cut, but there is one. In private respondents’ favor, the provisions of law
they cite pertain directly and exclusively to the statutory jurisdiction of trial courts acquired by virtue of
the transfer of jurisdiction following the passage of the SRC. In contrast, the SRC provisions relied upon
by GSIS do not immediately or directly establish that body’s jurisdiction over the petition, since it
necessitates the linkage of Section 20 to Section 53.1 of the SRC before the point can bear on us.

On the other hand, the distinction between "proxy solicitation" and "proxy validation" cannot be
dismissed offhand. The right of a stockholder to vote by proxy is generally established by the

Corporation Code,41 but it is the SRC which specifically regulates the form and use of proxies, more
particularly the procedure of proxy solicitation, primarily through Section 20.42 AIRR-SRC Rule 20 defines
the terms solicit and solicitation:

The terms solicit and solicitation include:

A. any request for a proxy whether or not accompanied by or included in a form of proxy

B. any request to execute or not to execute, or to revoke, a proxy; or

C. the furnishing of a form of proxy or other communication to security holders under


circumstance reasonably calculated to result in the procurement, withholding or revocation of a
proxy.

It is plain that proxy solicitation is a procedure that antecedes proxy validation. The former involves the
securing and submission of proxies, while the latter concerns the validation of such secured and
submitted proxies. GSIS raises the sensible point that there was no election yet at the time it filed its
petition with the SEC, hence no proper election contest or controversy yet over which the regular courts
may have jurisdiction. And the point ties its cause of action to alleged irregularities in the proxy
solicitation procedure, a process that precedes either the validation of proxies or the annual meeting
itself.

Under Section 20.1, the solicitation of proxies must be in accordance with rules and regulations issued by
the SEC, such as AIRR-SRC Rule 4. And by virtue of Section 53.1, the SEC has the discretion "to make such
investigations as it deems necessary to determine whether any person has violated" any rule issued by it,
such as AIRR-SRC Rule 4. The investigatory power of the SEC established by Section 53.1 is central to its
regulatory authority, most crucial to the public interest especially as it may pertain to corporations with
publicly traded shares. For that reason, we are not keen on pursuing private respondents’ insistence that
the GSIS complaint be viewed as rooted in an intra-corporate controversy solely within the jurisdiction of
the trial courts to decide. It is possible that an intra-corporate controversy may animate a disgruntled
shareholder to complain to the SEC a corporation’s violations of SEC rules and regulations, but that
motive alone should not be sufficient to deprive the SEC of its investigatory and regulatory powers,
especially so since such powers are exercisable on a motu proprio basis.

At the same time, Meralco raises the substantial point that nothing in the SRC empowers the SEC to annul
or invalidate improper proxies issued in contravention of Section 20. It cites that the penalties defined by
the SEC itself for violation of Section 20 or AIRR-SRC Rule 20 are limited to a reprimand/warning for the
first offense, and pecuniary fines for succeeding offenses.43 Indeed, if the SEC does not have the power to
invalidate proxies solicited in violation of its promulgated rules, serious questions may be raised whether
it has the power to adjudicate claims of violation in the first place, since the relief it may extend does not
directly redress the cause of action of the complainant seeking the exclusion of the proxies.

There is an interesting point, which neither party raises, and it concerns Section 6(g) of Presidential
Decree No. 902-A, which states:

SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following
powers:

xxx

(g) To pass upon the validity of the issuance and use of proxies and voting trust agreements for absent
stockholders or members;

xxx

As promulgated then, the provision would confer on the SEC the power to adjudicate controversies
relating not only to proxy solicitation, but also to proxy validation. Should the proposition hold true up to
the present, the position of GSIS would have merit, especially since Section 6 of Presidential Decree No.
902-A was not expressly repealed or abrogated by the SRC.44

Yet a closer reading of the provision indicates that such power of the SEC then was incidental or ancillary
to the "exercise of such jurisdiction." Note that Section 6 is immediately preceded by Section 5, which
originally conferred on the SEC "original and exclusive jurisdiction to hear and decide cases" involving
"controversies in the election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations." The cases referred to in Section 5 were transferred from the
jurisdiction of the SEC to the regular courts with the passage of the SRC, specifically Section 5.2. Thus, the
SEC’s power to pass upon the validity of proxies in relation to election controversies has effectively been
withdrawn, tied as it is to its abrogated jurisdictional powers.

Based on the foregoing, it is evident that the linchpin in deciding the question is whether or not the cause
of action of GSIS before the SEC is intimately tied to an election controversy, as defined under Section 5(c)
of Presidential Decree No. 902-A. To answer that, we need to properly ascertain the scope of the power of
trial courts to resolve controversies in corporate elections.
B.

Shares of stock in corporations may be divided into voting shares and non-voting shares, which are
generally issued as "preferred" or "redeemable" shares.45 Voting rights are exercised during regular or
special meetings of stockholders; regular meetings to be held annually on a fixed date, while special
meetings may be held at any time necessary or as provided in the by-laws, upon due notice.46 The
Corporation Code provides for a whole range of matters which can be voted upon by stockholders,
including a limited set on which even non-voting stockholders are entitled to vote on.47 On any of these
matters which may be voted upon by stockholders, the proxy device is generally available.48

Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular
trial courts with respect to election-related controversies is specifically confined to "controversies in the
election or appointment of directors, trustees, officers or managers of corporations, partnerships, or
associations." Evidently, the jurisdiction of the regular courts over so-called election contests or
controversies under Section 5(c) does not extend to every potential subject that may be voted on by
shareholders, but only to the election of directors or trustees, in which stockholders are authorized to
participate under Section 24 of the Corporation Code.49

This qualification allows for a useful distinction that gives due effect to the statutory right of the SEC to
regulate proxy solicitation, and the statutory jurisdiction of regular courts over election contests or
controversies. The power of the SEC to investigate violations of its rules on proxy solicitation is
unquestioned when proxies are obtained to vote on matters unrelated to the cases enumerated under
Section 5 of Presidential Decree No. 902-A. However, when proxies are solicited in relation to the election
of corporate directors, the resulting controversy, even if it ostensibly raised the violation of the SEC rules
on proxy solicitation, should be properly seen as an election controversy within the original and exclusive
jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to Section 5(c) of Presidential
Decree No. 902-A.

The conferment of original and exclusive jurisdiction on the regular courts over such controversies in the
election of corporate directors must be seen as intended to confine to one body the adjudication of all
related claims and controversy arising from the election of such directors. For that reason, the
aforequoted Section 2, Rule 6 of the Interim Rules broadly defines the term "election contest" as
encompassing all plausible incidents arising from the election of corporate directors, including: (1) any
controversy or dispute involving title or claim to any elective office in a stock or nonstock corporation,
(2) the validation of proxies, (3) the manner and validity of elections and (4) the qualifications of
candidates, including the proclamation of winners. If all matters anteceding the holding of such election
which affect its manner and conduct, such as the proxy solicitation process, are deemed within the
original and exclusive jurisdiction of the SEC, then the prospect of overlapping and competing
jurisdictions between that body and the regular courts becomes frighteningly real. From the language of
Section 5(c) of Presidential Decree No. 902-A, it is indubitable that controversies as to the qualification of
voting shares, or the validity of votes cast in favor of a candidate for election to the board of directors are
properly cognizable and adjudicable by the regular courts exercising original and exclusive jurisdiction
over election cases. Questions relating to the proper solicitation of proxies used in such election are
indisputably related to such issues, yet if the position of GSIS were to be upheld, they would be resolved
by the SEC and not the regular courts, even if they fall within "controversies in the election" of directors.

The Court recognizes that GSIS’s position flirts with the abhorrent evil of split jurisdiction,50 allowing as it
does both the SEC and the regular courts to assert jurisdiction over the same controversies surrounding
an election contest. Should the argument of GSIS be sustained, we would be perpetually confronted with
the spectacle of election controversies being heard and adjudicated by both the SEC and the regular
courts, made possible through a mere allegation that the anteceding proxy solicitation process was
errant, but the competing cases filed with one objective in mind – to affect the outcome of the election of
the board of directors. There is no definitive statutory provision that expressly mandates so untidy a
framework, and we are disinclined to construe the SRC in such a manner as to pave the way for the
splitting of jurisdiction.

Unlike either Section 20.1 or Section 53.1, which merely alludes to the rule-making or investigatory
power of the SEC, Section 5 of Pres. Decree No. 902-A sets forth a definitive rule on jurisdiction, expressly
granting as it does "original and exclusive jurisdiction" first to the SEC, and now to the regular courts. The
fact that the jurisdiction of the regular courts under Section 5(c) is confined to the voting on election of
officers, and not on all matters which may be voted upon by stockholders, elucidates that the power of
the SEC to regulate proxies remains extant and could very well be exercised when stockholders vote on
matters other than the election of directors.

That the proxy challenge raised by GSIS relates to the election of the directors of Meralco is undisputed.
The controversy was engendered by the looming annual meeting, during which the stockholders of
Meralco were to elect the directors of the corporation. GSIS very well knew of that fact. On 17 March
2008, the Meralco board of directors adopted a board resolution stating:

RESOLVED that the board of directors of the Manila Electric Company (MERALCO) delegate, as it hereby
delegates to the Nomination & Governance Committee the authority to approve and adopt appropriate
rules on: (1) nomination of candidates for election to the board of directors; (2) appreciation of
ballots during the election of members of the board of directors; and (3) validation of proxies for
regular or special meetings of the stockholders.51

In addition, the Information Statement/Proxy form filed by First Philippine Holdings Corporation with
the SEC pursuant to Section 20 of the SRC, states:

REASON FOR SOLICITATION OF VOTES

The Solicitor is soliciting proxies from stockholders of the Company for the purpose of electing the
directors named under the subject headed ‘Directors’ in this Statement as well as to vote the
matters in the agenda of the meeting as provided for in the Information Statement of the Company. All of
the nominees are current directors of the Company.52

Under the circumstances, we do not see it feasible for GSIS to posit that its challenge to the solicitation or
validation of proxies bore no relation at all to the scheduled election of the board of directors of Meralco
during the annual meeting. GSIS very well knew that the controversy falls within the contemplation of an
election controversy properly within the jurisdiction of the regular courts. Otherwise, it would have
never filed its original petition with the RTC of Pasay. GSIS may have withdrawn its petition with the RTC
on a new assessment made in good faith that the controversy falls within the jurisdiction of the SEC, yet
the reality is that the reassessment is precisely wrong as a matter of law.

IV.
The lack of jurisdiction of the SEC over the subject matter of GSIS’s petition necessarily invalidates the
CDO and SDO issued by that body. However, especially with respect to the CDO, there is need for this
Court to squarely rule on the question pertaining to its validity, if only for jurisprudential value and for
the guidance of the SEC.

To recount the facts surrounding the issuance of the CDO, GSIS filed its petition with the SEC on 26 May
2008. The CDO, six (6) pages in all with three (3) pages devoted to the tenability of granting the
injunctive relief, was issued on the very same day, 26 May 2008, without notice or hearing. The CDO bore
the signature of Commissioner Jesus Martinez, identified therein as "Officer-in-Charge," and nobody
else’s.

The provisions of the SRC relevant to the issuance of a CDO are as follows:

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency and
shall have the powers and functions provided by this Code, Presidential Decree No. 902-A,
the Corporation Code, the Investment Houses Law, the Financing Company Act and other existing laws.
Pursuant thereto the Commission shall have, among others, the following powers and functions:

xxx

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;

xxx

[SEC.] 53.3. Whenever it shall appear to the Commission that any person has engaged or is about to
engage in any act or practice constituting a violation of any provision of this Code, any rule, regulation or
order thereunder, or any rule of an Exchange, registered securities association, clearing agency or other
self-regulatory organization, it may issue an order to such person to desist from committing such act or
practice: Provided, however, That the Commission shall not charge any person with violation of the rules
of an Exchange or other self regulatory organization unless it appears to the Commission that such
Exchange or other self-regulatory organization is unable or unwilling to take action against such person.
After finding that such person has engaged in any such act or practice and that there is a reasonable
likelihood of continuing, further or future violations by such person, the Commission may issue ex-parte a
cease and desist order for a maximum period of ten (10) days, enjoining the violation and compelling
compliance with such provision. The Commission may transmit such evidence as may be available
concerning any violation of any provision of this Code, or any rule, regulation or order thereunder, to the
Department of Justice, which may institute the appropriate criminal proceedings under this Code.

SEC. 64. Cease and Desist Order. – 64.1. The Commission, after proper investigation or verification, motu
proprio, or upon verified complaint by any aggrieved party, may issue a cease and desist order without
the necessity of a prior hearing if in its judgment the act or practice, unless restrained, will operate as a
fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing
public.

64.2. Until the Commission issues a cease and desist order, the fact that an investigation has been
initiated or that a complaint has been filed, including the contents of the complaint, shall be confidential.
Upon issuance of a cease and desist order, the Commission shall make public such order and a copy
thereof shall be immediately furnished to each person subject to the order.
64.3. Any person against whom a cease and desist order was issued may, within five (5) days from receipt
of the order, file a formal request for a lifting thereof. Said request shall be set for hearing by the
Commission not later than fifteen (15) days from its filing and the resolution thereof shall be made not
later than ten (10) days from the termination of the hearing. If the Commission fails to resolve the
request within the time herein prescribed, the cease and desist order shall automatically be lifted.

There are three distinct bases for the issuance by the SEC of the CDO. The first, allocated by Section 5(i),
is predicated on a necessity "to prevent fraud or injury to the investing public". No other requisite or
detail is tied to this CDO authorized under Section 5(i).

The second basis, found in Section 53.3, involves a determination by the SEC that "any person has
engaged or is about to engage in any act or practice constituting a violation of any provision of this Code,
any rule, regulation or order thereunder, or any rule of an Exchange, registered securities association,
clearing agency or other self-regulatory organization." The provision additionally requires a finding that
"there is a reasonable likelihood of continuing [or engaging in] further or future violations by such
person." The maximum duration of the CDO issued under Section 53.3 is ten (10) days.

The third basis for the issuance of a CDO is Section 64. This CDO is founded on a determination of an act
or practice, which unless restrained, "will operate as a fraud on investors or is otherwise likely to cause
grave or irreparable injury or prejudice to the investing public". Section 64.1 plainly provides three
segregate instances upon which the SEC may issue the CDO under this provision: (1) after proper
investigation or verification, (2) motu proprio, or (3) upon verified complaint by any aggrieved party.
While no lifetime is expressly specified for the CDO under Section 64, the respondent to the CDO may file
a formal request for the lifting thereof, which the SEC must hear within fifteen (15) days from filing and
decide within ten (10) days from the hearing.

It appears that the CDO under Section 5(i) is similar to the CDO under Section 64.1. Both require a
common finding of a need to prevent fraud or injury to the investing public. At the same time, no mention
is made whether the CDO defined under Section 5(i) may be issued ex-parte, while the CDO under Section
64.1 requires "grave and irreparable" injury, language absent in Section 5(i). Notwithstanding the
similarities between Section 5(i) and Section 64.1, it remains clear that the CDO issued under Section
53.3 is a distinct creation from that under Section 64.

The Court of Appeals cited the CDO as having been issued in violation of the constitutional provision on
due process, which requires both prior notice and prior hearing.53 Yet interestingly, the CDO as
contemplated in Section 53.3 or in Section 64, may be issued "ex-parte" (under Section 53.3) or "without
necessity of hearing" (under Section 64.1). Nothing in these provisions impose a requisite hearing before
the CDO may be issued thereunder. Nonetheless, there are identifiable requisite actions on the part of the
SEC that must be undertaken before the CDO may be issued either under Section 53.3 or Section 64. In
the case of Section 53.3, the SEC must make two findings: (1) that such person has engaged in any such
act or practice, and (2) that there is a reasonable likelihood of continuing, (or engaging in) further or
future violations by such person. In the case of Section 64, the SEC must adjudge that the act, unless
restrained, will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury
or prejudice to the investing public."

Noticeably, the CDO is not precisely clear whether it was issued on the basis of Section 5.1, Section 53.3
or Section 64 of the SRC. The CDO actually refers and cites all three provisions, yet it is apparent that a
singular CDO could not be founded on Section 5.1, Section 53.3 and Section 64 collectively. At the very
least, the CDO under Section 53.3 and under Section 64 have their respective requisites and terms.

GSIS was similarly cagey in its petition before the SEC, it demurring to state whether it was seeking the
CDO under Section 5.1, Section 53.3, or Section 64. Considering that injunctive relief generally avails upon
the showing of a clear legal right to such relief, the inability or unwillingness to lay bare the precise
statutory basis for the prayer for injunction is an obvious impediment to a successful

application. Nonetheless, the error of the SEC in granting the CDO without stating which kind of CDO it
was issuing is more unpardonable, as it is an act that contravenes due process of law.

We have particularly required, in administrative proceedings, that the body or tribunal "in all
controversial questions, render its decision in such a manner that the parties to the proceeding can know
the various issues involved, and the reason for the decision rendered."54 This requirement is vital, as its
fulfillment would afford the adverse party the opportunity to interpose a reasoned and intelligent appeal
that is responsive to the grounds cited against it. The CDO extended by the SEC fails to provide the
needed reasonable clarity of the rationale behind its issuance.

The subject CDO first refers to Section 64, citing its provisions, then stating: "[p]rescinding from the
aforequoted, there can be no doubt whatsoever that the Commission is in fact mandated to take up, if
expeditiously, any verified complaint praying for the provisional remedy of a cease and desist
order."55 The CDO then discusses the nature of the right of GSIS to obtain the CDO, as well as "the urgent
and paramount necessity to prevent serious damage because the stockholders’ meeting is scheduled on
May 28, 2008 x x x" Had the CDO stopped there, the unequivocal impression would have been that the
order is based on Section 64.

But the CDO goes on to cite Section 5.1, quoting paragraphs (i) and (n) in full, ratiocinating that under
these provisions, the SEC had "the power to issue cease and desist orders to prevent fraud or injury to the
public and such other measures necessary to carry out the Commission’s role as
regulator."56 Immediately thence, the CDO cites Section 53.3 as providing "that whenever it shall appear
to the Commission that nay person has engaged or is about to engage in any act or practice constituting a
violation of any provision, any rule, regulation or order thereunder, the Commission may issue ex-parte a
cease and desist order for a maximum period of ten (10) days, enjoining the violation and compelling
compliance therewith."57

The citation in the CDO of Section 5.1, Section 53.3 and Section 64 together may leave the impression that
it is grounded on all three provisions, and that may very well have been the intention of the SEC.
Assuming that is so, it is legally impermissible for the SEC to have utilized both Section 53.3 and Section
64 as basis for the CDO at the same time. The CDO under Section 53.3 is premised on distinctly different
requisites than the CDO under Section 64. Even more crucially, the lifetime of the CDO under Section 53.3
is confined to a definite span of ten (10) days, which is not the case with the CDO under Section 64. This
CDO under Section 64 may be the object of a formal request for lifting within five (5) days from its
issuance, a remedy not expressly afforded to the CDO under Section 53.3.

Any respondent to a CDO which cites both Section 53.3 and Section 64 would not have an intelligent or
adequate basis to respond to the same. Such respondent would not know whether the CDO would have a
determinate lifespan of ten (10) days, as in Section 53.3, or would necessitate a formal request for lifting
within five (5) days, as required under Section 64.1. This lack of clarity is to the obvious prejudice of the
respondent, and is in clear defiance of the constitutional right to due process of law. Indeed, the veritable
mélange that the assailed CDO is, with its jumbled mixture of premises and conclusions, the antithesis of
due process.

Had the CDO issued by the SEC expressed the length of its term, perhaps greater clarity would have been
offered on what Section of the SRC it is based. However, the CDO is precisely silent as to its lifetime,
thereby precluding much needed clarification. In view of the statutory differences among the three CDOs
under the SRC, it is essential that the SEC, in issuing such injunctive relief, identify the exact provision of
the SRC on which the CDO is founded. Only by doing so could the adversely affected party be able to
properly evaluate whatever his responses under the law.

To make matters worse for the SEC, the fact that the CDO was signed, much less apparently deliberated
upon, by only by one commissioner likewise renders the order fatally infirm.

The SEC is a collegial body composed of a Chairperson and four (4) Commissioners.58 In order to
constitute a quorum to conduct business, the presence of at least three (3) Commissioners is
required.59 In the leading case of GMCR v. Bell,60 we definitively explained the nature of a collegial body,
and how the act of one member of such body, even if the head, could not be considered as that of the
entire body itself. Thus:

We hereby declare that the NTC is a collegial body requiring a majority vote out of the three members of
the commission in order to validly decide a case or any incident therein. Corollarily, the vote alone of the
chairman of the commission, as in this case, the vote of Commissioner Kintanar, absent the required
concurring vote coming from the rest of the membership of the commission to at least arrive at a
majority decision, is not sufficient to legally render an NTC order, resolution or decision.

Simply put, Commissioner Kintanar is not the National Telecommunications Commission. He alone does
not speak for and in behalf of the NTC. The NTC acts through a three-man body, and the three members of
the commission each has one vote to cast in every deliberation concerning a case or any incident therein
that is subject to the jurisdiction of the NTC. When we consider the historical milieu in which the NTC
evolved into the quasi-judicial agency it is now under Executive Order No. 146 which organized the NTC
as a three-man commission and expose the illegality of all memorandum circulars negating the collegial
nature of the NTC under Executive Order No. 146, we are left with only one logical conclusion: the NTC is
a collegial body and was a collegial body even during the time when it was acting as a one-man regime.61

We can adopt a virtually word-for-word observation with respect to former Commissioner Martinez and
the SEC. Simply put, Commissioner Martinez is not the SEC. He alone does not speak for and in behalf of
the SEC. The SEC acts through a five-person body, and the five members of the commission each has one
vote to cast in every deliberation concerning a case or any incident therein that is subject to the
jurisdiction of the SEC.

GSIS attempts to defend former Commissioner Martinez’s action, but its argument is without merit. It
cites SEC Order No. 169, Series of 2008, whereby Martinez was designated as "Officer-in-Charge of the
Commission for the duration of the official travel of the Chairperson to Paris, France, to attend the 33rd
Annual Conference of the [IOSCO] from May 26-30, 2008."62 As officer-in-charge (OIC), Martinez was
"authorized to sign all documents and papers and perform all other acts and deeds as may be necessary
in the day-to-day operation of the Commission".1avvphi1
It is clear that Martinez was designated as OIC because of the official travel of only one member,
Chairperson Fe Barin. Martinez was not commissioned to act as the SEC itself. At most, he was to act in
place of Chairperson Barin in the exercise of her duties as Chairperson of the SEC. Under Section 4.3 of
the SRC, the Chairperson is the chief executive officer of the SEC, and thus empowered to "execute and
administer the policies, decisions, orders and resolutions approved by the Commission," as well as to
"have the

general executive direction and supervision of the work and operation of the Commission."63 It is in
relation to the exercise of these duties of the Chairperson, and not to the functions of the Commission,
that Martinez was "authorized to sign all documents and papers and perform all other acts and deeds as
may be necessary in the day-to-day operation of the Commission."

GSIS likewise cites, as authority for Martinez’s unilateral issuance of the CDO, Section 4.6 of the SRC,
which states that the SEC "may, for purposes of efficiency, delegate any of its functions to any department
or office of the Commission, an individual Commissioner or staff member of the Commission except its
review or appellate authority and its power to adopt, alter and supplement any rule or regulation."
Reliance on this provision is inappropriate. First, there is no convincing demonstration that the SEC had
delegated to Martinez the authority to issue the CDO. The SEC Order designating Martinez as OIC only
authorized him to exercise the functions of the absent Chairperson, and not of the Commission. If the
Order is read as enabling Martinez to issue the CDO in behalf of the Commission, it would be akin to
conceding that the SEC Chairperson, acting alone, can issue the CDO in behalf of the SEC itself. That again
contravenes our holding in GMCR v. Bell.

In addition, it is clear under Section 4.6 that the ability to delegate functions to a single commissioner
does not extend to the exercise of the review or appellate authority of the SEC. The issuance of the CDO is
an act of the SEC itself done in the exercise of its original jurisdiction to review actual cases or
controversies. If it has not been clear to the SEC before, it should be clear now that its power to issue a
CDO can not, under the SRC, be delegated to an individual commissioner.

V.

In the end, even assuming that the events narrated in our Resolution in A.M. No. 08-8-11-CA constitute
sufficient basis to nullify the assailed decision of the Court of Appeals, still it remains clear that the reliefs
GSIS seeks of this Court have no basis in law. Notwithstanding the black mark that stains the appellate
court’s decision, the first paragraph of its fallo, to the extent that it dismissed the complaint of GSIS with
the SEC for lack of jurisdiction and consequently nullified the CDO and SDO, defies unbiased scrutiny and
deserves affirmation.

A.

In its dispositive portion, the Court of Appeals likewise pronounced that the complaint filed by GSIS with
the SEC should be barred from being considered "as an election contest in the RTC", given that the fifteen
(15) day prescriptive period to file an election contest with the RTC, under Section 3, Rule 6 of the
Interim Rules, had already run its course.64 Yet no such relief was requested by private respondents in
their petition for certiorari filed with the Court of Appeals65 . Without disputing the legal predicates
surrounding this pronouncement, we note that its tenor, if not the text, unduly suggests an unwholesome
pre-emptive strike. Given our observations in A.M. No. 08-8-11-CA of the "undue interest" exhibited by
the author of the appellate court decision, such declaration is best deleted. Nonetheless, we do trust that
any court or tribunal that may be confronted with that premise adverted to by the Court of Appeals
would know how to properly treat the same.

B.

Finally, we turn to the sanction on the lawyers of GSIS imposed by the Court of Appeals.

Nonetheless, we find that as a matter of law the sanctions are unwarranted. The charter of GSIS66 is
unique among government owned or controlled corporations with original charter in that it allocates a
role for its internal legal counsel that is in conjunction with or complementary to the Office of the
Government Corporate Counsel (OGCC), which is the statutory legal counsel for GOCCs. Section 47 of GSIS
charter reads:

SEC. 47. Legal Counsel.—The Government Corporate Counsel shall be the legal adviser and consultant of
GSIS, but GSIS may assign to the Office of the Government Corporate Counsel (OGCC) cases for legal
action or trial, issues for legal opinions, preparation and review of contracts/agreements and others, as
GSIS may decide or determine from time to time: Provided, however, That the present legal services
group in GSIS shall serve as its in-house legal counsel.

The GSIS may, subject to approval by the proper court, deputize any personnel of the legal service group
to act as special sheriff in the enforcement of writs and processes issued by the court, quasi-judicial
agencies or administrative bodies in cases involving GSIS.67

The designation of the OGCC as the legal counsel for GOCCs is set forth by statute, initially by Rep. Act No.
3838, then reiterated by the Administrative Code of 1987.68 Given that the designation is statutory in
nature, there is no impediment for Congress to impose a different role for the OGCC with respect to
particular GOCCs it may charter. Congress appears to have done so with respect to GSIS, designating the
OGCC as a "legal adviser and consultant," rather than as counsel to GSIS. Further, the law clearly vests
unto GSIS the discretion, rather than the duty, to assign cases to the OGCC for legal action, while
designating the present legal services group of GSIS as "in-house legal counsel." This situates GSIS
differently from the Land Bank of the Philippines, whose own in-house lawyers have persistently argued
before this Court to no avail on their alleged right

to file petitions before us instead of the OGCC.69 Nothing in the Land Bank charter70 vested it with the
discretion to choose when to assign

cases to the OGCC, notwithstanding the establishment of its own Legal Department.71

Congress is not bound to retain the OGCC as the primary or exclusive legal counsel of GSIS even if it
performs such a role for other GOCCs. To bind Congress to perform in that manner would be akin to
elevating the OGCC’s statutory role to irrepealable status, and it is basic that Congress is barred from
passing irrepealable laws.72

C.

We close by acknowledging that the surrounding circumstances behind these petitions are unfortunate,
given the events as narrated in A.M. No. 08-8-11-CA. While due punishment has been meted on the errant
magistrates, the corporate world may very well be reminded that the members of the judiciary are not to
be viewed or treated as

mere pawns or puppets in the internecine fights businessmen and their associates wage against other
businessmen in the quest for corporate dominance. In the end, the petitions did afford this Court to
clarify consequential points of law, points rooted in principles which will endure long after the names of
the participants in these cases have been forgotten.

WHEREFORE, the petition in G.R. No. 184275 is EXPUNGED for lack of capacity of the petitioner to bring
forth the suit.

The petition in G.R. No. 183905 is DISMISSED for lack of merit except that the second and third
paragraphs of the fallo of the assailed decision dated 23 July 2008 of the Court of Appeals, including
subparagraphs (1), (2), 2(a), 2(b), 2(c) and 2(d) under the second paragraph, are hereby DELETED.

No pronouncements as to costs.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 93695 February 4, 1992

RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,


vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and
THOMAS GONZALES, respondents.

Cayanga, Zuniga & Angel Law Offices for petitioners.

Timbol & Associates for private respondents.

GUTIERREZ, JR., J.:

What is the nature of the voting trust agreement executed between two parties in this case? Who owns
the stocks of the corporation under the terms of the voting trust agreement? How long can a voting trust
agreement remain valid and effective? Did a director of the corporation cease to be such upon the
creation of the voting trust agreement? These are the questions the answers to which are necessary in
resolving the principal issue in this petition forcertiorari — whether or not there was proper service of
summons on Alfa Integrated Textile Mills (ALFA, for short) through the petitioners as president and vice-
president, allegedly, of the subject corporation after the execution of a voting trust agreement between
ALFA and the Development Bank of the Philippines (DBP, for short).

From the records of the instant case, the following antecedent facts appear:

On November 15, 1985, a complaint for a sum of money was filed by the International Corporate Bank,
Inc. against the private respondents who, in turn, filed a third party complaint against ALFA and the
petitioners on March 17, 1986.

On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint which the
Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988.

On July 18, 1988, the petitioners filed their answer to the third party complaint.

Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of an alias summons
upon ALFA through the DBP as a consequence of the petitioner's letter informing the court that the
summons for ALFA was erroneously served upon them considering that the management of ALFA had
been transferred to the DBP.

In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive summons on
behalf of ALFA since the DBP had not taken over the company which has a separate and distinct
corporate personality and existence.

On August 4, 1988, the trial court issued an order advising the private respondents to take the
appropriate steps to serve the summons to ALFA.

On August 16, 1988, the private respondents filed a Manifestation and Motion for the Declaration of
Proper Service of Summons which the trial court granted on August 17, 1988.

On September 12, 1988, the petitioners filed a motion for reconsideration submitting that Rule 14,
section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA and
that the private respondents should have availed of another mode of service under Rule 14, Section 16 of
the said Rules, i.e., through publication to effect proper service upon ALFA.

In their Comment to the Motion for Reconsideration dated September 27, 1988, the private respondents
argued that the voting trust agreement dated March 11, 1981 did not divest the petitioners of their
positions as president and executive vice-president of ALFA so that service of summons upon ALFA
through the petitioners as corporate officers was proper.

On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through the
petitioners, thus, denying the latter's motion for reconsideration and requiring ALFA to filed its answer
through the petitioners as its corporate officers.

On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating their
stand that by virtue of the voting trust agreement they ceased to be officers and directors of ALFA, hence,
they could no longer receive summons or any court processes for or on behalf of ALFA. In support of their
second motion for reconsideration, the petitioners attached thereto a copy of the voting trust agreement
between all the stockholders of ALFA (the petitioners included), on the one hand, and the DBP, on the
other hand, whereby the management and control of ALFA became vested upon the DBP.

On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January 2, 1989
and declared that service upon the petitioners who were no longer corporate officers of ALFA cannot be
considered as proper service of summons on ALFA.

On May 15, 1989, the private respondents moved for a reconsideration of the above Order which was
affirmed by the court in its Order dated August 14, 1989 denying the private respondent's motion for
reconsideration.

On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent
before the public respondent which, nonetheless, resolved to give due course thereto on September 21,
1989.

On October 17, 1989, the trial court, not having been notified of the pending petition for certiorari with
public respondent issued an Order declaring as final the Order dated April 25, 1989. The private
respondents in the said Order were required to take positive steps in prosecuting the third party
complaint in order that the court would not be constrained to dismiss the same for failure to prosecute.
Subsequently, on October 25, 1989 the private respondents filed a motion for reconsideration on which
the trial court took no further action.

On March 19, 1990, after the petitioners filed their answer to the private respondents' petition
for certiorari, the public respondent rendered its decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the orders of respondent judge dated April 25, 1989
and August 14, 1989 are hereby SET ASIDE and respondent corporation is ordered to file
its answer within the reglementary period. (CA Decision, p. 8; Rollo, p. 24)

On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public respondent
which resolved to deny the same on May 10, 1990. Hence, the petitioners filed this certiorari petition
imputing grave abuse of discretion amounting to lack of jurisdiction on the part of the public respondent
in reversing the questioned Orders dated April 25, 1989 and August 14, 1989 of the court a quo, thus,
holding that there was proper service of summons on ALFA through the petitioners.

In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990
erroneously applying the rule that the period during which a motion for reconsideration has been
pending must be deducted from the 15-day period to appeal. However, in its Resolution dated January 3,
1991, the public respondent set aside the aforestated entry of judgment after further considering that the
rule it relied on applies to appeals from decisions of the Regional Trial Courts to the Court of Appeals, not
to appeals from its decision to us pursuant to our ruling in the case of Refractories Corporation of the
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp. 249-250)

In their memorandum, the petitioners present the following arguments, to wit:

(1) that the execution of the voting trust agreement by a stockholders whereby all his
shares to the corporation have been transferred to the trustee deprives the stockholders of
his position as director of the corporation; to rule otherwise, as the respondent Court of
Appeals did, would be violative of section 23 of the Corporation Code ( Rollo, pp. 270-
3273); and

(2) that the petitioners were no longer acting or holding any of the positions provided
under Rule 14, Section 13 of the Rules of Court authorized to receive service of summons
for and in behalf of the private domestic corporation so that the service of summons on
ALFA effected through the petitioners is not valid and ineffective; to maintain the
respondent Court of Appeals' position that ALFA was properly served its summons through
the petitioners would be contrary to the general principle that a corporation can only be
bound by such acts which are within the scope of its officers' or agents' authority (Rollo, pp.
273-275)

In resolving the issue of the propriety of the service of summons in the instant case, we dwell first on the
nature of a voting trust agreement and the consequent effects upon its creation in the light of the
provisions of the Corporation Code.

A voting trust is defined in Ballentine's Law Dictionary as follows:

(a) trust created by an agreement between a group of the stockholders of a corporation and
the trustee or by a group of identical agreements between individual stockholders and a
common trustee, whereby it is provided that for a term of years, or for a period contingent
upon a certain event, or until the agreement is terminated, control over the stock owned by
such stockholders, either for certain purposes or for all purposes, is to be lodged in the
trustee, either with or without a reservation to the owners, or persons designated by them,
of the power to direct how such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19 Am J
2d Corp. sec. 685).

Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements, a
more definitive meaning may be gathered. The said provision partly reads:

Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a trustee or trustees the right to vote and
other rights pertaining to the share for a period rights pertaining to the shares for a period
not exceeding five (5) years at any one time: Provided, that in the case of a voting trust
specifically required as a condition in a loan agreement, said voting trust may be for a
period exceeding (5) years but shall automatically expire upon full payment of the loan. A
voting trust agreement must be in writing and notarized, and shall specify the terms and
conditions thereof. A certified copy of such agreement shall be filed with the corporation
and with the Securities and Exchange Commission; otherwise, said agreement is ineffective
and unenforceable. The certificate or certificates of stock covered by the voting trust
agreement shall be cancelled and new ones shall be issued in the name of the trustee or
trustees stating that they are issued pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the name of the trustee or trustees is
made pursuant to said voting trust agreement.

By its very nature, a voting trust agreement results in the separation of the voting rights of a stockholder
from his other rights such as the right to receive dividends, the right to inspect the books of the
corporation, the right to sell certain interests in the assets of the corporation and other rights to which a
stockholder may be entitled until the liquidation of the corporation. However, in order to distinguish a
voting trust agreement from proxies and other voting pools and agreements, it must pass three criteria or
tests, namely: (1) that the voting rights of the stock are separated from the other attributes of ownership;
(2) that the voting rights granted are intended to be irrevocable for a definite period of time; and (3) that
the principal purpose of the grant of voting rights is to acquire voting control of the corporation. (5
Fletcher, Cyclopedia of the Law on Private Corporations, section 2075 [1976] p. 331 citingTankersly v.
Albright, 374 F. Supp. 538)

Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a trustee not
only the stockholder's voting rights but also other rights pertaining to his shares as long as the voting
trust agreement is not entered "for the purpose of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud." (section 59, 5th paragraph of the
Corporation Code) Thus, the traditional concept of a voting trust agreement primarily intended to single
out a stockholder's right to vote from his other rights as such and made irrevocable for a limited duration
may in practice become a legal device whereby a transfer of the stockholder's shares is effected subject to
the specific provision of the voting trust agreement.

The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable or
beneficial ownership of the corporate shares of a stockholders, on the one hand, and the legal title thereto
on the other hand.

The law simply provides that a voting trust agreement is an agreement in writing whereby one or more
stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest in the
latter voting or other rights pertaining to said shares for a period not exceeding five years upon the
fulfillment of statutory conditions and such other terms and conditions specified in the agreement. The
five year-period may be extended in cases where the voting trust is executed pursuant to a loan
agreement whereby the period is made contingent upon full payment of the loan.

In the instant case, the point of controversy arises from the effects of the creation of the voting trust
agreement. The petitioners maintain that with the execution of the voting trust agreement between them
and the other stockholders of ALFA, as one party, and the DBP, as the other party, the former assigned
and transferred all their shares in ALFA to DBP, as trustee. They argue that by virtue to of the voting trust
agreement the petitioners can no longer be considered directors of ALFA. In support of their contention,
the petitioners invoke section 23 of the Corporation Code which provides, in part, that:

Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director which share shall stand in his name on the books of the corporation.
Any director who ceases to be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be director . . . (Rollo, p. 270)

The private respondents, on the contrary, insist that the voting trust agreement between ALFA and the
DBP had all the more safeguarded the petitioners' continuance as officers and directors of ALFA
inasmuch as the general object of voting trust is to insure permanency of the tenure of the directors of a
corporation. They cited the commentaries by Prof. Aguedo Agbayani on the right and status of the
transferring stockholders, to wit:

The "transferring stockholder", also called the "depositing stockholder", is equitable owner
for the stocks represented by the voting trust certificates and the stock reversible on
termination of the trust by surrender. It is said that the voting trust agreement does not
destroy the status of the transferring stockholders as such, and thus render them ineligible
as directors. But a more accurate statement seems to be that for some purposes the
depositing stockholder holding voting trust certificates in lieu of his stock and being the
beneficial owner thereof, remains and is treated as a stockholder. It seems to be deducible
from the case that he may sue as a stockholder if the suit is in equity or is of an equitable
nature, such as, a technical stockholders' suit in right of the corporation. [Commercial Laws
of the Philippines by Agbayani, Vol. 3 pp. 492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)

We find the petitioners' position meritorious.

Both under the old and the new Corporation Codes there is no dispute as to the most immediate effect of
a voting trust agreement on the status of a stockholder who is a party to its execution — from legal
titleholder or owner of the shares subject of the voting trust agreement, he becomes the equitable or
beneficial owner. (Salonga, Philippine Law on Private Corporations, 1958 ed., p. 268; Pineda and
Carlos, The Law on Private Corporations and Corporate Practice, 1969 ed., p. 175; Campos and Lopez-
Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981, ed., p. 386;
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines,Vol. 3, 1988 ed., p.
536). The penultimate question, therefore, is whether the change in his status deprives the stockholder of
the right to qualify as a director under section 23 of the present Corporation Code which deletes the
phrase "in his own right." Section 30 of the old Code states that:

Every director must own in his own right at least one share of the capital stock of the stock
corporation of which he is a director, which stock shall stand in his name on the books of
the corporation. A director who ceases to be the owner of at least one share of the capital
stock of a stock corporation of which is a director shall thereby cease to be a director . . .
(Emphasis supplied)

Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely
affected by the simple act of such director being a party to a voting trust agreement inasmuch as he
remains owner (although beneficial or equitable only) of the shares subject of the voting trust agreement
pursuant to which a transfer of the stockholder's shares in favor of the trustee is required (section 36 of
the old Corporation Code). No disqualification arises by virtue of the phrase "in his own right" provided
under the old Corporation Code.

With the omission of the phrase "in his own right" the election of trustees and other persons who in fact
are not beneficial owners of the shares registered in their names on the books of the corporation
becomes formally legalized (see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear
indication that in order to be eligible as a director, what is material is the legal title to, not beneficial
ownership of, the stock as appearing on the books of the corporation (2 Fletcher, Cyclopedia of the Law of
Private Corporations, section 300, p. 92 [1969] citingPeople v. Lihme, 269 Ill. 351, 109 N.E. 1051).

The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in 1981
disposed of all their shares through assignment and delivery in favor of the DBP, as trustee. Consequently,
the petitioners ceased to own at least one share standing in their names on the books of ALFA as required
under Section 23 of the new Corporation Code. They also ceased to have anything to do with the
management of the enterprise. The petitioners ceased to be directors. Hence, the transfer of the
petitioners' shares to the DBP created vacancies in their respective positions as directors of ALFA. The
transfer of shares from the stockholder of ALFA to the DBP is the essence of the subject voting trust
agreement as evident from the following stipulations:

1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the shares of
the stocks owned by them respectively and shall do all things necessary for the transfer of
their respective shares to the TRUSTEE on the books of ALFA.

2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the number of
shares transferred, which shall be transferrable in the same manner and with the same
effect as certificates of stock subject to the provisions of this agreement;

3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual or
special, upon any resolution, matter or business that may be submitted to any such
meeting, and shall possess in that respect the same powers as owners of the equitable as well
as the legal title to the stock;

4. The TRUSTEE may cause to be transferred to any person one share of stock for the
purpose of qualifying such person as director of ALFA, and cause a certificate of stock
evidencing the share so transferred to be issued in the name of such person;

xxx xxx xxx

9. Any stockholder not entering into this agreement may transfer his shares to the same
trustees without the need of revising this agreement, and this agreement shall have the
same force and effect upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis
supplied)

Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of
the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of record
with respect to the said shares of stocks. In the absence of a showing that the DBP had caused to be
transferred in their names one share of stock for the purpose of qualifying as directors of ALFA, the
petitioners can no longer be deemed to have retained their status as officers of ALFA which was the case
before the execution of the subject voting trust agreement. There appears to be no dispute from the
records that DBP has taken over full control and management of the firm.

Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A. Guevarra,
Vice-President of its Special Accounts Department II, Remedial Management Group, the petitioners were
no longer included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp. 140-142)

Inasmuch as the private respondents in this case failed to substantiate their claim that the subject voting
trust agreement did not deprive the petitioners of their position as directors of ALFA, the public
respondent committed a reversible error when it ruled that:

. . . while the individual respondents (petitioners Lee and Lacdao) may have ceased to be
president and vice-president, respectively, of the corporation at the time of service of
summons on them on August 21, 1987, they were at least up to that time, still directors . . .
The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No. 4 of the
subject voting trust agreement. Both parties, ALFA and the DBP, were aware at the time of the execution
of the agreement that by virtue of the transfer of shares of ALFA to the DBP, all the directors of ALFA
were stripped of their positions as such.

There can be no reliance on the inference that the five-year period of the voting trust agreement in
question had lapsed in 1986 so that the legal title to the stocks covered by the said voting trust
agreement ipso facto reverted to the petitioners as beneficial owners pursuant to the 6th paragraph of
section 59 of the new Corporation Code which reads:

Unless expressly renewed, all rights granted in a voting trust agreement shall automatically
expire at the end of the agreed period, and the voting trust certificate as well as the
certificates of stock in the name of the trustee or trustees shall thereby be deemed
cancelled and new certificates of stock shall be reissued in the name of the transferors.

On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA and the
DBP that the duration of the agreement is contingent upon the fulfillment of certain obligations of ALFA
with the DBP. This is shown by the following portions of the agreement.

WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured by a first
mortgage on the manufacturing plant of said company;

WHEREAS, ALFA is also indebted to other creditors for various financial accomodations
and because of the burden of these obligations is encountering very serious difficulties in
continuing with its operations.

WHEREAS, in consideration of additional accommodations from the TRUSTEE, ALFA had


offered and the TRUSTEE has accepted participation in the management and control of the
company and to assure the aforesaid participation by the TRUSTEE, the TRUSTORS have
agreed to execute a voting trust covering their shareholding in ALFA in favor of the
TRUSTEE;

AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.

NOW, THEREFORE, it is hereby agreed as follows:

xxx xxx xxx

6. This Agreement shall last for a period of Five (5) years, and is renewable for as long as
the obligations of ALFA with DBP, or any portion thereof, remains outstanding; (CA Rollo,
pp. 137-138)

Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have
transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the national government
through the Asset Privatization Trust (APT) as attested to in a Certification dated January 24, 1989 of the
Vice President of the DBP's Special Accounts Department II. In the same certification, it is stated that the
DBP, from 1987 until 1989, had handled APT's account which included ALFA's assets pursuant to a
management agreement by and between the DBP and APT (CA Rollo, p. 142) Hence, there is evidence on
record that at the time of the service of summons on ALFA through the petitioners on August 21, 1987,
the voting trust agreement in question was not yet terminated so that the legal title to the stocks of ALFA,
then, still belonged to the DBP.

In view of the foregoing, the ultimate issue of whether or not there was proper service of summons on
ALFA through the petitioners is readily answered in the negative.

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:

Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is a
corporation organized under the laws of the Philippines or a partnership duly registered,
service may be made on the president, manager, secretary, cashier, agent or any of its
directors.

It is a basic principle in Corporation Law that a corporation has a personality separate and distinct from
the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976];
Osias Academy v. Department of Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990).
Thus, the above rule on service of processes of a corporation enumerates the representatives of a
corporation who can validly receive court processes on its behalf. Not every stockholder or officer can
bind the corporation considering the existence of a corporate entity separate from those who compose it.

The rationale of the aforecited rule is that service must be made on a representative so integrated with
the corporation sued as to make it a priori supposable that he will realize his responsibilities and know
what he should do with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA 197
[1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).

The petitioners in this case do not fall under any of the enumerated officers. The service of summons
upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as correctly argued by the
petitioners, will contravene the general principle that a corporation can only be bound by such acts which
are within the scope of the officer's or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).

WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision dated March
19, 1990 and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders dated April
25, 1989 and October 17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are REINSTATED.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 77860 November 22, 1988

BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION, petitioners,


vs.
HON. COURT OF APPEALS and NILCAR Y. FAJILAN, respondents.
Lim, Duran & Associates for petitioner.

Renato J. Dilag for private respondent.

GRIÑO-AQUINO, J.:

The only issue in this case is whether or not a suit brought by a withdrawing stockholder against the
corporation to enforce payment of the balance due on the consideration (evidenced by a corporate
promissory note) for the surrender of his shares of stock and interests in the corporation, involves an
intra-corporate dispute. The resolution of that issue will determine whether the Securities and Exchange
Commission (SEC) or a regular court has jurisdiction over the action.

On May 7, 1984, respondent Nilcar Y. Fajilan offered in writing to resign as President and Member of the
Board of Directors of petitioner, Boman Environmental Development Corporation (BEDECO), and to sell
to the company all his shares, rights, and interests therein for P 300,000 plus the transfer to him of the
company's Isuzu pick-up truck which he had been using. The letter-offer (Exh. A-1) reads as follows:

07 May 1984

THE BOARD OF DIRECTORS,


BOMAN ENVIRONMENTAL DEVELOPMENT
CORPORATION
2nd Floor, AGS Building,
466 EDSA, Makati,
Metro Manila

Gentlemen:

With deepest regrets, I am tendering my resignation as member of the Board of Directors


and President of the Company effective as soon as my shares and interests thereto are sold
and fully paid.

It is really painful to leave the Company which we painstakingly labored and nortured for
years to attain its success today, however, family interests and other considerations dictate
me otherwise.

Thank you for your interest of buying my shares and other interests on the Company. It is
really my intention to divest myself of these investments and sell them all for PESOS:
THREE HUNDRED THOUSAND (P 300,000) payable in cash in addition to the Isuzu pick up
I am presently using for and in behalf of the Company.

Thank you.

NILCAR Y. FAJILAN
Director/President (p. 239, Rollo.)
At a meeting of the Board of Directors of BEDECO on June 14, 1984, Fajilan's resignation as president was
accepted and new officers were elected. Fajilan's offer to sell his shares back to the corporation was
approved, the Board promising to pay for them on a staggered basis from July 15, 1984 to December 15,
1984 (Annex B).<äre||anº•1àw> The resolution of the Board was communicated to Fajilan in the
following letter-agreement dated June 25, 1984 to which he affixed his conformity (Annex C):

June
25,
1984

Mr. Nilcar Y. Fajilan


No. 159 Aramismis Street
Project 7, Quezon City

Dear Mr. Fajilan:

Please be informed that after due deliberation the Board of Directors has accepted your
offer to sellyour share and interest in the company at the price of P300,000.00, inclusive of
your unpaid salary from February 1984 to May 31, 1984, loan principal, interest on loan,
profit sharing and share on book value of the corporation as at May 31, 1984. Payment of
the P300,000.00 shall be as follows:

July 15, P
1984 100,000.00
September P
15, 1984 75,000.00
October P
15, 1984 62,500.00
December P
15, 1984 62,500.00
P
300,000.00.

To assure you of payment of the above amount on respective due dates, the company will
execute the necessary promissory note.

In addition to the above, the Ford Courier Pick-up will belong to you subject to your
assumption of the outstanding obligation thereof with Fil-Invest. It is understood that upon
your full payment of the pick-up, arrangement will be made and negotiated with Fil-Invest
regarding the transfer of the ownership of the vehicle to your name.

If the above meets your requirements, kindly signify your conformity/approval by signing below.

Very truly yours,


(SGD) JAMES C.
PERALTA
Corporate Secretary

CONFORME:

(SGD) NILCAR Y. FAJILAN

Noted:

(SGD) ALFREDO S. PANGILINAN (SGD) MAXIMO R. REBALDO (SGD) BENEDICTO M.


EMPAYNADO

SUBSCRIBED AND SWORN TO before me, this 3rd day of July, 1984, Alfredo S. Pangilinan
exhibiting to me his Residence Certificate No. 1696224 issued at Makati, Metro Manila on
January 24, 1984, in his capacity as President of Boman Environmental Development
Corporation with Corporate Residence Certificate No. 207911 issued at Makati, Metro
Manila on March 26, 1984.

(SGD) ERNESTO B.
DURAN
NOTARY PUBLIC
Until December 31,
1984
PTR No. 8582861
Issued
on January 24, 1984
at
Makati, Metro
Manila

Doc. No. 392


Page No. 80
Book No. X
Series of 1984. (p. 245, Rollo.)

A promissory note dated July 3, 1984, was signed by BEDECO'S new president, Alfredo Pangilinan, in the
presence of two directors, committing BEDECO to pay him P300,000 over a six-month period from July
15, 1984 to December 15, 1984. The promissory note (Exh. D) provided as follows:

PROMISSORY NOTE

Makati
,
Metro
Manila
July 3,
1984
FOR VALUE RECEIVED, BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION, a
domestic corporation duly registered with the Securities and Exchange Commission, with
office at Rm. 608, Metro Bank Bldg., Ayala Blvd., Makati, Metro Manila, promise to pay
NILCAR Y. FAJILAN of 17 Aramismis St., Project 7, Quezon City, the sum of PESOS: THREE
HUNDRED THOUSAND (P300,000.00), Philippine Currency payable as follows:

P100,000.00 — July 15,


1984
75,000.00 — Sept.
15,
1984
62,500.00 — October
15,
1984
62,500.00 — Dec. 15,
1984
P300,000.00

BOMAN ENVIRONMENTAL
DEVELOPMENT CORPORATION
By:
(SGD) ALFREDO S. PANGILINAN
President

Signed in the presence of:

(SGD) MAXIMO R. REBALDO

(SGD) BENEDICTO M. EMPAYNADO


(Annex D, p. 247, Rollo.)

However, BEDECO paid only P50,000 on July 15, 1984 and another P50,000 on August 31, 1984 and
defaulted in paying the balance of P200,000.

On April 30, 1985, Fajilan filed a complaint in the Regional Trial Court of Makati for collection of that
balance from BEDECO.

In an order dated September 9, 1985, the trial court, through Judge Ansberto Paredes, dismissed the
complaint for lack of jurisdiction. It ruled that the controversy arose out of intracorporate relations,
hence, the Securities and Exchange Commission has original and exclusive jurisdiction to hear and decide
it.

His motion for reconsideration of that order having been denied, Fajilan filed a "Petition for Certiorari,
and mandamus with Preliminary Attachment" in the Intermediate Appellate Court.
In a decision dated March 2, 1987, the Court of Appeals set aside Judge Paredes' order of dismissal and
directed him to take cognizance of the case. BEDECO's motion for reconsideration was denied in a
resolution dated March 24, 1987 of the Court of Appeals.

In its decision, the Appellate Court characterized the case as a suit for collection of a sum of money as
Fajilan "was merely suing on the balance of the promissory note" (p. 4, Decision; p. 196, Rollo) which
BEDECO failed and refused to pay in full. More particularly, the Court of Appeals held:

While it is true that the circumstances which led to the execution of the promissory note by
the Board of Directors of respondent corporation was an intra- corporate matter, there
arose no controversy as to the sale of petitioner's interests and rights as well as his shares
as Member of the Board of Directors and President of respondent corporation. The intra-
corporate matter of the resignation of petitioner as Member of the Board of Directors and
President of respondent corporation has long been settled without issue.

The Board of Directors of respondent corporation has likewise long settled the sale by
petitioner of all his shares, rights and interests in favor of the corporation. No controversy
arose out of this transaction. The jurisdiction of the Securities and Exchange Commission
therefore need not be invoked on this matter. (p. 196, Rollo.)

The petition is impressed with merit.

Section 5(b) of P.D. No. 902-A, as amended, grants the SEC original and exclusive jurisdiction to hear and
decide cases involving—

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; ... (Emphasis supplied.)

This case involves an intra-corporate controversy because the parties are a stockholder and the
corporation. As correctly observed by the trial court, the perfection of the agreement to sell Fajilan's
participation and interests in BEDECO and the execution of the promissory note for payment of the price
of the sale did not remove the dispute from the coverage of Section 5(b) of P.D. No. 902, as amended, for
both the said agreement (Annex C) and the promissory note (Annex D) arose from intra-corporate
relations. Indeed, all the signatories of both documents were stockholders of the corporation at the time
of signing the same. It was an intra-corporate transaction, hence, this suit is an intra-corporate
controversy.

Fajilan's offer to resign as president and director "effective as soon as my shares and interests thereto
(sic) are sold and fully paid" (Annex A-1, p. 239, Rollo) implied that he would remain a stockholder until
his shares and interests were fully paid for, for one cannot be a director or president of a corporation
unless he is also a stockholder thereof. The fact that he was replaced as president of the corporation did
not necessaryily mean that he ceased to be a stockholder considering how the corporation failed to
complete payment of the consideration for the purchase of his shares of stock and interests in the
goodwill of the business. There has been no actual transfer of his shares to the corporation. In the books
of the corporation he is still a stockholder.
Fajilan's suit against the corporation to enforce the latter's promissory note or compel the corporation to
pay for his shareholdings is cognizable by the SEC alone which shall determine whether such payment
will not constitute a distribution of corporate assets to a stockholder in preference over creditors of the
corporation. The SEC has exclusive supervision, control and regulatory jurisdiction to investigate
whether the corporation has unrestricted retained earnings to cover the payment for the shares, and
whether the purchase is for a legitimate corporate purpose as provided in Sections 41 and 122 of the
Corporation Code, which reads as follows:

SEC. 41. Power to acquire own shares.—A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including but not limited to the following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or acquired;

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid


subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares


under the provisions of this Code,

Sec. 12. Corporate liquidation. ...

xxx xxx xxx

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after
payment of all its debts and liabilities, (77a, 89a, 16a).

These provisions of the Corporation Code should be deemed written into the agreement between the
corporation and the stockholders even if there is no express reference to them in the promissory note.
The principle is well settled that an existing law enters into and forms part of a valid contract without
need for the parties' expressly making reference to it (Lakas ng Manggagawang Makabayan vs. Abiera, 36
SCRA 437).

The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine
which means that the capital stock, property and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred
over the stockholders in the distribution of corporate assets. There can be no distribution of assets
among the stockholders without first paying corporate creditors. Hence, any disposition of corporate
funds to the prejudice of creditors is null and void. "Creditors of a corporation have the right to assume
that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of
the corporation to purchase its own stock ..."(Steinberg vs. Velasco, 52 Phil. 953.)

WHEREFORE, the petition for certiorari is granted. The decision of the Court of Appeals is reversed and
set aside. The order of the trial court dismissing the complaint for lack of jurisdiction is hereby reinstated.
No costs.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 90580 April 8, 1991

RUBEN SAW, DIONISIO SAW, LINA S. CHUA, LUCILA S. RUSTE AND EVELYN SAW, petitioners,
vs.
HON. COURT OF APPEALS, HON. BERNARDO P. PARDO, Presiding Judge of Branch 43, (Regional
Trial Court of Manila), FREEMAN MANAGEMENT AND DEVELOPMENT CORPORATION, EQUITABLE
BANKING CORPORATION, FREEMAN INCORPORATED, SAW CHIAO LIAN, THE REGISTER OF DEEDS
OF CALOOCAN CITY, and DEPUTY SHERIFF ROSALIO G. SIGUA, respondents.

Benito O. Ching, Jr. for petitioners.


William R. Vetor for Equitable Banking Corp.
Pineda, Uy & Janolo for Freeman, Inc. and Saw Chiao.

CRUZ, J.:

A collection suit with preliminary attachment was filed by Equitable Banking Corporation against
Freeman, Inc. and Saw Chiao Lian, its President and General Manager. The petitioners moved to
intervene, alleging that (1) the loan transactions between Saw Chiao Lian and Equitable Banking Corp.
were not approved by the stockholders representing at least 2/3 of corporate capital; (2) Saw Chiao Lian
had no authority to contract such loans; and (3) there was collusion between the officials of Freeman, Inc.
and Equitable Banking Corp. in securing the loans. The motion to intervene was denied, and the
petitioners appealed to the Court of Appeals.

Meanwhile, Equitable and Saw Chiao Lian entered into a compromise agreement which they submitted to
and was approved by the lower court. But because it was not complied with, Equitable secured a writ of
execution, and two lots owned by Freeman, Inc. were levied upon and sold at public auction to Freeman
Management and Development Corp.

The Court of Appeals1 sustained the denial of the petitioners' motion for intervention, holding that "the
compromise agreement between Freeman, Inc., through its President, and Equitable Banking Corp. will
not necessarily prejudice petitioners whose rights to corporate assets are at most inchoate, prior to the
dissolution of Freeman, Inc. . . . And intervention under Sec. 2, Rule 12 of the Revised Rules of Court is
proper only when one's right is actual, material, direct and immediate and not simply contingent or
expectant."

It also ruled against the petitioners' argument that because they had already filed a notice of appeal, the
trial judge had lost jurisdiction over the case and could no longer issue the writ of execution.
The petitioners are now before this Court, contending that:

1. The Honorable Court of Appeals erred in holding that the petitioners cannot intervene in Civil
Case No. 88-44404 because their rights as stockholders of Freeman are merely inchoate and not
actual, material, direct and immediate prior to the dissolution of the corporation;

2. The Honorable Court of Appeals erred in holding that the appeal of the petitioners in said Civil
Case No. 88-44404 was confined only to the order denying their motion to intervene and did not
divest the trial court of its jurisdiction over the whole case.

The petitioners base their right to intervene for the protection of their interests as stockholders
on Everett v. Asia Banking Corp.2 where it was held:

The well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to
the corporation, but that the action must be brought by the Board of Directors, . . . has its
exceptions. (If the corporation [were] under the complete control of the principal defendants, . . . it
is obvious that a demand upon the Board of Directors to institute action and prosecute the same
effectively would have been useless, and the law does not require litigants to perform useless acts.

Equitable demurs, contending that the collection suit against Freeman, Inc, and Saw Chiao Lian is
essentially in personam and, as an action against defendants in their personal capacities, will not
prejudice the petitioners as stockholders of the corporation. The Everett case is not applicable because it
involved an action filed by the minority stockholders where the board of directors refused to bring an
action in behalf of the corporation. In the case at bar, it was Freeman, Inc. that was being sued by the
creditor bank.

Equitable also argues that the subject matter of the intervention falls properly within the original and
exclusive jurisdiction of the Securities and Exchange Commission under P.D. No. 902-A. In fact, at the time
the motion for intervention was filed, there was pending between Freeman, Inc. and the petitioners SEC
Case No. 03577 entitled "Dissolution, Accounting, Cancellation of Certificate of Registration with
Restraining Order or Preliminary Injunction and Appointment of Receiver." It also avers in its Comment
that the intervention of the petitioners could have only caused delay and prejudice to the principal
parties.

On the second assignment of error, Equitable maintains that the petitioners' appeal could only apply to
the denial of their motion for intervention and not to the main case because their personality as party
litigants had not been recognized by the trial court.

After examining the issues and arguments of the parties, the Court finds that the respondent court
committed no reversible error in sustaining the denial by the trial court of the petitioners' motion for
intervention.

In the case of Magsaysay-Labrador v. Court of Appeals,3 we ruled as follows:

Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the
respondent court's holding that petitioners herein have no legal interest in the subject matter in
litigation so as to entitle them to intervene in the proceedings below. In the case of Batama
Farmers' Cooperative Marketing Association, Inc. v. Rosal, we held: "As clearly stated in Section 2
of Rule 12 of the Rules of Court, to be permitted to intervene in a pending action, the party must
have a legal interest in the matter in litigation, or in the success of either of the parties or an
interest against both, or he must be so situated as to be adversely affected by a distribution or
other disposition of the property in the custody of the court or an officer thereof."

To allow intervention, [a] it must be shown that the movant has legal interest in the matter in
litigation, or otherwise qualified; and [b] consideration must be given as to whether the
adjudication of the rights of the original parties may be delayed or prejudiced, or whether the
intervenor's rights may be protected in a separate proceeding or not. Both requirements must
concur as the first is not more important than the second.

The interest which entitles a person to intervene in a suit between other parties must be in the
matter in litigation and of such direct and immediate character that the intervenor will either gain
or lose by the direct legal operation and effect of the judgment. Otherwise, if persons not parties of
the action could be allowed to intervene, proceedings will become unnecessarily complicated,
expensive and interminable. And this is not the policy of the law.

The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and
which would put the intervenor in a legal position to litigate a fact alleged in the complaint,
without the establishment of which plaintiff could not recover.

Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote,


conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in
sheer expectancy of a right in the management of the corporation and to share in the profits
thereof and in the properties and assets thereof on dissolution, after payment of the corporate
debts and obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the
corporation, it does not vest the owner thereof with any legal right or title to any of the property,
his interest in the corporate property being equitable or beneficial in nature. Shareholders are in
no legal sense the owners of corporate property, which is owned by the corporation as a distinct
legal person.

On the second assignment of error, the respondent court correctly noted that the notice of appeal was
filed by the petitioners on October 24, 1988, upon the denial of their motion to intervene, and the writ of
execution was issued by the lower court on January 30, 1989. The petitioners' appeal could not have
concerned the "whole" case (referring to the decision) because the petitioners "did not appeal the
decision as indeed they cannot because they are not parties to the case despite their being stockholders
of respondent Freeman, Inc." They could only appeal the denial of their motion for intervention as they
were never recognized by the trial court as party litigants in the main case.

Intervention is "an act or proceeding by which a third person is permitted to become a party to an action
or proceeding between other persons, and which results merely in the addition of a new party or parties
to an original action, for the purpose of hearing and determining at the same time all conflicting claims
which may be made to the subject matter in litigation.4

It is not an independent proceeding, but an ancillary and supplemental one which, in the nature of things,
unless otherwise provided for by the statute or Rules of Court, must be in subordination to the main
proceeding.5 It may be laid down as a general rule that an intervenor is limited to the field of litigation
open to the original parties.6

In the case at bar, there is no more principal action to be resolved as a writ of execution had already been
issued by the lower court and the claim of Equitable had already been satisfied. The decision of the lower
court had already become final and in fact had already been enforced. There is therefore no more
principal proceeding in which the petitioners may intervene.

As we held in the case of Barangay Matictic v. Elbinias:7

An intervention has been regarded, as merely "collateral or accessory or ancillary to the principal
action and not an independent proceedings; and interlocutory proceeding dependent on and
subsidiary to, the case between the original parties." (Fransisco, Rules of Court, Vol. 1, p. 721).
With the final dismissal of the original action, the complaint in intervention can no longer be acted
upon. In the case of Clareza v. Resales, 2 SCRA 455, 457-458, it was stated that:

That right of the intervenor should merely be in aid of the right of the original party, like
the plaintiffs in this case. As this right of the plaintiffs had ceased to exist, there is nothing
to aid or fight for. So the right of intervention has ceased to exist.

Consequently, it will be illogical and of no useful purpose to grant or even consider further herein
petitioner's prayer for the issuance of a writ of mandamus to compel the lower court to allow and
admit the petitioner's complaint in intervention. The dismissal of the expropriation case has no
less the inherent effect of also dismissing the motion for intervention which is but the unavoidable
consequence.

The Court observes that even with the denial of the petitioners' motion to intervene, nothing is really lost
to them.1âwphi1The denial did not necessarily prejudice them as their rights are being litigated in the
case now before the Securities and Exchange Commission and may be fully asserted and protected in that
separate proceeding.

WHEREFORE, the petition is DENIED, with costs against the petitioners. It is so ordered.

Republic of the Philippines


SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 157479 November 24, 2010

PHILIP TURNER and ELNORA TURNER, Petitioners,


vs.
LORENZO SHIPPING CORPORATION, Respondent.

DECISION

BERSAMIN, J.:
This case concerns the right of dissenting stockholders to demand payment of the value of their
shareholdings.

In the stockholders’ suit to recover the value of their shareholdings from the corporation, the Regional
Trial Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered the corporation,
herein respondent, to pay. Execution was partially carried out against the respondent. On the
respondent’s petition for certiorari, however, the Court of Appeals (CA) corrected the RTC and dismissed
the petitioners’ suit on the ground that their cause of action for collection had not yet accrued due to the
lack of unrestricted retained earnings in the books of the respondent.

Thus, the petitioners are now before the Court to challenge the CA’s decision promulgated on March 4,
2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his
capacity as Presiding Judge of Branch 46 of the Regional Trial Court of Manila, et al.1

Antecedents

The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged
primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles of
incorporation to remove the stockholders’ pre-emptive rights to newly issued shares of stock. Feeling
that the corporate move would be prejudicial to their interest as stockholders, the petitioners voted
against the amendment and demanded payment of their shares at the rate of ₱2.276/share based on the
book value of the shares, or a total of ₱2,298,760.00.

The respondent found the fair value of the shares demanded by the petitioners unacceptable. It insisted
that the market value on the date before the action to remove the pre-emptive right was taken should be
the value, or ₱0.41/share (or a total of ₱414,100.00), considering that its shares were listed in the
Philippine Stock Exchange, and that the payment could be made only if the respondent had unrestricted
retained earnings in its books to cover the value of the shares, which was not the case.

The disagreement on the valuation of the shares led the parties to constitute an appraisal committee
pursuant to Section 82 of the Corporation Code, each of them nominating a representative, who together
then nominated the third member who would be chairman of the appraisal committee. Thus, the
appraisal committee came to be made up of Reynaldo Yatco, the petitioners’ nominee; Atty. Antonio
Acyatan, the respondent’s nominee; and Leo Anoche of the Asian Appraisal Company, Inc., the third
member/chairman.

On October 27, 2000, the appraisal committee reported its valuation of ₱2.54/share, for an aggregate
value of ₱2,565,400.00 for the petitioners.2

Subsequently, the petitioners demanded payment based on the valuation of the appraisal committee, plus
2%/month penalty from the date of their original demand for payment, as well as the reimbursement of
the amounts advanced as professional fees to the appraisers.3

In its letter to the petitioners dated January 2, 2001,4 the respondent refused the petitioners’ demand,
explaining that pursuant to the Corporation Code, the dissenting stockholders exercising their appraisal
rights could be paid only when the corporation had unrestricted retained earnings to cover the fair value
of the shares, but that it had no retained earnings at the time of the petitioners’ demand, as borne out by
its Financial Statements for Fiscal Year 1999 showing a deficit of ₱72,973,114.00 as of December 31,
1999.

Upon the respondent’s refusal to pay, the petitioners sued the respondent for collection and damages in
the RTC in Makati City on January 22, 2001. The case, docketed as Civil Case No. 01-086, was initially
assigned to Branch 132.5

On June 26, 2002, the petitioners filed their motion for partial summary judgment, claiming that:

7) xxx the defendant has an accumulated unrestricted retained earnings of ELEVEN MILLION
NINE HUNDRED SEVENTY FIVE THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS,
Philippine Currency, evidenced by its Financial Statement as of the Quarter Ending March 31,
2002; xxx

8) xxx the fair value of the shares of the petitioners as fixed by the Appraisal Committee is final,
that the same cannot be disputed xxx

9) xxx there is no genuine issue to material fact and therefore, the plaintiffs are entitled, as a
matter of right, to a summary judgment. xxx 6

The respondent opposed the motion for partial summary judgment, stating that the determination of the
unrestricted retained earnings should be made at the end of the fiscal year of the respondent, and that
the petitioners did not have a cause of action against the respondent.

During the pendency of the motion for partial summary judgment, however, the Presiding Judge of
Branch 133 transmitted the records to the Clerk of Court for re-raffling to any of the RTC’s special
commercial courts in Makati City due to the case being an intra-corporate dispute. Hence, Civil Case No.
01-086 was re-raffled to Branch 142.

Nevertheless, because the principal office of the respondent was in Manila, Civil Case No. 01-086 was
ultimately transferred to Branch 46 of the RTC in Manila, presided by Judge Artemio Tipon,7 pursuant to
the Interim Rules of Procedure on Intra-Corporate Controversies (Interim Rules) requiring intra-
corporate cases to be brought in the RTC exercising jurisdiction over the place where the principal office
of the corporation was found.

After the conference in Civil Case No. 01-086 set on October 23, 2002, which the petitioners’ counsel did
not attend, Judge Tipon issued an order,8 granting the petitioners’ motion for partial summary judgment,
stating:

As to the motion for partial summary judgment, there is no question that the 3-man committee mandated
to appraise the shareholdings of plaintiff submitted its recommendation on October 27, 2000 fixing the
fair value of the shares of stocks of the plaintiff at P2.54 per share. Under Section 82 of the Corporation
Code:

"The findings of the majority of the appraisers shall be final, and the award shall be paid by the
corporation within thirty (30) days after the award is made."

"The only restriction imposed by the Corporation Code is–"


"That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted
retained earning in its books to cover such payment."

The evidence submitted by plaintiffs shows that in its quarterly financial statement it submitted to the
Securities and Exchange Commission, the defendant has retained earnings of P11,975,490 as of March 21,
2002. This is not disputed by the defendant. Its only argument against paying is that there must be
unrestricted retained earning at the time the demand for payment is made.

This certainly is a very narrow concept of the appraisal right of a stockholder. The law does not say that
the unrestricted retained earnings must exist at the time of the demand. Even if there are no retained
earnings at the time the demand is made if there are retained earnings later, the fair value of such stocks
must be paid. The only restriction is that there must be sufficient funds to cover the creditors after the
dissenting stockholder is paid. No such allegations have been made by the defendant.9

On November 12, 2002, the respondent filed a motion for reconsideration.

On the scheduled hearing of the motion for reconsideration on November 22, 2002, the petitioners filed a
motion for immediate execution and a motion to strike out motion for reconsideration. In the latter
motion, they pointed out that the motion for reconsideration was prohibited by Section 8 of the Interim
Rules. Thus, also on November 22, 2002, Judge Tipon denied the motion for reconsideration and granted
the petitioners’ motion for immediate execution.10

Subsequently, on November 28, 2002, the RTC issued a writ of execution.11

Aggrieved, the respondent commenced a special civil action for certiorari in the CA to challenge the two
aforecited orders of Judge Tipon, claiming that:

A.

JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING SUMMARY JUDGMENT TO THE
SPOUSES TURNER, BECAUSE AT THE TIME THE "COMPLAINT" WAS FILED, LSC HAD NO
RETAINED EARNINGS, AND THUS WAS COMPLYING WITH THE LAW, AND NOT VIOLATING ANY
RIGHTS OF THE SPOUSES TURNER, WHEN IT REFUSED TO PAY THEM THE VALUE OF THEIR LSC
SHARES. ANY RETAINED EARNINGS MADE A YEAR AFTER THE "COMPLAINT" WAS FILED ARE
IRRELEVANT TO THE SPOUSES TURNER’S RIGHT TO RECOVER UNDER THE "COMPLAINT",
BECAUSE THE WELL-SETTLED RULE, REPEATEDLY BROUGHT TO JUDGE TIPON’S ATTENTION, IS
"IF NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS COMMENCED THE SUIT CANNOT BE
MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY HAVE ACCRUED THEREAFTER.

B.

JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS GRAVELY ABUSED HIS
DISCRETION, WHEN HE GRANTED AND ISSUED THE QUESTIONED "WRIT OF EXECUTION"
DIRECTING THE EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN FAVOR OF THE SPOUSES
TURNER, BECAUSE THAT JUDGMENT IS NOT A FINAL JUDGMENT UNDER SECTION 1 OF RULE 39
OF THE RULES OF COURT AND THEREFORE CANNOT BE SUBJECT OF EXECUTION UNDER THE
SUPREME COURT’S CATEGORICAL HOLDING IN PROVINCE OF PANGASINAN VS. COURT OF
APPEALS.
Upon the respondent’s application, the CA issued a temporary restraining order (TRO), enjoining the
petitioners, and their agents and representatives from enforcing the writ of execution. By then, however,
the writ of execution had been partially enforced.

The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent the execution.
Thereupon, the sheriff resumed the enforcement of the writ of execution.

The CA promulgated its assailed decision on March 4, 2003,12 pertinently holding:

However, it is clear from the foregoing that the Turners’ appraisal right is subject to the legal condition
that no payment shall be made to any dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover such payment. Thus, the Supreme Court held that:

The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine
which means that the capital stock, property and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred
over the stockholders in the distribution of corporate assets. There can be no distribution of assets
among the stockholders without first paying corporate creditors. Hence, any disposition of corporate
funds to the prejudice of creditors is null and void. Creditors of a corporation have the right to assume
that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of
the corporation to purchase its own stock.

In the instant case, it was established that there were no unrestricted retained earnings when the
Turners filed their Complaint. In a letter dated 20 August 2000, petitioner informed the Turners that
payment of their shares could only be made if it had unrestricted earnings in its books to cover the same.
Petitioner reiterated this in a letter dated 2 January 2001 which further informed the Turners that its
Financial Statement for fiscal year 1999 shows that its retained earnings ending December 31, 1999 was
at a deficit in the amount of ₱72,973,114.00, a matter which has not been disputed by private
respondents. Hence, in accordance with the second paragraph of sec. 82, BP 68 supra, the Turners’ right
to payment had not yet accrued when they filed their Complaint on January 22, 2001, albeit their
appraisal right already existed.

In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the Supreme Court declared that:

Now, before an action can properly be commenced all the essential elements of the cause of action must
be in existence, that is, the cause of action must be complete. All valid conditions precedent to the
institution of the particular action, whether prescribed by statute, fixed by agreement of the parties or
implied by law must be performed or complied with before commencing the action, unless the conduct of
the adverse party has been such as to prevent or waive performance or excuse non-performance of the
condition.

It bears restating that a right of action is the right to presently enforce a cause of action, while a cause of
action consists of the operative facts which give rise to such right of action. The right of action does not
arise until the performance of all conditions precedent to the action and may be taken away by the
running of the statute of limitations, through estoppel, or by other circumstances which do not affect the
cause of action. Performance or fulfillment of all conditions precedent upon which a right of action
depends must be sufficiently alleged, considering that the burden of proof to show that a party has a right
of action is upon the person initiating the suit.
The Turners’ right of action arose only when petitioner had already retained earnings in the amount of
₱11,975,490.00 on March 21, 2002; such right of action was inexistent on January 22, 2001 when they
filed the Complaint.

In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the Supreme Court ruled:

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

The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao vs. Court of Appeals.

The Turners’ apprehension that their claim for payment may prescribe if they wait for the petitioner to
have unrestricted retained earnings is misplaced. It is the legal possibility of bringing the action that
determines the starting point for the computation of the period of prescription. Stated otherwise, the
prescriptive period is to be reckoned from the accrual of their right of action.

Accordingly, We hold that public respondent exceeded its jurisdiction when it entertained the herein
Complaint and issued the assailed Orders. Excess of jurisdiction is the state of being beyond or outside
the limits of jurisdiction, and as distinguished from the entire absence of jurisdiction, means that the act
although within the general power of the judge, is not authorized and therefore void, with respect to the
particular case, because the conditions which authorize the exercise of his general power in that
particular case are wanting, and hence, the judicial power is not in fact lawfully invoked.

We find no necessity to discuss the second ground raised in this petition.

WHEREFORE, upon the premises, the petition is GRANTED. The assailed Orders and the corresponding
Writs of Garnishment are NULLIFIED. Civil Case No. 02-104692 is hereby ordered DISMISSED without
prejudice to refiling by the private respondents of the action for enforcement of their right to payment as
withdrawing stockholders.

SO ORDERED.

The petitioners now come to the Court for a review on certiorari of the CA’s decision, submitting that:

I.

THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT GRANTED THE PETITION
FOR CERTIORARI WHEN THE REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND ITS
JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN GRANTING THE MOTION FOR PARTIAL
SUMMARY JUDGMENT AND IN GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF JUDGMENT;

II.

THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT ORDERED THE DISMISSAL
OF THE CASE, WHEN THE PETITION FOR CERTIORARI MERELY SOUGHT THE ANNULMENT OF THE
ORDER GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND OF THE ORDER GRANTING
THE MOTION FOR IMMEDIATE EXECUTION OF THE JUDGMENT;

III.

THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF SUBSTANCE NOT THEREFORE
DETERMINED BY THIS HONORABLE COURT AND/OR DECIDED IT IN A WAY NOT IN ACCORD WITH
LAW OR WITH JURISPRUDENCE.

Ruling

The petition fails.

The CA correctly concluded that the RTC had exceeded its jurisdiction in entertaining the petitioners’
complaint in Civil Case No. 01-086, and in rendering the summary judgment and issuing writ of
execution.

A.

Stockholder’s Right of Appraisal, In General

A stockholder who dissents from certain corporate actions has the right to demand payment of the fair
value of his or her shares. This right, known as the right of appraisal, is expressly recognized in Section 81
of the Corporation Code, to wit:

Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent
and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending or shortening the term of
corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and

3. In case of merger or consolidation. (n)

Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter or
articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest unless
objectionable corporate action is taken.13 It serves the purpose of enabling the dissenting stockholder to
have his interests purchased and to retire from the corporation.141avvphil

Under the common law, there were originally conflicting views on whether a corporation had the power
to acquire or purchase its own stocks. In England, it was held invalid for a corporation to purchase its
issued stocks because such purchase was an indirect method of reducing capital (which was statutorily
restricted), aside from being inconsistent with the privilege of limited liability to creditors.15 Only a few
American jurisdictions adopted by decision or statute the strict English rule forbidding a corporation
from purchasing its own shares. In some American states where the English rule used to be adopted,
statutes granting authority to purchase out of surplus funds were enacted, while in others, shares might
be purchased even out of capital provided the rights of creditors were not prejudiced.16 The reason
underlying the limitation of share purchases sprang from the necessity of imposing safeguards against
the depletion by a corporation of its assets and against the impairment of its capital needed for the
protection of creditors.17

Now, however, a corporation can purchase its own shares, provided payment is made out of surplus
profits and the acquisition is for a legitimate corporate purpose.18 In the Philippines, this new rule is
embodied in Section 41 of the Corporation Code, to wit:

Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid


subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code. (n)

The Corporation Code defines how the right of appraisal is exercised, as well as the implications of the
right of appraisal, as follows:

1. The appraisal right is exercised by any stockholder who has voted against the proposed corporate
action by making a written demand on the corporation within 30 days after the date on which the vote
was taken for the payment of the fair value of his shares. The failure to make the demand within the
period is deemed a waiver of the appraisal right.19

2. If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares within
a period of 60 days from the date the stockholders approved the corporate action, the fair value shall be
determined and appraised by three disinterested persons, one of whom shall be named by the
stockholder, another by the corporation, and the third by the two thus chosen. The findings and award of
the majority of the appraisers shall be final, and the corporation shall pay their award within 30 days
after the award is made. Upon payment by the corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his or her shares to the corporation.20
3. All rights accruing to the withdrawing stockholder’s shares, including voting and dividend rights, shall
be suspended from the time of demand for the payment of the fair value of the shares until either the
abandonment of the corporate action involved or the purchase of the shares by the corporation, except
the right of such stockholder to receive payment of the fair value of the shares.21

4. Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall submit to
the corporation the certificates of stock representing his shares for notation thereon that such shares are
dissenting shares. A failure to do so shall, at the option of the corporation, terminate his rights under this
Title X of the Corporation Code. If shares represented by the certificates bearing such notation are
transferred, and the certificates are consequently canceled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have all the rights of a regular
stockholder; and all dividend distributions that would have accrued on such shares shall be paid to the
transferee.22

5. If the proposed corporate action is implemented or effected, the corporation shall pay to such
stockholder, upon the surrender of the certificates of stock representing his shares, the fair value thereof
as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in
anticipation of such corporate action.23

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover the payment. In case the corporation
has no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides
that if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his
voting and dividend rights shall immediately be restored.

The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment
of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property,
and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors,
who are preferred in the distribution of corporate assets.24 The creditors of a corporation have the right
to assume that the board of directors will not use the assets of the corporation to purchase its own stock
for as long as the corporation has outstanding debts and liabilities.25 There can be no distribution of
assets among the stockholders without first paying corporate debts. Thus, any disposition of corporate
funds and assets to the prejudice of creditors is null and void.26

B.

Petitioners’ cause of action was premature

That the respondent had indisputably no unrestricted retained earnings in its books at the time the
petitioners commenced Civil Case No. 01-086 on January 22, 2001 proved that the respondent’s legal
obligation to pay the value of the petitioners’ shares did not yet arise. Thus, the CA did not err in holding
that the petitioners had no cause of action, and in ruling that the RTC did not validly render the partial
summary judgment.

A cause of action is the act or omission by which a party violates a right of another.27 The essential
elements of a cause of action are: (a) the existence of a legal right in favor of the plaintiff; (b) a correlative
legal duty of the defendant to respect such right; and (c) an act or omission by such defendant in violation
of the right of the plaintiff with a resulting injury or damage to the plaintiff for which the latter may
maintain an action for the recovery of relief from the defendant.28 Although the first two elements may
exist, a cause of action arises only upon the occurrence of the last element, giving the plaintiff the right to
maintain an action in court for recovery of damages or other appropriate relief.29

Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be based on a cause
of action. Accordingly, Civil Case No. 01-086 was dismissible from the beginning for being without any
cause of action.

The RTC concluded that the respondent’s obligation to pay had accrued by its having the unrestricted
retained earnings after the making of the demand by the petitioners. It based its conclusion on the fact
that the Corporation Code did not provide that the unrestricted retained earnings must already exist at
the time of the demand.

The RTC’s construal of the Corporation Code was unsustainable, because it did not take into account the
petitioners’ lack of a cause of action against the respondent. In order to give rise to any obligation to pay
on the part of the respondent, the petitioners should first make a valid demand that the respondent
refused to pay despite having unrestricted retained earnings. Otherwise, the respondent could not be
said to be guilty of any actionable omission that could sustain their action to collect.

Neither did the subsequent existence of unrestricted retained earnings after the filing of the complaint
cure the lack of cause of action in Civil Case No. 01-086. The petitioners’ right of action could only spring
from an existing cause of action. Thus, a complaint whose cause of action has not yet accrued cannot be
cured by an amended or supplemental pleading alleging the existence or accrual of a cause of action
during the pendency of the action.30For, only when there is an invasion of primary rights, not before, does
the adjective or remedial law become operative.31 Verily, a premature invocation of the court’s
intervention renders the complaint without a cause of action and dismissible on such ground.32 In short,
Civil Case No. 01-086, being a groundless suit, should be dismissed.

Even the fact that the respondent already had unrestricted retained earnings more than sufficient to
cover the petitioners’ claims on June 26, 2002 (when they filed their motion for partial summary
judgment) did not rectify the absence of the cause of action at the time of the commencement of Civil Case
No. 01-086. The motion for partial summary judgment, being a mere application for relief other than by a
pleading,33 was not the same as the complaint in Civil Case No. 01-086. Thereby, the petitioners did not
meet the requirement of the Rules of Court that a cause of action must exist at the commencement of an
action, which is "commenced by the filing of the original complaint in court."34

The petitioners claim that the respondent’s petition for certiorari sought only the annulment of the
assailed orders of the RTC (i.e., granting the motion for partial summary judgment and the motion for
immediate execution); hence, the CA had no right to direct the dismissal of Civil Case No. 01-086.

The claim of the petitioners cannot stand.

Although the respondent’s petition for certiorari targeted only the RTC’s orders granting the motion for
partial summary judgment and the motion for immediate execution, the CA’s directive for the dismissal of
Civil Case No. 01-086 was not an abuse of discretion, least of all grave, because such dismissal was the
only proper thing to be done under the circumstances. According to Surigao Mine Exploration Co., Inc. v.
Harris:35
Subject to certain qualification, and except as otherwise provided by law, an action commenced before
the cause of action has accrued is prematurely brought and should be dismissed. The fact that the
cause of action accrues after the action is commenced and while the case is pending is of no moment. It is
a rule of law to which there is, perhaps no exception, either in law or in equity, that to recover at all there
must be some cause of action at the commencement of the suit. There are reasons of public policy why
there should be no needless haste in bringing up litigation, and why people who are in no default and
against whom there is as yet no cause of action should not be summoned before the public tribunals to
answer complaints which are groundless. An action prematurely brought is a groundless suit. Unless the
plaintiff has a valid and subsisting cause of action at the time his action is commenced, the defect
cannot be cured or remedied by the acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such after-accrued cause of action is not
permissible.

Lastly, the petitioners argue that the respondent’s recourse of a special action for certiorari was the
wrong remedy, in view of the fact that the granting of the motion for partial summary judgment
constituted only an error of law correctible by appeal, not of jurisdiction.

The argument of the petitioners is baseless. The RTC was guilty of an error of jurisdiction, for it exceeded
its jurisdiction by taking cognizance of the complaint that was not based on an existing cause of action.

WHEREFORE, the petition for review on certiorari is denied for lack of merit.

We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo
Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the
Regional Trial Court of Manila, et al.

Costs of suit to be paid by the petitioners.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

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

JOHN GOKONGWEI, JR., petitioner,


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

De Santos, Balgos & Perez for petitioner.

Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.

R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

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

SEC CASE NO 1375

On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for a
preliminary injunction" against the majority of the members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr.,
Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas,
Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.

As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents amended
by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted
on March 13, 1961, when the outstanding capital stock of respondent corporation was only
P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled
30,127,047 with a total par value of P301,270,430.00. It was contended that according to section 22 of
the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify,
repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the
corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the
amendment. Since the amendment was based on the 1961 authorization, petitioner contended that the
Board acted without authority and in usurpation of the power of the stockholders.

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

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

As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all the
qualifications to be a director of respondent corporation, being a Substantial stockholder thereof; that as
a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and
to be voted upon in the election of directors; and that in amending the by-laws, respondents purposely
provided for petitioner's disqualification and deprived him of his vested right as afore-mentioned hence
the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no inherent power to disqualify a
stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that
Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into
contracts (specifically a management contract) with respondent corporation, which was allowed because
the questioned amendment gave the Board itself the prerogative of determining whether they or other
persons are engaged in competitive or antagonistic business; that the portion of the amended bylaws
which states that in determining whether or not a person is engaged in competitive business, the Board
may consider such factors as business and family relationship, is unreasonable and oppressive and,
therefore, void; and that the portion of the amended by-laws which requires that "all nominations for
election of directors ... shall be submitted in writing to the Board of Directors at least five (5) working
days before the date of the Annual Meeting" is likewise unreasonable and oppressive.

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

On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange
Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary
of respondent corporation refused to allow him to inspect its records despite request made by petitioner
for production of certain documents enumerated in the request, and that respondent corporation had
been attempting to suppress information from its stockholders despite a negative reply by the SEC to its
query regarding their authority to do so. Among the documents requested to be copied were (a) minutes
of the stockholder's meeting field on March 13, 1961, (b) copy of the management contract between San
Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San Miguel
International, Inc.; (d) authority of the stockholders to invest the funds of respondent corporation in San
Miguel International, Inc.; and (e) lists of salaries, allowances, bonuses, and other compensation, if any,
received by Andres M. Soriano, Jr. and/or its successor-in-interest.

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

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

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying the
material averments thereof and stating, as part of their affirmative defenses, that in August 1972, the
Universal Robina Corporation (Robina), a corporation engaged in business competitive to that of
respondent corporation, began acquiring shares therein. until September 1976 when its total holding
amounted to 622,987 shares: that in October 1972, the Consolidated Foods Corporation (CFC) likewise
began acquiring shares in respondent (corporation. until its total holdings amounted to P543,959.00 in
September 1976; that on January 12, 1976, petitioner, who is president and controlling shareholder of
Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent corporation,
and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the stockholder "in his effort to secure for himself and
in representation of Robina and CFC interests, a seat in the Board of Directors of SMC", that in the
stockholders' meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure
a seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive business
and his securing a seat would have subjected respondent corporation to grave disadvantages; that
"petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting; that
thereafter the Board of Directors amended the by-laws as afore-stated.

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

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

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

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

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

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

3. In view of the Manifestation of petitioner-movant dated November 29, 1976,


withdrawing his request to copy and inspect the management contract between San Miguel
Corporation and A. Soriano Corporation and the renewal and amendments thereof for the
reason that he had already obtained the same, the Commission takes note thereof; and

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

This Order is immediately executory upon its approval. 2

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

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

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

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

In view of the fact that the annul stockholders' meeting of respondent corporation had been scheduled
for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that he intended
to run for the position of director of respondent corporation. Thereafter, respondents filed a
Manifestation with respondent Commission, submitting a Resolution of the Board of Directors of
respondent corporation disqualifying and precluding petitioner from being a candidate for director
unless he could submit evidence on May 3, 1977 that he does not come within the disqualifications
specified in the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof,
petitioner filed a manifestation and motion to resolve pending incidents in the case and to issue a writ of
injunction, alleging that private respondents were seeking to nullify and render ineffectual the exercise of
jurisdiction by the respondent Commission, to petitioner's irreparable damage and prejudice, Allegedly
despite a subsequent Manifestation to prod respondent Commission to act, petitioner was not heard
prior to the date of the stockholders' meeting.

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

SEC. CASE NO. 1423

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

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

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

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


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

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

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

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

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

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

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

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

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

It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and
that respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative
to San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment, alleging
that the petition is without merit for the following reasons:

(1) that the petitioner the interest he represents are engaged in business competitive and antagonistic to
that of respondent San Miguel Corporation, it appearing that the owns and controls a greater portion of
his SMC stock thru the Universal Robina Corporation and the Consolidated Foods Corporation, which
corporations are engaged in business directly and substantially competing with the allied businesses of
respondent SMC and of corporations in which SMC has substantial investments. Further, when CFC and
Robina had accumulated investments. Further, when CFC and Robina had accumulated shares in SMC, the
Board of Directors of SMC realized the clear and present danger that competitors or antagonistic parties
may be elected directors and thereby have easy and direct access to SMC's business and trade secrets and
plans;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the by-
law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to the
limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which
reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment
instead of the judgment of those who are authorized to make by-laws and who have exercised their
authority. 11

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

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

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL


CORPORATION

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

Product Line Estimated Market Share Total


1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%

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

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

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

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED


BY LAW

Private respondents contend that the disputed amended by laws were adopted by the Board of Directors
of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the clear and
present danger that the election of a business competitor to the Board may cause upon the corporation
and the other stockholders inseparable prejudice. Submitted for resolution, therefore, is the issue —
whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a
competitor from nomination and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its
internal government, and to regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management of its affairs. 12 At common law, the
rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents. And it is settled throughout the United States that in the
absence of positive legislative provisions limiting it, every private corporation has this inherent power as
one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its
charter or in general law, such power of self-government being essential to enable the corporation to
accomplish the purposes of its creation. 13

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

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

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

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

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

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


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

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

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

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

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

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

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


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

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

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

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

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

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the
information which he acquires as director to promote his individual or corporate interests to the
prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws
was made. Certainly, where two corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his corporation duties above his personal
concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and reasonable
an amendment to the by-laws of a bank, requiring that its directors should not be directors, officers,
employees, agents, nominees or attorneys of any other banking corporation, affiliate or subsidiary
thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus:

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

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

(1) A director shall not be directly or indirectly interested as a stockholder in any other
firm, company, or association which competes with the subject corporation.

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

(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other firm,
company, or association which compete with the subject corporation.

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


office.

(5) No person who is an attorney against the corporation in a law suit is eligible for service
on the board. (At p. 7.)

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

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

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

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

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

Article 186 of the Revised Penal Code also provides:

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

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

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

3. Any person who, being a manufacturer, producer, or processor of any merchandise or


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

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

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

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

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

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

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

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

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

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

Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but
waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms, applies to all stockholders. The equal
protection clause of the Constitution requires only that the by-law operate equally upon all persons of a
class. Besides, before petitioner can be declared ineligible to run for director, there must be hearing and
evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of
public policy and management, therefore, support the view that a by-law which disqualifies a competition
from election to the Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the
corporation in adopting measures to protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who have expressed their authority. 45

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

III

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

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

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

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

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

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

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

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

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

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

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

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

IV

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

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

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

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

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

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

"j. Power to acquire or dispose of shares or securities. — A private corporation, in order to


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

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

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

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

WHEREFORE, judgment is hereby rendered as follows:

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

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

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the
validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing
by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

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

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

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

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-33320 May 30, 1983

RAMON A. GONZALES, petitioner,


vs.
THE PHILIPPINE NATIONAL BANK, respondent.

Ramon A. Gonzales in his own behalf.

Juan Diaz for respondent.

VASQUEZ, J.:

Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a special civil
action for mandamus against the herein respondent praying that the latter be ordered to allow him to
look into the books and records of the respondent bank in order to satisfy himself as to the truth of the
published reports that the respondent has guaranteed the obligation of Southern Negros Development
Corporation in the purchase of a US$ 23 million sugar-mill to be financed by Japanese suppliers and
financiers; that the respondent is financing the construction of the P 21 million Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron
Philippines, Inc., as well as to inquire into the validity of Id transactions. The petitioner has alleged hat his
written request for such examination was denied by the respondent. The trial court having dismissed the
petition for mandamus, the instant appeal to review the said dismissal was filed.

The facts that gave rise to the subject controversy have been set forth by the trial court in the decision
herein sought to be reviewed, as follows:

Briefly stated, the following facts gathered from the stipulation of the parties served as the
backdrop of this proceeding.

Previous to the present action, the petitioner instituted several cases in this Court
questioning different transactions entered into by the Bark with other parties. First among
them is Civil Case No. 69345 filed on April 27, 1967, by petitioner as a taxpayer versus Sec.
Antonio Raquiza of Public Works and Communications, the Commissioner of Public
Highways, the Bank, Continental Ore Phil., Inc., Continental Ore, Huber Corporation, Allis
Chalmers and General Motors Corporation In the course of the hearing of said case on
August 3, 1967, the personality of herein petitioner to sue the bank and question the letters
of credit it has extended for the importation by the Republic of the Philippines of public
works equipment intended for the massive development program of the President was
raised. In view thereof, he expressed and made known his intention to acquire one share of
stock from Congressman Justiniano Montano which, on the following day, August 30, 1967,
was transferred in his name in the books of the Bank.

Subsequent to his aforementioned acquisition of one share of stock of the Bank, petitioner,
in his dual capacity as a taxpayer and stockholder, filed the following cases involving the
bank or the members of its Board of Directors to wit:

l. On October l8,1967, Civil Case No. 71044 versus the Board of Directors of the Bank; the
National Investment and Development Corp., Marubeni Iida Co., Ltd., and Agro-Inc. Dev. Co.
or Saravia;

2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and other Directors of
the Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar Mill Integrated
Farming, Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and Batangas Sugar Central
Inc.;

3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and the Directors of
both the PNB and DBP;

On January 11, 1969, however, petitioner addressed a letter to the President of the Bank
(Annex A, Pet.), requesting submission to look into the records of its transactions covering
the purchase of a sugar central by the Southern Negros Development Corp. to be financed
by Japanese suppliers and financiers; its financing of the Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar Mills in Iloilo. On
January 23, 1969, the Asst. Vice-President and Legal Counsel of the Bank answered
petitioner's letter denying his request for being not germane to his interest as a one-share
stockholder and for the cloud of doubt as to his real intention and purpose in acquiring said
share. (Annex B, Pet.) In view of the Bank's refusal the petitioner instituted this action.'
(Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court in its brief which he
characterized as having been "correctly stated." (Petitioner-Appellant"s Brief, pp. 57.)

The court a quo denied the prayer of the petitioner that he be allowed to examine and inspect the books
and records of the respondent bank regarding the transactions mentioned on the grounds that the right
of a stockholder to inspect the record of the business transactions of a corporation granted under Section
51 of the former Corporation Law (Act No. 1459, as amended) is not absolute, but is limited to purposes
reasonably related to the interest of the stockholder, must be asked for in good faith for a specific and
honest purpose and not gratify curiosity or for speculative or vicious purposes; that such examination
would violate the confidentiality of the records of the respondent bank as provided in Section 16 of its
charter, Republic Act No. 1300, as amended; and that the petitioner has not exhausted his administrative
remedies.

Assailing the conclusions of the lower court, the petitioner has assigned the single error to the lower
court of having ruled that his alleged improper motive in asking for an examination of the books and
records of the respondent bank disqualifies him to exercise the right of a stockholder to such inspection
under Section 51 of Act No. 1459, as amended. Said provision reads in part as follows:

Sec. 51. ... The record of all business transactions of the corporation and the minutes of any
meeting shall be open to the inspection of any director, member or stockholder of the
corporation at reasonable hours.

Petitioner maintains that the above-quoted provision does not justify the qualification made by the lower
court that the inspection of corporate records may be denied on the ground that it is intended for an
improper motive or purpose, the law having granted such right to a stockholder in clear and
unconditional terms. He further argues that, assuming that a proper motive or purpose for the desired
examination is necessary for its exercise, there is nothing improper in his purpose for asking for the
examination and inspection herein involved.

Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as amended, regarding
the right of a stockholder to inspect and examine the books and records of a corporation. The former
Corporation Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwise
known as the "Corporation Code of the Philippines."

The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has been retained, but
with some modifications. The second and third paragraphs of Section 74 of Batas Pambansa Blg. 68
provide the following:

The records of all business transactions of the corporation and the minutes of any meeting
shag be open to inspection by any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he may demand, in writing, for a
copy of excerpts from said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustee,
stockholder or member of the corporation to examine and copy excerpts from its records
or minutes, in accordance with the provisions of this Code, shall be liable to such director,
trustee, stockholder or member for damages, and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of this Code: Provided, That if such refusal is
made pursuant to a resolution or order of the board of directors or trustees, the liability
under this section for such action shall be imposed upon the directors or trustees who
voted for such refusal; and Provided, further, That it shall be a defense to any action under
this section that the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any information secured through
any prior examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making his
demand.

As may be noted from the above-quoted provisions, among the changes introduced in the new Code with
respect to the right of inspection granted to a stockholder are the following the records must be kept at
the principal office of the corporation; the inspection must be made on business days; the stockholder
may demand a copy of the excerpts of the records or minutes; and the refusal to allow such inspection
shall subject the erring officer or agent of the corporation to civil and criminal liabilities. However, while
seemingly enlarging the right of inspection, the new Code has prescribed limitations to the same. It is
now expressly required as a condition for such examination that the one requesting it must not have been
guilty of using improperly any information through a prior examination, and that the person asking for
such examination must be "acting in good faith and for a legitimate purpose in making his demand."

The unqualified provision on the right of inspection previously contained in Section 51, Act No. 1459, as
amended, no longer holds true under the provisions of the present law. The argument of the petitioner
that the right granted to him under Section 51 of the former Corporation Law should not be dependent
on the propriety of his motive or purpose in asking for the inspection of the books of the respondent bank
loses whatever validity it might have had before the amendment of the law. If there is any doubt in the
correctness of the ruling of the trial court that the right of inspection granted under Section 51 of the old
Corporation Law must be dependent on a showing of proper motive on the part of the stockholder
demanding the same, it is now dissipated by the clear language of the pertinent provision contained in
Section 74 of Batas Pambansa Blg. 68.

Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books
of the respondent bank, he has not set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of published reports regarding certain transactions
entered into by the respondent bank and to inquire into their validity. The circumstances under which he
acquired one share of stock in the respondent bank purposely to exercise the right of inspection do not
argue in favor of his good faith and proper motivation. Admittedly he sought to be a stockholder in order
to pry into transactions entered into by the respondent bank even before he became a stockholder. His
obvious purpose was to arm himself with materials which he can use against the respondent bank for
acts done by the latter when the petitioner was a total stranger to the same. He could have been impelled
by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his
interest as a stockholder.

We also find merit in the contention of the respondent bank that the inspection sought to be exercised by
the petitioner would be violative of the provisions of its charter. (Republic Act No. 1300, as amended.)
Sections 15, 16 and 30 of the said charter provide respectively as follows:

Sec. 15. Inspection by Department of Supervision and Examination of the Central Bank. —
The National Bank shall be subject to inspection by the Department of Supervision and
Examination of the Central Bank'
Sec. 16. Confidential information. —The Superintendent of Banks and the Auditor General,
or other officers designated by law to inspect or investigate the condition of the National
Bank, shall not reveal to any person other than the President of the Philippines, the
Secretary of Finance, and the Board of Directors the details of the inspection or
investigation, nor shall they give any information relative to the funds in its custody, its
current accounts or deposits belonging to private individuals, corporations, or any other
entity, except by order of a Court of competent jurisdiction,'

Sec. 30. Penalties for violation of the provisions of this Act.— Any director, officer, employee,
or agent of the Bank, who violates or permits the violation of any of the provisions of this
Act, or any person aiding or abetting the violations of any of the provisions of this Act, shall
be punished by a fine not to exceed ten thousand pesos or by imprisonment of not more
than five years, or both such fine and imprisonment.

The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not
governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides:

SEC. 4. Corporations created by special laws or charters. — Corporations created by special


laws or charters shall be governed primarily by the provisions of the special law or charter
creating them or applicable to them. supplemented by the provisions of this Code, insofar
as they are applicable.

The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to the
right of a stockholder to demand an inspection or examination of the books of the corporation may not be
reconciled with the abovequoted provisions of the charter of the respondent bank. It is not correct to
claim, therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a
supplementary capacity to the charter of the respondent bank.

WHEREFORE, the petition is hereby DISMISSED, without costs.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. 88809 July 10, 1991

REPUBLIC OF THE PHILIPPINES, (PRESIDENTIAL COMMISSION ON GOOD


GOVERNMENT), petitioner,
vs.
THE HONORABLE SANDIGANBAYAN (FIRST DIVISION) AND EDUARDO COJUANGCO,
JR., respondents.

G.R. No. 88858 July 10, 1991


REPUBLIC OF THE PHILIPPINES, (PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT), petitioner,
vs.
THE HONORABLE SANDIGANBAYAN (FIRST DIVISION) AND EDUARDO COJUANGCO,
JR., respondents.

Estelito P. Mendoza for private respondent.

RESOLUTION

BIDIN, J.:

These petitions for certiorari assail the resolution of respondent Sandiganbayan dated May 9, 1989,
allowing respondent Eduardo Cojuangco, Jr., to inspect the corporate records of United Coconut Planters
Bank, the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, the respondent UCPB and its corporate secretary shall respond to
petitioner Eduardo Cojuangco's request for examination and copying of corporate records in a
manner consistent with its duties to all its other registered stockholders as described in the
Corporation Code and under specific laws governing banking institutions such as said respondent
UCPB. (Rollo, pp. 3640, G.R. No. 88858)

and its resolution dated May 18, 1989, likewise allowing respondent Cojuangco to examine the corporate
records of San Miguel Corporation. It reads:

IN VIEW OF THE FOREGOING, the petition filed by Petitioner Eduardo Cojuangco, Jr., to examine
the records of the San Miguel Corporation is granted within the confines of Sec. 74 of the
Corporation Code. (Rollo, pp. 36-40; G.R. No. 88809)

The facts that gave rise to the instant petitions are as follows:

In G.R. No. 88809:

On December 26, 1988, private respondent-stockholder requested the San Miguel Corporation (SMC) and
its corporate secretary the production, inspection, examination/verification and/or photocopying of the
SMC corporate records to inform him of the decisions, policies, acts and performance of the management
of the SMC under the PCGG-Board.

Since the shares of private respondent in the SMC have been sequestered by the PCGG, the former (SMC)
sought advice from the latter on the effect of such sequestration. Subsequently, private respondent was
informed by the SMC that all requests for the examination, inspection and photocopying of its corporate
records should be coursed through the PCGG.

In G.R. No. 88858:


The facts set forth in G.R. No. 88809 are substantially similar in G.R. No. 88858 except that in the latter
case, private respondent as stockholder of record seeks authority to inspect and examine the corporate
records of United Coconut Planters Bank.

The request of private respondent for the inspection/examination of SMC's corporate records was denied
by the PCGG (Rollo, p. 44, G.R. No. 88809). As regards the corporate records of URPB, private respondent
was likewise advised to course his request through the PCGG (Rollo, pp. 45-46, GR No. 88858).

Thereafter, private respondent filed two separate petitions for prohibition and mandamus before the
Sandiganbayan seeking to enforce his stockholder's right to inspect the corporate records of SMC and the
UCPB. Subsequently, respondent Sandiganbayan rendered the assailed resolutions aforequoted.

Hence, the instant petitions for certiorari with prayer for the issuance of temporary restraining orders.
On June 13, 1989 and July 20, 1989, the Court issued a temporary restraining order in G.R. Nos. 88809
and 88858, respectively.

Petitioner argues, among others, that:

1) respondent Sandiganbayan has no jurisdiction over the petition filed by respondent Eduardo
Cojuangco, Jr.;

2) the PCGG may validly refuse private respondent's right to inspection; and

3) the petition filed by private respondent before the Sandiganbayan is barred by the doctrine of state
immunity from suit.

We find the petition devoid of merit.

Nothing is more settled than this Court's pronouncement in PCGG v. Peña (159 SCRA 556 [1988]), where
We held that:

. . . Under Section 2 of the President's Executive Order No. 14 issued on May 7, 1986, all cases of
the Commission regarding "the Funds, Moneys, Assets, and Properties Illegally Acquired or
Misappropriated by Former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their
Close Relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees," civil or
criminal, are lodged within the "exclusive and original jurisdiction of the Sandiganbayan" and all
incidents arising from, incidental to, or related to, such cases necessarily fall likewise under the
Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari exclusively by
the Supreme Court.

xxx xxx xxx

. . . Executive Order No. 14, which defines the jurisdiction over cases involving the ill-gotten wealth
of former President Marcos, his wife, Imelda, members of their immediate family, close relatives,
subordinates, close and/or business associates, dummies, agents and nominees, specifically
provides in section 2 that "the Presidential Commission on Good Government shall file all such
cases, whether civil or criminal, with the Sandiganbayan which shall have exclusive and original
jurisdiction thereof. "Necessarily, those who wish to question or challenge the Commission's acts or
orders in such cases must seek recourse in the same court, the Sandiganbayan, which is vested with
exclusive and original jurisdiction. . . . (Emphasis supplied)

The above ruling was reiterated in Soriano v. Yuson (164 SCRA 226 [1988]) and accompanying cases.

All matters of sequestration being within the exclusive and original jurisdiction of the Sandiganbayan, it
follows that the propriety of petitioner's action in denying Cojuangco's right of inspection, ostensibly
based on the order of sequestration, may be challenged before the respondent court.

Neither may the doctrine of state immunity be properly invoked by petitioner in the case at bar. For one
thing, the petition filed by respondent Cojuangco, Jr., before the Sandiganbayan demanded no affirmative
performance by the State in its political capacity which would otherwise call for the application of
immunity from suit. (See Republic v. Sandiganbayan, 184 SCRA 382 [1990] and cases cited therein).

As regards the might of inspection, it is the submission of petitioner that the request of respondent
Cojuangco, Jr., for the examination of the corporate records of SMC and UCPB may be validly refused
pending judicial determination of respondent's sequestered shares, i.e., whether the same are ill-gotten
or not (Rollo, p. 14, GR No. 88809; citing EO Nos. 1 & 2). It is further argued that respondent's purpose in
examining the corporate records of SMC and the UCPB is merely to satisfy his curiosity regarding the
performance of said corporations (Rollo, p. 16, GR No. 88809; Rollo, p. 17, GR No. 88858).

Does sequestration automatically deprive a stockholder of his right of inspection?

We rule in the negative.

The right of a stockholder to inspect and/or examine the records of a corporation is explicitly provided in
Section 74 of the Corporation Code, the pertinent portion of which reads:

Sec. 74. Books to be kept; stock transfer agent.

xxx xxx xxx

The records of all business transactions of the corporation and the minutes of any meeting shall be
open to the inspection of any director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in writing, for a copy of excerpts from
said records or minutes, at his expense.

Petitioners argue, however, that the Corporation Code has to give way to, as having been amended by,
Executive Orders Nos. 1, 2, 14 and related issuances as well as the pronouncement laid down by this
Court in Bataan Shipyard and Engineering Corporation v. Presidential Commission on Good Government
(150 SCRA 181 [1987]) on the effects of sequestration (Rollo, p. 12, GR No. 88809; Rollo, p. 13, GR No.
88858). There is mischief in this argument. We have examined the extent of Executive Orders Nos. 1, 2
and 14 on sequestration as well as the BASECO case relied upon by petitioner. Nevertheless, the Court
finds nothing therein to indicate that the Corporation Code has been deemed amended, much less an
implied modification of a stockholder's right to inspection as guaranteed by Sec. 74 thereof. Moreover,
what is clear in the case of BASECO, supra, is the following:
One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of dominion
over property sequestered, frozen or provisionally taken over. As already earlier stressed with no
little insistence, the act of sequestration; freezing or provisional takeover of property does not
import or bring about a divestment of title over said property; does not make the PCGG the owner
thereof. In relation to the property sequestered, frozen or provisionally taken over, the PCGG is a
conservator, not an owner. . . .

The PCGG does not become, ipso facto, the owner of the shares just because the same have been
sequestered; nor does it become the stockholder of record by virtue of such sequestration.

Just recently, We ruled that the PCGG cannot vote the sequestered shares of respondent Cojuangco, Jr., in
San Miguel Corporation (Cojuangco, Jr., et al., v. Roxas, et al., GR No. 91925, April 16, 1991; Cojuangco, Jr.,
et al., v. Azcuna, et al., GR No. 93005, April 16, 1991). If the PCGG cannot vote the sequestered shares of
private respondent, with much more reason it cannot restrain or prevent private respondent, as
stockholder from inspecting the corporate records of the SMC and the UCPB at reasonable hours on
business days. The law grants respondent/stockholder such authority.

Petitioner, in seeking to bar private respondent from exercising his statutory right of inspection, lays
emphasis on the argument that respondent's express purpose is to "supervise" PCGG's management, if
not to gratify his curiosity regarding the performance of the SMC and the UCPB.

Again, the argument is devoid of merit. Records indicate that private respondent is the ostensible owner
of a substantial number of shares and is a stockholder of record in SMC and UCPB. * Being a stockholder
beyond doubt, there is therefore no reason why private respondent may not exercise his statutory right
of inspection in accordance with Sec. 74 of the Corporation Code, the only express limitation being that
the right of inspection should be exercised at reasonable hours on business days; 2) the person
demanding to examine and copy excerpts from the corporation's records and minutes has not improperly
used any information secured through any previous examination of the records of such corporation; and
3) the demand is made in good faith or for a legitimate purpose. The latter two limitations, however, must
be set up as a defense by the corporation if it is to merit judicial cognizance. As such, and in the absence of
evidence, the PCGG cannot unilaterally deny a stockholder from exercising his statutory right of
inspection based on an unsupported and naked assertion that private respondent's motive is improper or
merely for curiosity or on the ground that the stockholder is not in friendly terms with the corporation's
officers.1âwphi1

Explaining the rationale behind a stockholder's right to inspection, this Court in the case of Gokongwei,
Jr., v. Securities and Exchange Commission (89 SCRA 336 [1979]) held that:

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership
of the corporate property, whether this ownership or interest be termed an equitable ownership,
a beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of self-
protection. It is generally held by majority of the courts that where the right is granted by statute
to the stockholder, it is given to him as such and must be exercised by him with respect to his
interest as a stockholder and for some purpose germane thereto or in the interest of the
corporation. In other words, the inspection has to be germane to the petitioner's interest as a
stockholder, and has to be proper and lawful in character and not inimical to the interest of the
corporation. (citing Fletcher Cyc, Private Corporations, Vol. 5, 1976 Rev. Ed., Secs. 2213, 2218 &
2222)

While it may be true that the right of inspection granted by Sec. 74 of the Corporation Code is not
absolute, as when the stockholder is not acting in good faith and for a legitimate purpose (Gonzales v.
PNB, 122 SCRA 489 [1983]); or when the demand is purely speculative or merely to satisfy curiosity
(Grey v. Insular Lumber Co., 40 O.G., No. 31st Supp. 1 [1939]; See also State ex rel. Thiele v. Cities Service
Co. (115 A. 773 [1922]), the same may not be said in the case of private respondent. This is because:

. . . the "impropriety of purpose such as will defeat enforcement must be set up (by) the
corporation defensively if the Court is to take cognizance of it as a qualification. In other words,
the specific provisions take from the stockholder the burden of showing impropriety of purpose or
motive. (Gokongwei, Jr., v. Securities and Exhange Commission, supra; citing State v. Monida &
Yellowstone Stage Co., 110 Minn. 193, 124 NW 791; State v. Cities Service Co., 114 A 463.)

In the case at bar, petitioner failed to discharge the burden of proof to show that private respondent's
action in seeking examination of the corporate records was moved by unlawful or ill-motivated designs
which could appropriately call for a judicial protection against the exercise of such right. Save for its
unsubstantiated allegations, petitioner could offer no proof, nay, not even a scintilla of evidence that
respondent Cojuangco, Jr., was motivated by bad faith; that the demand was for an illegitimate purpose or
that the demand was impelled by speculation or idle curiosity. Surely, respondent's substantial
shareholdings in the SMC and UCPB cannot be an object of mere curiosity.

IN VIEW OF THE FOREGOING, the Court Resolved to DISMISS the instant petition for lack of merit. The
temporary restraining orders issued are hereby LIFTED and SET ASIDE. This Resolution is immediately
executory.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. 83831 January 9, 1992

VICTOR AFRICA, petitioner,


vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, JOSE LAURETA, MELQUIADES GUTIERREZ,
EDUARDO M. VILLANUEVA, EDUARDO DE LOS ANGELES and ROMAN MABANTA, JR., respondents.

G.R. No. 85594 January 9, 1992

PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT and PCGG-Nominees/Designees:


MELQUIADES GUTIERREZ, EDUARDO M. VILLANUEVA, RAMON DESUASIDO, ALMARIO P. VELASCO,
RANULFO P. PAYOS and JOSE P. ROXAS, petitioners.
vs.
THE HONORABLE SANDIGANBAYAN (THIRD DIVISION), JOSE L. AFRICA, MANUEL H. NIETO, JR.,
RAFAEL VALDEZ and VICTOR AFRICA, respondents.

G.R. No. 85597 January 9, 1992

REPUBLIC OF THE PHILIPPINES (PRESIDENTIAL COMMISSION ON GOOD


GOVERNMENT), petitioner,
vs.
THE HONORABLE SANDIGANBAYAN (THIRD DIVISION), JOSE L. AFRICA, MANUEL H. NIETO and
RAFAEL VALDEZ, respondents.

G.R. No. 85621 January 9, 1992

EDUARDO M. VILLANUEVA, petitioner,


vs.
THE HONORABLE SANDIGANBAYAN (THIRD DIVISION), JOSE L. AFRICA, MANUEL NIETO, RAFAEL C.
VALDEZ and PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT,* respondents.

Victor Africa for petitioner in G.R. No. 83831

Jose L. Africa and Manuel H. Nieto for respondents in G.R. No. 85594 and 85597.

Arthur D. Lim Law Office for petitioner in G.R. No. 85621.

Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles for respondents Mabanta & de los Angeles in
83831 & 85594.

REGALADO, J.:

These four cases separately filed before this Court were consolidated pursuant to our resolution of
November 22, 1988 1 since they involve issues arising from, incidental or related to the sequestration of
Eastern Telecommunications Philippines, Inc. (ETPI) by the Presidential Commission on Good
Government (PCGG) on March 14, 1986 and the consequent filing by the PCGG on July 22, 1987 of an
action for reconveyance, reversion, accounting and restitution of the alleged ill-gotten ETPI shares and
damages, docketed as Civil Case No. 0009 in the Sandiganbayan.

Shortly after the PCGG sequestered ETPI on March 14, 1986, the sequestration order was partially lifted
in May, 1986 when 40% of the shares of stock (Class "B") owned by Cable and Wireless, Ltd. were freed
from the effects of sequestration. The remaining 60% of the shares (Class "A"), however, remained under
sequestration. Thereafter, on July 22, 1987, the PCGG filed with the Sandiganbayan the aforesaid Civil
Case No. 0009.

Subsequently, during the annual stockholders meeting convened on January 29, 1988 pursuant to a PCGG
Resolution dated January 28, 1988 which called for the resumption of the stockholders meeting originally
scheduled on January 4, 1988, Eduardo M. Villanueva, as PCGG nominee, Roman Mabanta, Jr. and Eduardo
de los Angeles as nominees of the foreign investors, Cable and Wireless Ltd., and Jose L. Africa (who was
absent) were elected as members of the board of directors.

An organizational meeting was later held where Eduardo Villanueva was elected as president and general
manager, while Ramon Desuasido, Almario Velasco and Ranulfo Payos were elected as acting corporate
secretary, acting treasurer, and acting assistant corporate secretary, respectively.

The nomination and election of PCGG nominees/designees to the ETPI Board of Directors, as well as the
election of its new officers, triggered a chain of contentious proceedings before the Sandiganbayan and
this Court between the members of the ETPI Board and its stockholders, on the one hand, and the PCGG's
nominees/designees elected ETPI Board, on the other hand, in the cases hereinunder discussed.

G.R. No. 83831

Victor Africa, who claims to be an employee of ETPI holding the positions of vice-president, general
counsel (on official leave without pay), corporate secretary and special assistant to the chairman (and
president), filed directly with this Court on June 30, 1988 a petition for injunction docketed as G.R. No.
83831, seeking to enjoin the PCGG and its nominees/designees to the board of directors and the newly-
installed officers of ETPI from implementing their alleged illegal, invalid and immoral act of ousting him
from his offices and positions at the ETPI pending the determination of whether they have validly, legally
and morally assumed their supposed positions and offices as "directors" and/or "officers" of ETPI.

He contends that the reasons advanced by the PCGG-sponsored board of directors for ousting him from
his offices (redundancy, need to conserve company funds and loss of confidence) are flimsy, whimsical
and arbitrary, evidencing not only the PCGG-sponsored board's discriminatory and oppressive attitude
towards him but, more importantly, its clear intent to harass him into refraining from questioning before
several tribunals all the invalid, illegal and immoral acts of said PCGG-sponsored board which have
caused and are still causing ETPI damages because they constitute dissipation of assets.

Further claiming that the acts of respondents will work injustice, unfairness and inequity to him as they
will invalidly, illegally and immorally deprive him of his principal means of livelihood to the detriment of
his spouse and three children, petitioner sought the issuance of a writ of preliminary injunction or a
temporary restraining order to enjoin the PCGG from ousting him from his positions and offices effective
June 30, 1988.

On July 8, 1988, petitioner informed the Court that while a verbal agreement to maintain the status
quo was reached between petitioner's lawyers, Attys. Juan de Ocampo and Antonio Africa, and Messrs.
Orlando Romero and Serafin Rivera of the PCGG, respondent Eduardo M. Villanueva circulated on July 5,
1988 an inter-office memorandum easing out the legitimate members of the board from their rooms in
the executive offices for the benefit of the newly-installed members of the questioned PCGG board; and
that Ildefonso Reynoso, vice-president for administration, issued a memorandum to the Nival Security
and Protective Agency informing them that they were being relieved of their duty to provide security
services at the 7th Floor of Telecoms Plaza where the executive offices are located, which services would
then be handled by the FCA Security Agency. 2

On July 15, 1988, petitioner was allegedly forcibly taken out of his office on the basis of a PCGG order
which petitioner claimed was addressed not to then PCGG Commissioner Laureta but to three other PCGG
officials, namely, Esteban B. Conejos, Jr., Serafin P. Rivera and Orlando Z. Romero. As a consequence,
petitioner Africa sought to have then Commissioner Laureta declared in contempt of court for having
committed "improper conduct tending directly or indirectly, to impede, obstruct or degrade the
administration of justice." 3 He likewise sought the issuance of a writ of preliminary mandatory
injunction ordering respondents to open his office and allow him access to and use of the same.

G.R. Nos. 85597 and 85621

Jose L. Africa, Manuel Nieto and Rafael Valdez, allegedly the registered stockholders of ETPI, instituted on
September 6, 1988 before the Sandiganbayan Civil Case No. 0048, 4 a complaint for injunction and
damages with prayer for a temporary restraining order seeking to enjoin Eduardo M. Villanueva from
acting as "Director, President and/or General Manager" of ETPI and from exercising the powers and
functions of said positions, as well as to stop the PCGG from directly or indirectly interfering with the
management of ETPI. They contend that the assumption of Villanueva to said positions was effected
without due process of law through the PCGG using and voting the sequestered shares without legal
justification.

Eduardo M. Villanueva filed a motion to dismiss/opposition to the issuance of a restraining order on the
grounds of lack of jurisdiction, because the complaint partakes of the nature of a suit against the State
without its consent; that plaintiffs are not the real parties in interest in the action, which is actually a quo
warranto proceeding; that the complaint is premature for failure to exhaust administrative remedies; and
that the issues raised have already been passed upon by the Supreme Court in G.R. No. 82188, a recourse
against the Securities and Exchange Commission (SEC), entitled "PCGG, et al. vs. SEC, et al." 5

The PCGG, on the other hand, opposed the issuance of a writ of preliminary injunction, contending that
the issues raised in Civil Case No. 0048 have already been passed upon by the Supreme Court in its
aforesaid decision in G.R. No. 82188 promulgated on June 30, 1988. 6

In the proceedings on September 13, 1988, the PCGG, through Solicitor Ramolete, moved to defer the
hearing until after the motion to dismiss of Villanueva and the objection raised by PCGG shall have been
resolved. However, the Sandiganbayan resolved to hear the evidence on the application for preliminary
injunction with the understanding that the incident shall not be resolved earlier than the resolution of the
motion to dismiss and the issue raised by Solicitor Ramolete. 7

At the scheduled hearing on October 12, 1988, Villanueva objected to further proceedings without his
motion to dismiss being first resolved, contending that since the action is for injunction and damages, the
reception of evidence on the application for preliminary injunction was tantamount to a hearing on the
merits. In open court, he was overruled and his motion to have the proceedings suspended pending
resolution of his motion to dismiss was denied.

From the denial of PCGG's motion to defer hearing and Villanueva's motion to suspend proceedings in
Civil Case No. 0048, the PCGG filed on November 12, 1988 a petition for prohibition with prayer for a writ
of preliminary injunction and/or restraining order with this Court, docketed as G.R. No. 85597, while
Villanueva filed on November 16, 1988 a separate petition for prohibition with preliminary injunction
and/or restraining order docketed as G.R. No. 85621. Both petitions assail the orders issued by the
Sandiganbayan, dated September 13, 1988 and October 12, 1988, as having been issued with grave abuse
of discretion amounting to lack of jurisdiction.
On November 15, 1988, the Court issued a temporary restraining order 8 in G.R. No. 85597 directing the
Sandiganbayan to cease and desist from proceeding with its hearing in Civil Case No. 0048 scheduled on
November 18, 1988 at 2:00 p.m. In the resolution of November 22, 1988, the case was ordered
consolidated with the other ETPI cases (G.R. Nos. 83831, 85594 and 85621).

G.R. No. 85594

The same plaintiffs in Civil Case No. 0048, now in their capacity as erstwhile members of the Board of
Directors of ETPI, instituted before the Sandiganbayan on September 23, 1988 Civil Case No. 0050,
another action for injunction and damages with prayer for a writ of preliminary injunction and/or
temporary restraining order.

In their complaint, plaintiffs questioned the acts and orders of the PCGG leading to the election of therein
defendants Melquiades Gutierrez, Mark Javier, Ranulfo P. Payos, Jose P. Roxas and Almario Velasco, and
Cable and Wireless representatives Roman Mabanta, Jr. and Eduardo de los Angeles to the ETPI Board of
Directors. Claiming to be the duly elected members of the ETPI Board of Directors during the January 4,
1988 special stockholders meeting, plaintiffs prayed that defendants be removed from their ETPI
positions, and that an injunction be issued perpetually restraining the PCGG from electing, designating
and supporting the defendants in their ETPI roles. 9

The PCGG 10 and its nominees/designees to the ETPI Board, 11 Roman Mabanta, Jr. and Eduardo de los
Angeles, 12 separately filed their respective motions to dismiss and opposed the issuance of writ of
preliminary injunction/restraining order invoking substantially the same grounds proffered in Civil Case
No. 0048, as follows: (1) the court lacks jurisdiction because plaintiffs may not sue the State without its
consent; (2) the filing of the complaint is improper because the cause(s) of action alleged and the reliefs
sought therein constitute an action for quo warranto, hence plaintiffs are not the proper and real parties
in interest to oust or unseat defendants; and (3) the filing of the complaint is barred by lis pendens, as
plaintiffs should have contested PCGG's acts in Civil Case No. 0009 (Republic vs. Jose L. Africa, et al.).
Roman Mabanta, Jr. and Eduardo de los Angeles further maintained that respondent court has no
jurisdiction over the nature and subject matter of the complaint insofar as they are concerned, they being
Class B Directors; and that the complaint is barred by the decision of the Supreme Court in G.R. No.
82188.

On October 21, 1988, or while the motions to dismiss remained pending and prior to the hearing set on
November 3, 1988 for the issuance of a writ of preliminary injunction/temporary restraining order, the
Clerk of Court of the Sandiganbayan issued, upon request of the counsel for Jose L. Africa, et al. dated
October 18, 1988, a subpoena duces tecum and ad testificandum ordering the PCGG or its representatives
to appear and testify before the Sandiganbayan during the hearing on November 3, 1988 at 2:00 p.m. and
to produce the stock and transfer book and all stubs of the outstanding stock certificates of ETPI.

Three days thereafter, or on October 24, 1988, another subpoena duces tecum was issued upon an
amended request for subpoena by the same counsel, ordering Assistant Solicitor General Ramon
Desuasido or his representative to appear before the Sandiganbayan at the 2:00 p.m. hearing on
November 3, 1988 and to produce the "minutes of all meetings of the Board of Directors and
Stockholders of ETPI held from January 29, 1988 to date."
The PCGG and its nominee/designee, Ramon Desuasido, moved to quash both subpoenae, but the motion
was denied by the Sandiganbayan in an order 13 dated November 3, 1988. The hearing was reset to
November 15, 1988 at 2:00 o'clock in the afternoon.

On November 15, 1988, an urgent petition for certiorari, docketed as G.R. No. 85594, was filed by the
PCGG and its nominees/designees before this Court, assailing as having been issued with grave abuse of
discretion the incidental orders dated October 24, 1988 and November 3, 1988 on the principal
contention that the Sandiganbayan has no jurisdiction over the main action for damages since Civil Case
No. 0050 is in truth a suit against the State without its consent. The PCGG also prayed for the issuance of a
temporary restraining order to enjoin the respondents from enforcing and/or executing the subpoenas
dated October 21, 1988 and October 24, 1988. On the same date, or on November 15, 1988, the Court
issued a temporary restraining order. 14

The Sandiganbayan, in the meantime, proceeded with the main case and, thereafter, on December 13,
1988 promulgated a resolution 15 denying the motions to dismiss separately filed by the PCGG and the
individual defendants.

On February 23, 1989, the Sandiganbayan denied the motion for reconsideration filed by the
representatives of Cable and Wireless, Ltd. 16 The PCGG and its nominees opted not to file a motion for
reconsideration apparently in the belief that the same would be merely repetitive, if not futile.

From the denial of the motion to dismiss, the PCGG and its nominees/designees filed on March 27, 1989
an Urgent Supplemental Petition in G.R. No. 85594 17 assailing the denial by the Sandiganbayan of their
motions to dismiss on the grounds that the core subject matter and issue are res judicata by virtue of the
decision in G.R. No. 82188; that the respondent court lacks jurisdiction over the case; that private
respondents have no legal capacity to sue and institute a separate action; and that they are not the real
parties in interest.

Recapping, therefore, from the foregoing narration it appears that the injunction suits filed and docketed
as Civil Cases Nos. 0048 and 0050 in the Sandiganbayan and the petition for injunction filed directly with
this Court as G.R. No. 83831 are substantially identical in the reliefs sought therein, that is, to nullify the
acts and orders of the PCGG which led to the nomination and election of the new members of the board of
directors and officers of the ETPI and to enjoin said directors and officers from exercising the powers and
functions of said positions.

Civil Cases Nos. 0048 and 0050 were elevated to this Court on some incidental matters relating to the
propriety of hearing the cases on the merits without the motions to dismiss filed therein having been first
resolved; and in Civil Case No. 0050, on the additional issue of the legality of the subpoena duces
tecum and ad testificandum issued by the Sandiganbayan ordering the PCGG or its representatives to
testify and produce the stock and transfer book, all stubs of the outstanding stock certificates of ETPI and
the minutes of all meetings of the board of directors and stockholders held from January 29, 1988.

The issue in Civil Case No. 0050 as to the propriety of hearing the main action for injunction before
resolving the motions to dismiss has been mooted when the Sandiganbayan denied said motions to
dismiss on December 13, 1988. We are, however, constrained to go deeper into the issue since the denial
of said motions was the subject matter of a supplemental petition in G.R. No. 85594.
With respect to G.R. Nos. 85597 and 85621, we find that the deferment of the resolution of the motions to
dismiss Civil Case No. 0048 was tainted with grave abuse of discretion. It is well-settled that while the
court has the discretion to defer the hearing and determination of a motion to dismiss if the ground
therefor is not indubitable, 18such deferment is in excess of jurisdiction if the ground for the motion to
dismiss is lack of jurisdiction or lack of cause of action, since the allegations of the complaint are deemed
admitted and the motion to dismiss can be resolved without waiting for trial on the merits.19 Clearly, on
the face of the complaint, the issue of lack of jurisdiction invoked in the motion to dismiss can be resolved
without waiting for trial on the merits as will be shown hereunder. Thus, petitioner Villanueva is correct
in his assertion that his motion to dismiss must first be resolved before trial on the merits may be had.

Be that as it may, this finding merely constitutes a technical victory for said petitioner as it will be
rendered moot and academic by the following ruling on the merits of the grounds raised in his motion to
dismiss.

In G.R. No. 85621, petitioner Villanueva imputes grave abuse of discretion to the Sandiganbayan in
proceeding with the hearing of Civil Case No. 0048. To his mind, the injunction suit filed by Africa, Nieto
and Valdez is in effect a suit against the State and, since there is no waiver of immunity by the State,
respondent court cannot acquire jurisdiction over the same.

Along the same vein, the PCGG elevated to this Court in G.R. No. 85594 the denial of its motion to dismiss
Civil Case No. 0050 contending that the Sandiganbayan has no jurisdiction to entertain an independent
suit against the Republic of the Philippines (PCGG) not only because it is only the Republic, without
consenting to be sued or countersued, that is allowed to file civil or criminal cases with said court
pursuant to Executive Order No. 14, but also because the cause of action, if any, or the subject matter or
nature of the complaint for injunction are not within the limited or special jurisdiction of the
Sandiganbayan as defined by Section 4, Presidential Decree No. 1606, as amended by Presidential Decree
No. 1891, even as such jurisdiction has been enlarged by Executive Order No. 14.

The law and jurisprudence on the jurisdiction of the Sandiganbayan over cases for the recovery of "ill-
gotten wealth" are now settled. In PCGG vs. Hon. Emmanuel G. Peña, etc., et al., 20 this Court held:

. . . Under Section 2 of the President's Executive Order No. 14 issued on May 7, 1986, all
cases of the Commission regarding "the Funds, Moneys, Assets, and Properties Illegally
Acquired or Misappropriated by Former President Ferdinand Marcos, Mrs. Imelda
Romualdez Marcos, their Close Relatives, Subordinates, Business Associates, Dummies,
Agents, or Nominees" whether civil or criminal, are lodged within the "exclusive and
original jurisdiction of the Sandiganbayan" and all incidents arising from, incidental to, or
related to, such cases necessarily fall likewise under the Sandiganbayan's exclusive and
original jurisdiction, subject to review on certiorari exclusively by the Supreme Court.

The aforequoted ruling was reiterated in PCGG vs. Hon. Aquino, Jr., etc., et al. and Marcelo Fiberglass
Corporation vs. PCGG, 21 which were jointly decided by the Court on June 30, 1988.

In six (6) subsequent cases 22 likewise jointly decided on August 10, 1988, the Court pointed out that:

. . . (the) exclusive jurisdiction conferred on the Sandiganbayan would evidently extend not
only to the principal causes of action, i.e., the recovery of alleged ill-gotten wealth, but also
to "all incidents arising from, incidental to, or related to, such cases," such as the dispute
over the sale of shares, the propriety of the issuance of ancillary writs or provisional
remedies relative thereto, the sequestration thereof, which may not be made the subject of
separate actions or proceedings in another forum.

A careful examination of the records of these cases reveals that the complaints instituted by Jose L. Africa,
et al. in Civil Cases Nos. 0048 and 0050 before the Sandiganbayan are in the nature of special and original
civil actions for injunction 23 directed against the defendants therein and specially seeking to restrain
them from representing and acting as officers and members of the Board of Directors of ETPI and to
prevent the PCGG from exercising acts of ownership and/or management over ETPI.

Moreover, in claiming as illegal the acts or orders of the PCGG issued in pursuance of the exercise of its
powers and functions under Executive Orders Nos. 1, 2 and 14, which resulted in the installation of
defendants to the Board of Directors of ETPI and to their corporate offices, plaintiffs Jose L. Africa, et al.
merely sought to preserve the status quo, that is, the last actual, peaceable, uncontested status which
preceded the pending controversy. The status quoto the plaintiffs was the fact of their election to the
Board of Directors of ETPI during the special stockholders meeting on January 4, 1988 allegedly pursuant
to a valid call, notice and assembly in accordance with law.

The issue of jurisdiction of the Sandiganbayan over original special civil actions involving the powers and
functions of the PCGG has been raised in and resolved by this Court. In the consolidated cases of PCGG
vs. Hon. Aquino, Jr., etc., et al. and Marcelo Fiberglass Corporation vs. PCGG, supra, therein private
respondent Marcelo Fiberglass Corporation contested the jurisdiction of the Sandiganbayan over special
civil actions claiming that Section 2 of Executive Order No. 14 vested the Sandiganbayan with Jurisdiction
over civil and criminal cases filed by the PCGG but not over special civil actions filed by private parties;
that Section 2 did not limit the filing of special civil actions by private persons exclusively with the
Sandiganbayan; and that Presidential Decree No. 1606 which created the Sandiganbayan did not vest
such court with jurisdiction over special civil actions such as those involved therein and as enumerated in
Section 4 of Presidential Decree No. 1606.

The Court rejected such contention, declaring that the attempt to remove special civil actions from the
Sandiganbayan's exclusive jurisdiction is of no avail if they similarly involve the powers and functions of
the PCGG. The Court reiterated the pronouncement in PCGG vs. Peña, etc., et al., supra, that the
Sandiganbayan has exclusive and original jurisdiction in civil or criminal cases involving ill-gotten wealth
under Executive Order No. 14, as well as incidents arising from, incidental or related to such cases,
subject to review on certiorari exclusively by the Supreme Court.

Since the injunctive suits filed by Jose L. Africa, et al. before the Sandiganbayan stemmed from incidents
arising from, incidental and related to the partial sequestration of ETPI, the directive enunciated in
the Peña case that "those who wish to question or challenge the Commission's acts or orders in such
cases must seek recourse in the same court, the Sandiganbayan, which is vested with exclusive and
original jurisdiction," applies to the instant case.

Neither would the principle of immunity of the State from suit invoked by the PCGG divest the
Sandiganbayan of its jurisdiction over the complaints for injunction in both Civil Cases Nos. 0048 and
0050. While there were claims for damages alleged in the complaints in both cases, the same are,
however, directed against the individual defendants in their personal capacities for having allegedly
acted without legal authority and in a manner adverse to the interests of ETPI. 24
Incorporating a monetary claim in the complaint will not convert the special civil action for injunction
into a mere claim for damages which would otherwise call for the application of the rule on non-suability
of the State. 25 The complaints for injunction do not seek money judgments from nor do they demand any
affirmative performance by the State in its political capacity which would call for immunity from suit. The
doctrine of state immunity from suit applies only in actions resulting in adverse consequences on the
public treasury, whether in the disbursement of funds or loss of property. 26

Plaintiffs in both cases sought the intervention of the Sandiganbayan to obtain redress for what they
perceived to be an arbitrary and illegal deprivation of their proprietary rights in the ETPI by the
individual defendants resulting from the latter being installed as directors or officers of ETPI by virtue of
the questioned acts or orders of the PCGG. Plaintiffs do not seek to impose pecuniary liabilities against
the PCGG as a government entity. Verily, the PCGG cannot hide behind the aforestated doctrine of
immunity of the State from suit to bar plaintiffs from going to the courts to seek affirmative reliefs in
these actions.

Seeking further to divest the Sandiganbayan of its jurisdiction over the actions for injunction in Civil
Cases Nos. 0048 and 0050, the PCGG argues that the said actions are barred by res judicata because of the
prior judgment in PCGG, et al. vs. SEC, et al. and its companion case, PCGG vs. Sandiganbayan, et pl., supra.
It is the contention of the PCGG that the subject matter and issues in both Civil Cases Nos. 0048 and 0050
are the very same subject matter and issues raised by Africa, et al. in SEC Case No. 3297 and in their
motion for injunction in Civil Case No. 0009, both of which were elevated by the PCGG to this Court in G.R.
No. 82186.

The doctrine of res judicata or bar by prior judgment does not apply in the instant cases. The two issues
raised in G.R. No. 82188 related principally to the issue of jurisdiction, namely: (1) whether or not the
Securities and Exchange Commission gravely abused its discretion and acted in excess of jurisdiction in
SEC Case No. 3297 when it restrained the PCGG from holding the special stockholders meeting of the
ETPI on March 4, 1988; and (2) whether or not the Sandiganbayan gravely abused its discretion and
acted in excess of jurisdiction when it restrained the PCGG, its nominated directors and/or corporate
officers, employees, nominees, agents and/or representatives at ETPI from calling and/or holding a
stockholders meeting and voting the sequestered shares thereat for the purpose of amending the articles
of incorporation or by-laws of ETPI, or otherwise effecting substantial changes in policy, programs or
practices of said corporation.

In brief, what was obviously raised and resolved by the Court was the scope and extent of the authority of
the Sandiganbayan to issue injunctive writs on matters involving the exercise and performance of the
powers and functions of the PCGG as conservator in accordance with the ruling in BASECO vs. PCGG, et
al. 27 to prevent the disposal and dissipation of the assets of sequestered companies or businesses.

Although the challenge against the temporary restraining order issued by the Securities and Exchange
Commission in SEC Case No. 3297 became moot and academic by virtue of the expiration of its 20-day
effectivity period, the Court nevertheless ruled that the issuance of the same was tainted with grave
abuse of discretion considering that the SEC Hearing Panel should have then realized that there existed
an element in the case which effectively removed it from the jurisdiction of the SEC, to wit, the presence
of the PCGG which, as another quasi-judicial body, is a co-equal entity over whose actions the SEC has no
power of control.
The Court, on the other hand, upheld the temporary restraining order issued by the Sandiganbayan
insofar as it restrained the stockholders meeting specifically called for the purpose of ratifying the
proposed amendment to delete from ETPI's articles of incorporation and by-laws the "right of first
refusal" clause. Recognizing that the exercise of the "right of first refusal" is an act of strict ownership, the
Court ruled that while there may be instances when only through an act of strict ownership can the PCGG
be able to prevent the dissipation of assets of a sequestered corporation or business, the situation then
presented was nevertheless not one of such instances.

Significantly, however, the Court found the general injunction imposed by the Sandiganbayan on the
PCGG to desist and refrain from calling a stockholders meeting for the purpose of electing a new board of
directors or effecting substantial changes in the policy, program or practice of the corporation to be too
broad as to thereby taint said order with grave abuse of discretion.

On PCGG's insistence on the rule of bar by prior judgment, it is readily apparent that one fundamental
requisite for the application of that doctrine of res judicata is absent in the instant case, that is, the prior
judgment or order must be a judgment on the merits of the case. For a prior judgment to constitute a bar
to a subsequent case, (1) it must be a final judgment or order, (2) the court rendering the same must have
jurisdiction over the subject matter and over the parties, (3) it must be a judgment or order on the merits,
and (4) there must be between the two cases identity of parties, subject matter, and causes of
action. 28

There is no dispute that, substantially, the acts or orders of the PCGG which led to the election of the
members of the board of directors and officers of ETPI, as well as all acts done thereafter by the said
board, are the incidents which gave rise to the causes of action involved in the injunction suit in SEC Case
No. 3297 and the motion for injunction in Civil Case No. 0009, both of which gave rise to G.R. No. 82188.

There is, accordingly, identity of the incidents upon which the causes of action in Civil Cases Nos. 0048
and 0050 are based and those of the two cases which gave rise to G.R. No. 82188.

However, there is nothing, in the pronouncements of the Court in G.R. No. 82188 which finally resolved
the merits of the factual issues raised therein by the opposing parties which included, among others, the
alleged illegal manner by which the meeting to elect the new board of directors was called and held on
January 29, 1988; the qualification, experience and probity of those elected to the board contrary to the
caveat in BASECO vs. PCGG, et al., supra, on the substitution of directors of the board of sequestered
corporations; and the alleged mismanagement of the operations of ETPI by those elected to the board and
the corporate offices by the PCGG.

A cursory reading of the decision would show that the Court merely ruled on the parameters of the
jurisdiction of the Sandiganbayan to issue injunctive writs in cases involving the PCGG and PCGG-related
matters. In fact, the Court stressed in G.R. No. 82188 that "the various motions filed by private
respondents in this case involving matters which would require us to look into the facts of the case are
better ventilated before the Sandiganbayan." Nothing final or definite was laid down by this Court in that
case with respect to the legality or illegality of the questioned acts or orders of the PCGG leading to the
election of its nominees/designees to the ETPI board of directors and corporate offices.

The denial, therefore, of the motion to dismiss in Civil Case No. 0050 was not sullied by grave abuse of
discretion. With this pronouncement, the denial of the motion to dismiss Civil Case No. 0048 would
likewise be proper and necessarily called for.
The issue raised in the original petition in G.R. No. 85594 relating to the validity of the issuance by the
Sandiganbayan of the subpoena duces tecum and ad testificandum ordering the PCGG or its representative
to testify and produce the stock and transfer book, all stubs of the outstanding stock certificates of ETPI
and the minutes of all meetings of the board of directors and stockholders of ETPI held from January 29,
1988 to date was laid to rest by our joint resolution in two cases, both entitled Republic
vs. Sandiganbayan and Eduardo Cojuangco, Jr., 29 which applies squarely in the instant petitions.

In upholding therein the right of a stockholder of a sequestered company to inspect and/or examine the
records of a corporation pursuant to Section 74 of the Corporation Code, the Court found nothing in
Executive Orders Nos. 1, 2 and 14, as well as in BASECO, to indicate an implied amendment of the
Corporation Code, much less an implied modification of a stockholder's right of inspection as guaranteed
by Section 74 thereof. The only express limitation on the right of inspection, according to the Court, is
that (1) the right of inspection should be exercised at reasonable hours on business days; (2) the person
demanding the right to examine and copy excerpts from the corporate records and minutes has not
improperly used any information secured through any previous examination of the records of such
corporation; and (3) the demand is made in good faith or for a legitimate purpose.

The issues raised in G.R. No. 83831, an original petition filed by Victor Africa with this Court, including
the motion for contempt filed by Eduardo M. Villanueva against Jose L. Africa, Manuel Nieto and Victor
Africa for having made unwarranted comments to the news media on matters involved in the pending
petitions, are factual in nature and are best ventilated before the Sandiganbayan — the proper forum
where both parties can substantiate their respective claims. This Court is not a trier of facts.

Considering that Civil Cases Nos. 0048 and 0050 arose from the partial sequestration of ETPI and the
incidents raised before this Court in G.R. Nos. 85594, 85597 and 85621 are related to said partial
sequestration of ETPI, all the factual matters alleged in these cases are best threshed out in the main case,
Civil Case No. 0009, as incidents therein, to save time and efforts in the presentation of evidence and in
order to avoid multiplicity of suits.

IN VIEW OF THE FOREGOING, the petitions in G.R. Nos. 85594, 85597 and 85621 are hereby DISMISSED
for lack of merit, and G.R. No. 83831 is REFERRED to the Sandiganbayan for appropriate proceedings. The
Sandiganbayan is hereby ordered to consolidate G.R. No. 83831 and Civil Cases Nos. 0048 and 0050 with
Civil Case No. 0009. The temporary restraining orders separately issued in G.R. No. 85594 and G.R. No.
85597 on November 15, 1988 are hereby LIFTED and SET ASIDE.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 178511 December 4, 2008

MA. BELEN FLORDELIZA C. ANG-ABAYA, FRANCIS JASON A. ANG, HANNAH ZORAYDA A. ANG, and
VICENTE G. GENATO, petitioners,
vs.
EDUARDO G. ANG, respondent.

DECISION

YNARES-SANTIAGO, J.:

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the March 6, 2007
Decision2 of the Court of Appeals in CA-G.R. SP No. 94708, which nullified and set aside the July 26, 2005
and March 29, 2006 Resolutions3 of the Secretary of Justice in I.S. No. MAL-2004-1167 directing the
withdrawal of the information filed against petitioners for violation of Section 74 of the Corporation
Code. Also assailed is the June 19, 2007 Resolution4 denying the Motion for Reconsideration.

Vibelle Manufacturing Corporation (VMC) and Genato Investments, Inc. (Genato) (collectively referred to
as "the corporations") are family-owned corporations, where petitioners Ma. Belen Flordeliza C. Ang-
Abaya (Flordeliza), Francis Jason A. Ang (Jason), Vincent G. Genato (Vincent), Hanna Zorayda A. Ang
(Hanna) and private respondent Eduardo G. Ang (Eduardo) are shareholders, officers and members of
the board of directors.

Prior to the instant controversy, VMC, Genato, and Oriana Manufacturing Corporation (Oriana) filed Civil
Case No. 4257-MC, which is a case for damages with prayer for issuance of a temporary restraining order
(TRO) and/or writ of preliminary injunction against herein respondent Eduardo, together with Michael
Edward Chi Ang (Michael), and some other persons for allegedly conniving to fraudulently wrest
control/management of the corporations.5 Eduardo allegedly borrowed substantial amounts of money
from the said corporations without any intention to repay; that he repeatedly demanded for increases in
his monthly allowance and for more cash advances contrary to existing corporate policies; that he
harassed petitioner Flordeliza to transfer and/or sell certain corporate and personal properties in order
to pay off his personal obligations; that he attempted to forcibly evict petitioner Jason from his office and
claim it as his own; that he interfered with and disrupted the daily business operations of the
corporations; that Michael was placed on preventive suspension due to prolonged absence without leave
and commission of acts of disloyalty such as carrying out orders of Eduardo which were detrimental to
their business, using privileged information and confidential documents/data obtained in his capacity as
Vice President of the corporations, and admitting to have sabotaged their distribution system and
operations.

During the pendency of Civil Case No. 4257-MC, particularly in July, 2004, Eduardo sought permission to
inspect the corporate books of VMC and Genato on account of petitioners’ alleged failure and/or refusal
to update him on the financial and business activities of these family corporations.6 Petitioners denied
the request claiming that Eduardo would use the information obtained from said inspection for purposes
inimical to the corporations’ interests, considering that: "a) he is harassing and/or bullying the
Corporation[s] into writing off P165,071,586.55 worth of personal advances which he had unlawfully
obtained in the past; b) he is unjustly demanding that he be given the office currently occupied by Mr.
Francis Jason Ang, the Vice-President for Finance and Corporate Secretary; c) he is usurping the rights
belonging exclusively to the Corporation; and d) he is coercing and/or trying to inveigle the Directors
and/or Officers of the Corporation to give in to his baseless demands involving specific corporate
assets."7
Because of petitioners’ refusal to grant his request to inspect the corporate books of VMC and Genato,
Eduardo filed an Affidavit-Complaint8 against petitioners Flordeliza and Jason, charging them with
violation (two counts) of Section 74, in relation to Section 144, of the Corporation Code of the
Philippines.9 Ma. Belinda G. Sandejas (Belinda), Vincent, and Hanna were subsequently impleaded for
likewise denying respondent’s request to inspect the corporate books.

Petitioners filed a Joint Counter-Affidavit praying for the dismissal of the complaint for lack of factual and
legal basis, or for the suspension of the same while Civil Case No. 4257-MC is still pending
resolution.10 They denied violating Section 74 of the Corporation Code and reiterated the allegations
contained in their complaint in Civil Case No. 4257-MC. Petitioners blamed Eduardo’s lavish lifestyle,
which is funded by personal loans and cash advances from the family corporations. They alleged that
Eduardo consistently pressured petitioner Flordeliza, his daughter, to improperly transfer ownership of
the corporations’ V.A.G. Building to him;11 to disregard the company policy prohibiting advances by
shareholders; to unduly increase his corporate monthly allowance; and to sell her Wack-Wack Golf
proprietary share and use the proceeds thereof to pay his personal financial obligations. When the
proposed transfer of the V.A.G. Building did not materialize, petitioners claim that Eduardo instituted an
action to compel the donation of said property to him.12 Furthermore, they claim that Eduardo attempted
to forcibly evict petitioner Jason from his office at VMC so he can occupy the same; that Eduardo and his
cohorts constantly created trouble by intervening in the daily operations of the corporations without the
knowledge or consent of the board of directors.

Meanwhile, in Civil Case No. 4257-MC, the trial court rendered a Decision granting the permanent
injunction applied for by the corporations.13 However, the Court of Appeals subsequently rendered a
Decision14 declaring that Eduardo, his son Michael, and the other persons impleaded in Civil Case No.
4257-MC, were imprudently declared in default by the trial court. The appellate court thus annulled the
permanent injunction issued by the trial court and remanded the case for further proceedings. VMC,
Genato, and Oriana corporations filed a Petition for Review on Certiorari before this Court, but the same
was denied for failure to sufficiently show any reversible error in the Decision of the Court of
Appeals.15 The three corporations filed a Motion for Reconsideration, but the same was denied with
finality on June 25, 2008.

Meanwhile, on February 3, 2005, the City Prosecutor’s Office of Malabon City issued a
Resolution16 recommending that petitioners be charged with two counts of violation of Section 74 of the
Corporation Code, but dismissed the complaint against Belinda for lack of evidence.17 Petitioners filed a
Petition for Review18 before the Department of Justice (DOJ), which reversed the recommendation of the
City Prosecutor of Malabon City.19 The dispositive portion of the DOJ Resolution dated July 26, 2005,
reads:

Wherefore, premises considered, the assailed resolution is REVERSED and SET ASIDE. The City
Prosecutor of Malabon City is hereby directed to cause the withdrawal of the corresponding
information filed against respondents [herein petitioners] for violation of Section 74 of the
Corporation Code of the Philippines and to report the action taken thereon within ten (10) days
from the receipt hereof.

SO ORDERED.20

The DOJ denied Eduardo’s Motion for Reconsideration21 in a Resolution22 dated March 29, 2006. On
appeal, the Court of Appeals rendered the assailed Decision, the dispositive portion of which states:
WHEREFORE, the instant petition is partially GRANTED. The assailed Resolutions of public
respondent dated July 26, 2005 and March 29, 2006 are hereby NULLIFIED and SET ASIDE.
However, due to the present existence of a prejudicial question, the criminal case docketed I.S. No.
MAL-2004-1167 is hereby SUSPENDED until Civil Case No. 4257-MC is decided on the merits with
finality. 23

The appellate court ruled that the Secretary of Justice committed grave abuse of discretion amounting to
lack or excess of jurisdiction in reversing the Resolutions of the Malabon City Prosecutor and in finding
that Eduardo did not act in good faith when he demanded for the examination of VMC and Genato’s
corporate books. It further held that Eduardo can demand said examination as a stockholder of both
corporations; that Eduardo raised legitimate questions that necessitated inspection of the corporate
books and records; and that petitioners’ refusal to allow inspection created probable cause to believe that
they have committed a violation of Section 74 of the Corporation Code.

On June 19, 2007, the Court of Appeals denied the Motions for Reconsideration filed by petitioners and
the Secretary of Justice.24 Hence, this petition raising the following issues:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS WAS CORRECT IN ITS FINDING THAT
THE HONORABLE JUSTICE SECRETARY’S REVERSAL OF THE MALABON CITY
PROSECUTOR’S RESOLUTION FINDING PROBABLE CAUSE AGAINST HEREIN PETITIONERS WAS
DONE CONTRARY TO THE APPLICABLE LAW AND JURISPRUDENCE TANTAMOUNT TO GRAVE
ABUSE OF DISCRETION.

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED GRAVE ABUSE OF


DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN REVERSING THE
RESOLUTION OF THE MALABON CITY PROSECUTOR FINDING PROBABLE CAUSE AGAINST
PETITIONERS AFTER PRELIMINARY INVESTIGATION FOR VIOLATION OF SECTION 74 OF THE
CORPORATION CODE OF THE PHILIPPINES.

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED GRAVE ABUSE OF


DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN FINDING THAT
PETITIONERS ACTED IN GOOD FAITH WHEN THEY DENIED PRIVATE RESPONDENT’S DEMAND
FOR INSPECTION OF CORPORATE BOOKS.25

We grant the petition.

Probable cause, for purposes of filing a criminal information, has been defined as such facts as are
sufficient to engender a well-founded belief that a crime has been committed and that respondent is
probably guilty thereof. It is such a state of facts in the mind of the prosecutor as would lead a person of
ordinary caution and prudence to believe or entertain an honest or strong suspicion that a thing is so.
The term does not mean "actual or positive cause;" nor does it import absolute certainty. It is merely
based on opinion and reasonable belief. Thus, a finding of probable cause does not require an inquiry into
whether there is sufficient evidence to procure a conviction. It is enough that it is believed that the act or
omission complained of constitutes the offense charged. Precisely, there is a trial for the reception of
prosecution’s evidence in support of the charge."26

The determination of the existence of probable cause lies within the discretion of the prosecuting officers
after conducting a preliminary investigation upon complaint of an offended party. Their decisions are
reviewable by the Secretary of Justice who may direct the filing of the corresponding information or to
move for the dismissal of the case.27

In reversing the Resolutions of the Secretary of Justice directing the withdrawal of the information filed
against petitioners for lack of probable cause, the Court of Appeals held that it was beyond the Secretary
of Justice’s authority to determine the motives of Eduardo in seeking an inspection of the corporations’
books and papers.

In order that probable cause to file a criminal case may be arrived at, or in order to engender the well-
founded belief that a crime has been committed, the elements of the crime charged should be
present.28 This is based on the principle that every crime is defined by its elements, without which there
should be – at the most – no criminal offense.

In Gokongwei, Jr. v. Securities and Exchange Commission,29 this Court explained the rationale behind a
stockholder's right to inspect corporate books, to wit:

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership
of the corporate property, whether this ownership or interest be termed an equitable ownership,
a beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of self-
protection. It is generally held by majority of the courts that where the right is granted by statute
to the stockholder, it is given to him as such and must be exercised by him with respect to his
interest as a stockholder and for some purpose germane thereto or in the interest of the
corporation. In other words, the inspection has to be germane to the petitioner's interest as
a stockholder, and has to be proper and lawful in character and not inimical to the interest
of the corporation.30

In Republic v. Sandiganbayan,31 the Court declared that the right to inspect and/or examine the records of
a corporation under Section 74 of the Corporation Code is circumscribed by the express limitation
contained in the succeeding proviso, which states that:

[I]t shall be a defense to any action under this section that the person demanding to examine and
copy excerpts from the corporation's records and minutes has improperly used any
information securedthrough any prior examination of the records or minutes of such
corporation or of any other corporation, orwas not acting in good faith or for a legitimate
purpose in making his demand. (Emphasis supplied)

Thus, contrary to Eduardo’s insistence, the stockholder’s right to inspect corporate books is not without
limitations. While the right of inspection was enlarged under the Corporation Code as opposed to the old
Corporation Law (Act No. 1459, as amended),

It is now expressly required as a condition for such examination that the one requesting it must
not have been guilty of using improperly any information secured through a prior examination, or
that the person asking for such examination must be acting in good faith and for a legitimate
purpose in making his demand.32(Emphasis supplied)
In order therefore for the penal provision under Section 144 of the Corporation Code to apply in a case of
violation of a stockholder or member’s right to inspect the corporate books/records as provided for
under Section 74 of the Corporation Code, the following elements must be present:

First. A director, trustee, stockholder or member has made a prior demand in writing for a copy of
excerpts from the corporation’s records or minutes;

Second. Any officer or agent of the concerned corporation shall refuse to allow the said director, trustee,
stockholder or member of the corporation to examine and copy said excerpts;

Third. If such refusal is made pursuant to a resolution or order of the board of directors or trustees, the
liability under this section for such action shall be imposed upon the directors or trustees who voted for
such refusal; and,

Fourth. Where the officer or agent of the corporation sets up the defense that the person demanding to
examine and copy excerpts from the corporation’s records and minutes has improperly used any
information secured through any prior examination of the records or minutes of such corporation or of
any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand,
the contrary must be shown or proved.

Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the defense of improper
use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are
able to prove the same. Accordingly, where the corporation denies inspection on the ground of improper
motive or purpose, the burden of proof is taken from the shareholder and placed on the
corporation.33 This being the case, it would be improper for the prosecutor, during preliminary
investigation, to refuse or fail to address the defense of improper use or motive, given its express
statutory recognition. In the past we have declared that if justifying circumstances are claimed as a
defense, they should have at least been raised during preliminary investigation;34 which settles the view
that the consideration and determination of justifying circumstances as a defense is a relevant subject of
preliminary investigation.

A preliminary investigation is in effect a realistic judicial appraisal of the merits of the case; sufficient
proof of the guilt of the criminal respondent must be adduced so that when the case is tried, the trial
court may not be bound, as a matter of law, to order an acquittal.35 Although a preliminary investigation
is not a trial and is not intended to usurp the function of the trial court, it is not a casual affair; the officer
conducting the same investigates or inquires into the facts concerning the commission of the crime with
the end in view of determining whether or not an information may be prepared against the
accused.36 After all, the purpose of preliminary investigation is not only to determine whether there is
sufficient ground to engender a well-founded belief that a crime has been committed and the respondent
therein is probably guilty thereof and should be held for trial; it is just as well for the purpose of securing
the innocent against hasty, malicious and oppressive prosecution, and to protect him from an open and
public accusation of a crime, from the trouble, expense and anxiety of a public trial.37 More importantly,
in the appraisal of the case presented to him for resolution, the duty of a prosecutor is more to do justice
and less to prosecute.38

If the prosecutor is convinced during preliminary investigation of the validity of the respondent’s claim of
a justifying circumstance, then he must dismiss the complaint; if not, then he must file the requisite
information. This is his discretion, the exercise of which we grant sufficient latitude. 39
In the instant case, the Court finds that the Court of Appeals erred in declaring that the Secretary of
Justice exceeded his authority when he conducted an inquiry on the petitioners’ defense of improper use
and motive on Eduardo’s part. As a necessary element in the offense of refusal to honor a
stockholder/member’s right to inspect the corporate books/records, it was incumbent upon the
Secretary of Justice to determine that all the elements which constitute said offense are present, in line
with our ruling in Duterte v. Sandiganbayan.

A preliminary investigation is the crucial sieve in the criminal justice system which spells for an
individual the difference between months if not years of agonizing trial and possibly jail term, on the one
hand, and peace of mind and liberty, on the other. Thus, we have characterized the right to a preliminary
investigation as not a mere formal or technical right but a substantive one, forming part of due process in
criminal justice.40 Due process, in the instant case, requires that an inquiry into the motive behind
Eduardo’s attempt at inspection should have been made even during the preliminary investigation stage,
just as soon as petitioners set up the defense of improper use and motive.

Petitioners argue that Eduardo’s demand for an inspection of the corporations’ books is based on the
latter’s attempt in bad faith at having his more than P165 million advances from the corporations written
off; that Eduardo is unjustly demanding that he be given the office of Jason, or the Vice Presidency for
Finance and Corporate Secretary; that Eduardo is usurping rights belonging exclusively to the
corporations; and Eduardo’s attempts at coercing the corporations, their directors and officers into giving
in to his baseless demands involving specific corporate assets. Specifically, petitioners accuse Eduardo of
the following:

1. He is a spendthrift, using the family corporations’ resources to sustain his extravagant lifestyle.
During his incumbency as officer of VMC and Genato (from 1984 to 2000), he was able to obtain
massive amounts by way of cash advances from these corporations, amounting to more than P165
million;

2. He is exercising undue pressure upon petitioners in order to acquire ownership, through the
forced execution of a deed of donation, over the VAG Building in San Juan, which building belongs
to Genato;

3. He is putting pressure on the corporations, through their directors and officers, for the latter to
disregard their respective policies which prohibit the grant of cash advances to stockholders.

4. At one time, he coerced Flordeliza for the latter to sell her Wack-Wack Golf Proprietary Share;

5. In May 2003, without the requisite authority, he called a "stockholders’ meeting" to demand an
increase in his P140,000.00 monthly allowance from the corporation to P250,000.00; demand a
cash advance of US$10,000; and to demand that the corporations shoulder the medical and
educational expenses of his family as well as those of the other stockholders;

6. In November 2003, he demanded that he be given an office within the corporations’ premises.
In December 2003, he stormed the corporations’ common office, ordered the employees to vacate
the premises, summoned the directors to a meeting, and there he berated them for not acting on
his requests. In January 2004, he returned to the office, demanding the transfer of the Accounting
Department and for Jason to vacate his office by the end of the month. He likewise left a letter
which contained his demands. At the end of January 2004, he returned, ordered the employees to
leave the premises and demanded that Jason surrender his office and vacate his desk. He did this
no less than four (4) times. As a result, the respective boards of directors of the corporations
resolved to ban him from the corporate premises;

7. He has been interfering in the everyday operations of VMC and Genato, usurping the duties,
rights and authority of the directors and officers thereof. He attempted to lease out a warehouse
within the VMC premises without the knowledge and consent of its directors and officers; during
the wake of the former President of VMC and Genato, he issued instructions for the employees to
close down operations for the whole duration of the wake, against the corporate officers’
instructions to attend the wake by batch, so as not to hamper business operations; he has caused
chaos and confusion in VMC and Genato as a result;41

8. He is out to sabotage the family corporations.42

These serious allegations are supported by official and other documents, such as board resolutions,
treasurer’s affidavits and written communication from the respondent Eduardo himself, who appears to
have withheld his objections to these charges. His silence virtually amounts to an acquiescence.43 Taken
together, all these serve to justify petitioners’ allegation that Eduardo was not acting in good faith and for
a legitimate purpose in making his demand for inspection of the corporate books. Otherwise stated, there
is lack of probable cause to support the allegation that petitioners violated Section 74 of the Corporation
Code in refusing respondent’s request for examination of the corporation books.

WHEREFORE, the Petition for Review on Certiorari is GRANTED. The March 6, 2007 Decision and June
19, 2007 Resolution of the Court of Appeals in CA-G.R. SP No. 94708 are REVERSED and SET ASIDE. The
July 26, 2005 and March 29, 2006 Resolutions of the Secretary of Justice directing the withdrawal of the
information filed against petitioners for violation of Section 74 of the Corporation Code are
accordingly REINSTATED and AFFIRMED.

SO ORDERED.

FIRST DIVISION

G.R. No. 160924, August 05, 2015

TERELAY INVESTMENT AND DEVELOPMENT CORPORATION, Petitioner, v. CECILIA TERESITA J.


YULO, Respondent.

DECISION

BERSAMIN, J.:

In its desire to block the inspection of its corporate books by a stockholder holding a very insignificant
shareholding, the petitioner now seeks to set aside the judgment promulgated on September 12,
2003,1whereby the Court of Appeals (CA) affirmed the decision rendered on March 22, 2002 by the
Regional Trial Court, Branch 142, in Makati City (RTC) allowing the inspection, and ordering it to pay
attorney's fees of P50,000.00 to the stockholder.2cralawrednad
With the CA having denied the petitioner's motion for reconsideration and motion for oral argument
through the resolution promulgated on November 28, 2003,3 such denial is also the subject of this appeal.

Antecedents

The CA recited the following antecedents:cralawlawlibrary


Asserting her right as a stockholder, Cecilia Teresita Yulo wrote a letter, dated September 14, 1999,
addressed to Terelay Investment and Development Corporation (TERELAY) requesting that she be
allowed to examine its books and records on September 17, 1999 at 1:30 o'clock in the afternoon at the
latter's office on the 25th floor, Citibank Tower, Makati City. In its reply-letter, dated September 15, 1999,
TERELAY denied the request for inspection and instead demanded that she show proof that she was a
bona fide stockholder.

On September 16, 1999, Cecilia Yulo again sent another letter clarifying that her request for examination
of the corporate records was for the purpose of inquiring into the financial condition of TERELAY and the
conduct of its affairs by the principal officers. The following day, Cecilia Yulo received a faxed letter from
TERELAY's counsel advising her not to continue with the inspection in order to avoid trouble.

On October 11, 1999, Cecilia Yulo filed with the Securities and Exchange Commission (SEC), a Petition for
Issuance of a Writ of Mandamus with prayer for Damages against TERELAY, docketed as SEC Case No. 10-
99-6433. In her petition, she prayed that judgment be rendered ordering TERELAY to allow her to inspect
its corporate records, books of account and other financial records; to pay her actual damages
representing attorney's fees and litigation expenses of not less than One Hundred Thousand Pesos
(P100,000.00); to pay her exemplary damages; and to pay the costs of the suit On May 16, 2000, in the
preliminary conference held before the SEC Hearing Officer, the parties agreed on the
following:cralawlawlibrary
1. Petitioner Cecilia Teresita Yulo is registered as a stockholder in the corporation's stock and transfer
book subject to the qualification in the Answer, and

2. Petitioner had informed the respondent, through demand letter, of her desire to inspect the records of
the corporation, but the same was denied by the respondent.
Thereafter, the parties stipulated that the ISSUES to be resolved are the following:cralawlawlibrary
1. Whether or not petitioner has the right to inspect and examine TERELAY's corporate records, books of
account and other financial records pursuant to Section 74 of the Corporation Code of the Philippines;

2. Whether or not petitioner as stockholder and director of TERELAY has been unduly deprived of her
right to inspect and examine TERELAY's corporate records, books of accounts and other financial records
in clear contravention of law, which warrants her claim for damages;

3. Whether or not Atty. Reynaldo G. Geronimo and/or the principal officers, Ma. Antonia Yulo Loyzaga
and Teresa J. Yulo of respondent corporation are indispensable parties and hence, should be impleaded
as respondents;

4. As a prejudicial question, whether or not petitioner is a stockholder of respondent corporation and


such being the issue, whether this issue should be threshed out in the probate of the will of the late Luis
A. Yulo and settlement of estate now pending with the Regional Trial Court of Manila;

5. Assuming petitioner is a stockholder, whether or not petitioner's mere desire to inquire into the
financial condition of respondent corporation and conduct of the affairs of the corporation is a just and
sufficient ground for inspection of the corporate records.4
Following the enactment of Republic Act No. 8799 (The Securities Regulation Code), the case was
transferred from the Securities and Exchange Commission to the RTC.

On March 22, 2002, the RTC rendered its judgment,5 ruling thusly:cralawlawlibrary
Accordingly, petitioner's application for inspection of corporate records is granted pursuant to Rule 7 of
the Interim Rules in relation to Section 74 and 75 of the Corporation Code. Defendant, through its officers,
is ordered to allow inspection of corporate books and records at reasonable hours on business days
and/or furnish petitioner copies thereof all at her expense. In this connection, plaintiff is ordered to
deposit to the Court the amount of P1,000.00 to cover the estimated cost of the manpower necessary to
produce the books and records and the cost of copying.

Respondent is further ordered to pay petitioner attorney's fees in the amount of P50,000.00

SO ORDERED.6
On September 12, 2003, the CA affirmed the RTC.7cralawrednad

The petitioner sought reconsideration, and moved for the holding of oral arguments thereon, but the CA
denied the motion on November 28, 2003.8cralawrednad

Issues

In this appeal, the petitioner insists that the CA committed serious error: (a) in holding that the
respondent was a stockholder entitled to inspect its books and records, and allowing her to inspect its
corporate records despite her shareholding being a measly .001% interest; (b) in declaring that the RTC
had the jurisdiction to determine whether or not she was a stockholder; (c) in ruling that it did not
adduce sufficient proof showing that she was in bad faith or had an ulterior motive in demanding
inspection of the records; (d) in finding that her purpose for the inspection, which was to inquire into its
financial condition and into the conduct of its affairs by its principal officers, was a valid ground to
examine the corporate records; (e) in holding that her petition for mandamus was not premature; (f) in
not resolving whether or not its principal officers should be impleaded as indispensable parties; and (g)
in not setting aside the award of attorney's fees in the amount of P50,000.00.9cralawrednad

In her comment,10 the respondent counters that the law does not require substantial shareholding before
she can exercise her right of inspection as a stockholder; that the issue of the nullity of the donation in
her favor of the shareholding was irrelevant because it was the subscription to the shares that granted
the statutory and common rights to stockholders; that the RTC, sitting as a corporate court, was the
proper court to declare that she was a stockholder; that she has just and sufficient grounds to inspect its
corporate records; that its officers are not indispensable parties; that her petition for mandamus was not
premature; and that the CA correctly upheld the RTC's order to pay attorney's fees to her.

Ruling of the Court

We deny the petition for review on certiorari.

To start with, it is fundamental that a petition for review on certiorari should raise only questions of
law.11 In that regard, the findings of fact of the trial court, as affirmed by the appellate court, are final and
conclusive, and cannot be reviewed on appeal by the Court as long as such findings are supported by the
records, or are based on substantial evidence. In other words, it is not the function of the Court to analyze
or weigh all over again the evidence or the factual premises supportive of the lower courts'
determinations.

Even when the Court has to review the factual premises, it has consistently held that the findings of the
appellate and the trial courts are accorded great weight, if not binding effect, unless the most compelling
and cogent reasons exist to revisit such findings.12 Among the compelling and cogent reasons are the
following,13 namely: (a) when the findings are grounded entirely on speculation, surmises, or conjectures;
(b) when the inference made is manifestly mistaken, absurd, or impossible; (c) when there is grave abuse
of discretion; (d) when the judgment is based on a misapprehension of facts; (e) when the findings of
facts are conflicting; (f) when the CA, in making its findings, went beyond the issues of the case, or its
findings are contrary to the admissions of both the appellant and the appellee; (g) when the CA's findings
are contrary to those by the trial court; (h) when the findings are conclusions without citation of specific
evidence on which they are based; (i) when the facts set forth in the petition as well as in the petitioner's
main and reply briefs are not disputed by the respondent; (j) when the findings of fact are premised on
the supposed absence of evidence and contradicted by the evidence on record; or (k) when the CA
manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered,
would justify a different conclusion.

However, the Court has determined from its review in this appeal that the CA correctly disposed of the
legal and factual matters and issues presented by the parties. This appeal is not, therefore, under any of
the aforecited exceptions.

The Court now adopts with approval the cogent observations of the CA on the matters and issues raised
by the petitioner, as follows:cralawlawlibrary
Regarding the issue of jurisdiction, TERELAY avers that it is not within the jurisdiction of the trial court to
determine whether or not petitioner-appellee is its stockholder. It contends that a petition for the
probate of the will of Cecilia's father, the late Luis A. Yulo, and the settlement of his estate was filed with
the Regional Trial Court of Manila. The inventory of the estate includes the five (5) shares which Cecilia is
claiming. Being a court of limited jurisdiction, the court a quo could not decide whether or not Luis A.
Yulo donated five (5) shares to Cecilia during his lifetime. The position of TERELAY is untenable. As
correctly pointed out by Cecilia Yulo, the main issue in this case is the question of whether or not she is a
stockholder and therefore, has the right to inspect the corporate books and records. We agree with the
ruling of the trial court that the determination of this issue is within the competence of the Regional Trial
Court, acting as a special court for intra-corporate controversies, and not in the proceeding for the
settlement of the estate of the late Luis Yulo.

On the matter of exhaustion of administrative remedies, TERELAY asserts that the petition for mandamus
filed by Cecilia Yulo was premature because she failed to exhaust all available remedies before filing the
instant petition. The Court disagrees. A writ of mandamus is a remedy provided by law where despite the
stockholder's request for record inspection, the corporation still refuses to allow the stockholder the
right to inspect. In the instant case, Cecilia Yulo, through counsel, sent a letter request, dated September
14, 1999, for inspection of corporate records, books of accounts and other financial records, but the same
was denied by TERELAY through counsel, in its reply-letter, dated September 15, 1999. Appellee Yulo
sent another letter, dated September 16, 1999, reiterating the same request but the same was again
denied by TERELAY in a reply-letter dated September 17, 1999. Clearly then, appellee Yulo's right is not
pre-mature and may be enforced by a writ of mandamus.
On the contention that there was no stipulation that Cecilia Yulo was registered as a stockholder,
TERELAY asserts that the trial court was misled into believing that there was a stipulation or admission
that Cecilia Yulo is a registered stockholder in its stock and transfer book. According to TERELAY, the
admission or stipulation was that she was registered in the Articles of Incorporation is separate and
distinct from being so in the stock and transfer book. TERELAY's argument cannot be sustained. A careful
review of the records would show that in the Preliminary Conference Order, dated May 16, 2000, of the
SEC Hearing Officer, both parties represented by their respective counsels, agreed on the fact that
petitioner-appellee was "registered as a stockholder in respondent-appellant's stock and transfer book
subject to the qualifications in the Answer." The records failed to disclose any objection by TERELAY.
Neither did TERELAY raise this matter in the SEC hearing held on August 7, 2000 as one of the issues to
be determined and resolved.

TERELAY further points out that her name as incorporator, stockholder and director in the Articles of
Incorporation and Amendments were unsigned; that she did not pay for the five (5) shares appearing in
the Amended Articles of Incorporation and General Information Sheet of TERELAY; that she did not
subscribe to the shares; that she has neither been in possession of nor seen the certificate of stock
covering the five (5) shares of stock; that the donation of the five (5) shares claimed by her was null and
void for failure to comply with the requisites of a donation under Art. 748 of the Civil Code; and that there
was no acceptance of the donation by her as donee. TERELAY further contends that Cecilia Yulo's
purpose in inspecting the books was to inquire into its financial condition and the conduct of its affairs by
the principal officers which are not sufficient and valid reasons. Therefore, the presumption of good faith
cannot be accorded her.

TERELAY's position has no merit. The records disclose that the corporate documents submitted, which
include the Articles of Incorporation and the Amended Articles of Incorporation, as well as the General
Information Sheets and the Quarterly Reports all bear the signatures of the proper parties and their
authorized custodians. The signature of appellee under the name Cecilia J. Yulo appears in the Articles of
Incorporation of TERELAY. Likewise, her signatures under the name Cecilia Y. Blancaflor appear in the
Amended Articles of Incorporation where she signed as Director and Corporate Secretary of TERELAY.
The General Information Sheets from December 31, 1977 up to February 20, 2002 all exhibited that she
was recognized as director and corporate secretary, and that she had subscribed to five (5) shares of
stock. The quarterly reports do not show otherwise.

Verily, petitioner-appellee has presented enough evidence that she is a stockholder of TERELAY. The
corporate documents presented support her claim that she is a registered stockholder in TERELAY's
stock and transfer book thus giving her the right, under Section 74 par. 2 and Section 75 of the Philippine
Corporation Law, to inspect TERELAY's books, records, and financial statements. Section 74, par. 2 and
Section 75 of our Corporation Code reads as follows: x x x

Accordingly, Cecilia Yulo as the right to be fully informed of TERELAY's corporate condition and the
manner its affairs are being managed. It is well-settled that the ownership of shares of stock gives
stockholders the right under the law to be protected from possible mismanagement by its officers. This
right is predicated upon selfpreservation. In any case, TERELAY did not adduce sufficient proof that
Cecilia Yulo was in bad faith or had an ulterior motive in demanding her right under the law.

In view of the foregoing, the Court finds it unnecessary to discuss the other issues raised by TERELAY as
they are incapable of defeating the established fact that Cecilia Yulo is a registered stockholder of
respondent-applicant.

Finally, the Court agrees with the ruling of the court a quo that the petitioner is entitled to the reasonable
amount of P50,000.00 representing attorney's fees for having been compelled to litigate in order to
exercise her right of inspection.14
Secondly, the petitioner's submission that the respondent's "insignificant holding" of only .001% of the
petitioner's stockholding did not justify the granting of her application for inspection of the corporate
books and records is unwarranted.

The Corporation Code has granted to all stockholders the right to inspect the corporate books and
records, and in so doing has not required any specific amount of interest for the exercise of the right to
inspect.15 Ubi lex non distinguit nee nos distinguere debemos. When the law has made no distinction, we
ought not to recognize any distinction.

Neither could the petitioner arbitrarily deny the respondent's right to inspect the corporate books and
records on the basis that her inspection would be used for a doubtful or dubious reason. Under Section
74, third paragraph, of the Corporation Code, the only time when the demand to examine and copy the
corporation's records and minutes could be refused is when the corporation puts up as a defense to any
action that "the person demanding" had "improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other corporation, or was not acting in
good faith or for a legitimate purpose in making his demand."

The right of the shareholder to inspect the books and records of the petitioner should not be made
subject to the condition of a showing of any particular dispute or of proving any mismanagement or other
occasion rendering an examination proper, but if the right is to be denied, the burden of proof is upon the
corporation to show that the purpose of the shareholder is improper, by way of defense. According to a
recognized commentator:16
By early English decisions it was formerly held that there must be something more than bare suspicion of
mismanagement or fraud. There must be some particular controversy or question in which the party
applying was interested, and inspection would be granted only so far as necessary for that particular
occasion. By the general rule in the United States, however, shareholders have a right to inspect the books
and papers of the corporation without first showing any particular dispute or proving any
mismanagement or other occasion rendering an examination proper. The privilege, however, is not
absolute and the corporation may show in defense that the applicant is acting from wrongful motives.

In Guthrie v. Harkness, there was involved the right of a shareholder in a national bank to inspect its
books for the purpose of ascertaining whether the business affairs of the bank had been conducted
according to law, and whether, as suspected, the bank was guilty of irregularities. The court said: "The
decisive weight of American authority recognizes the right of the shareholder, for proper purposes and
under reasonable regulations as to place and time, to inspect the books of the corporation of which he is a
member . . . In issuing the writ of mandamus the court will exercise a sound discretion and grant the right
under proper safeguards to protect the interest of all concerned. The writ should not be granted for
speculative purposes or to gratify idle curiosity or to aid a blackmailer, but it may not be denied to the
stockholder who seeks the information for legitimate purposes."

Among the purposes held to justify a demand for inspection are the following: (1) To ascertain the
financial condition of the company or the propriety of dividends; (2) the value of the shares of stock for
sale or investment; (3) whether there has been mismanagement; (4) in anticipation of shareholders'
meetings to obtain a mailing list of shareholders to solicit proxies or influence voting; (5) to obtain
information in aid of litigation with the corporation or its officers as to corporate transactions. Among the
improper purposes which may justify denial of the right of inspection are: (1) Obtaining of information as
to business secrets or to aid a competitor; (2) to secure business "prospects" or investment or advertising
lists; (3) to find technical defects in corporate transactions in order to bring "strike suits" for purposes of
blackmail or extortion.

In general, however, officers and directors have no legal authority to close the office doors against
shareholders for whom they are only agents, and withhold from them the right to inspect the books
which furnishes the most effective method of gaining information which the law has provided, on mere
doubt or suspicion as to the motives of the shareholder. While there is some conflict of authority, when
an inspection by a shareholder is contested, the burden is usually held to be upon the corporation to
establish a probability that the applicant is attempting to gain inspection for a purpose not connected
with his interests as a shareholder, or that his purpose is otherwise improper. The burden is not upon the
petitioner to show the propriety of his examination or that the refusal by the officers or directors was
wrongful, except under statutory provisions.
WHEREFORE, the Court AFFIRMS the judgment promulgated on September 12, 2003; and ORDERSthe
petitioner to pay the costs of suit.

SO ORDERED.chanrobles virtuallawlibrary

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 123553 July 13, 1998

(CA-G.R. No. 33291) July 13, 1998

NORA A. BITONG, petitioner,

vs.

COURT OF APPEALS (FIFTH DIVISION), EUGENIA D. APOSTOL, JOSE A. APOSTOL, MR. & MS.
PUBLISHING CO., LETTY J. MAGSANOC, AND ADORACION G. NUYDA, respondents.

(CA-G.R. No. 33873) July 13, 1998

NORA A. BITONG, petitioner,

vs.

COURT OF APPEALS (FIFTH DIVISION) and EDGARDO B. ESPIRITU, respondents.


BELLOSILLO, J.:

These twin cases originated from a derivative suit 1 filed by petitioner Nora A. Bitong before
the Securities and Exchange Commission (SEC hereafter) allegedly for the benefit of private
respondent Mr. & Ms. Publishing Co., Inc. (Mr. & Ms. hereafter), among others, to hold respondent
spouses Eugenia D. Apostol and Jose A. Apostol 2 liable for fraud, misrepresentation, disloyalty,
evident bad faith, conflict of interest and mismanagement in directing the affairs of Mr. & Ms. to
the damage and prejudice of Mr. & Ms. and its stockholders, including petitioner.

Alleging before the SEC that she had been the Treasurer and a Member of the Board of Directors of
Mr. & Ms. from the time it was incorporated on 29 October 1976 to 11 April 1989, and was the
registered owner of 1,000 shares of stock out of the 4,088 total outstanding shares, petitioner
complained of irregularities committed from 1983 to 1987 by Eugenia D. Apostol, President and
Chairperson of the Board of Directors. Petitioner claimed that except for the sale of the
name Philippine Inquirer to Philippine Daily Inquirer (PDI hereafter) all other transactions and
agreements entered into by Mr. & Ms. with PDI were not supported by any bond and/or
stockholders' resolution. And, upon instructions of Eugenia D. Apostol, Mr. & Ms. made several
cash advances to PDI on various occasions amounting to P3.276 million. On some of these
borrowings PDI paid no interest whatsoever. Despite the fact that the advances made by Mr. & Ms.
to PDI were booked as advances to an affiliate, there existed no board or stockholders' resolution,
contract nor any other document which could legally authorize the creation of and support to an
affiliate.

Petitioner further alleged that respondents Eugenia and Jose Apostol were stockholders, directors
and officers in both Mr. & Ms. and PDI. In fact on 2 May 1986 respondents Eugenia D. Apostol,
Leticia J. Magsanoc and Adoracion G. Nuyda subscribed to PDI shares of stock at P50,000.00 each
or a total of P150,000.00. The stock subscriptions were paid for by Mr. & Ms. and initially treated,
as receivables from officers and employees. But, no payments were ever received from
respondents, Magsanoc and Nuyda.

The petition principally sought to (a) enjoin respondents Eugenia D. Apostol and Jose A. Apostol
from further acting as president-director and director, respectively, of Mr. & Ms. and disbursing
any money or funds except for the payment of salaries and similar expenses in the ordinary
course of business, and from disposing of their Mr. & Ms. shares; (b) enjoin respondents Apostol
spouses, Magsanoc and Nuyda from disposing of the PDI shares of stock registered in their names;
(c) compel respondents Eugenia and Jose Apostol to account for and reconvey all profits and
benefits accruing to them as a result of their improper and fraudulent acts; (d) compel
respondents Magsanoc and Nuyda to account for and reconvey to Mr. & Ms. all shares of stock paid
from cash advances from it and all accessions or fruits thereof; (e) hold respondents Eugenia and
Jose Apostol liable for damages suffered by Mr. & Ms. and the other stockholders, including
petitioner, by reason of their improper and fraudulent acts; (f) appoint a management committee
for Mr. & Ms. during the pendency of the suit to prevent further dissipation and loss of its assets
and funds as well as paralyzation of business operations; and, (g) direct the management
committee for Mr. & Ms. to file the necessary action to enforce its rights against PDI and other
third parties.
Private respondents Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms., on the other hand, refuted
the allegations of petitioner by starting with a narration of the beginnings of Mr. & Ms. They
recounted that on 9 March 1976 Ex Libris Publishing Co., Inc. (Ex Libris hereafter) was
incorporated for the purpose of publishing a weekly magazine. Its original principal stockholders
were spouses Senator Juan Ponce Enrile (then Minister of National Defense) and Cristina Ponce
Enrile through Jaka Investments Corporation (JAKA hereafter), and respondents Eugenia and Jose
Apostol. When Ex Libris suffered financial difficulties, JAKA and the Apostols, together with new
investors Luis Villafuerte and Ramon Siy, restructured Ex Libris by organizing a new corporation
known as Mr. & Ms.

The original stockholders of Mr. & Ms., i.e., JAKA, Luis Villafuerte, Ramon Siy, the Apostols and Ex
Libriscontinued to be virtually the same up to 1989. Thereafter it was agreed among them that,
they being close friends, Mr. & Ms. would be operated as a partnership or a close corporation;
respondent Eugenia D. Apostol would manage the affairs of Mr. & Ms.; and, no shares of stock
would be sold to third parties without first offering the shares to the other stockholders so that
transfers would be limited to and only among the original stockholders.

Private respondents also asserted that respondent Eugenia D. Apostol had been informing her
business partners of her actions as manager, and obtaining their advice and consent.
Consequently the other stockholders consented, either expressly or impliedly, to her
management. They offered no objections. As a result, the business prospered. Thus, as shown in a
statement prepared by the accounting firm Punongbayan and Araullo, there were increases from
1976 to 1988 in the total assets of Mr. & Ms. from P457,569.00 to P10,143,046.00; in the total
stockholders' equity from P203,378.00 to P2,324,954.00; and, in the net sales, from P301,489.00
to P16,325,610.00. Likewise, cash dividends were distributed and received by the stockholders.

Private respondents further contended that petitioner, being merely a holder-in-trust of JAKA
shares, only represented and continued to represent JAKA in the board. In the beginning,
petitioner cooperated with and assisted the management until mid-1986 when relations between
her and her principals on one hand, and respondent Eugenia D. Apostol on the other, became
strained due to political differences. Hence from mid-1986 to mid-1988 petitioner refused to
speak with respondent Eugenia D. Apostol, and in 1988 the former became openly critical of the
management of the latter. Nevertheless, respondent Eugenia D. Apostol always made available to
petitioner and her representatives all the books of the corporation.

Private respondents averred that all the PDI shares owned by respondents Eugenia and Jose
Apostol were acquired through their own private funds and that the loan of P750,000.00 by PDI
from Mr. & Ms. had been fully paid with 20% interest per annum. And, it was PDI, not Mr. & Ms.,
which loaned off P250,000.00 each to respondents Magsanoc and Nuyda. Private respondents
further argued that petitioner was not the true party to this case, the real party being JAKA which
continued to be the true stockholder of Mr. & Ms.; hence, petitioner did not have the personality to
initiate and prosecute the derivative suit which, consequently, must be dismissed.

On 6 December 1990, the SEC Hearing Panel 3 issued a writ of preliminary injunction enjoining
private respondents from disbursing any money except for the payment of salaries and other
similar expenses in the regular course of business. The Hearing Panel also enjoined respondent
Apostol spouses, Nuyda and Magsanoc from disposing of their PDI shares, and further ruled —
. . . respondents' contention that petitioner is not entitled to the provisional reliefs
prayed for because she is not the real party in interest . . . is bereft of any merit. No
less than respondents' Amended Answer, specifically paragraph V, No. 8 on
Affirmative Allegations/Defenses states that "The petitioner being herself a minor
stockholder and holder-in-trust of JAKA shares represented and continues to
represent JAKA in the Board." This statement refers to petitioner sitting in the board
of directors of Mr. & Ms. in two capacities, one as a minor stockholder and the other
as the holder in trust of the shares of JAKA in Mr. & Ms. Such reference alluded to by
the respondents indicates an admission on respondents' part of the petitioner's legal
personality to file a derivative suit for the benefit of the respondent Mr. & Ms.
Publishing Co., Inc.

The Hearing Panel however denied petitioner's prayer for the constitution of a
management committee.

On 25 March 1991 private respondents filed a Motion to Amend Pleadings to Conform to


Evidence alleging that the issue of whether petitioner is the real party-in-interest had been tried
by express or implied consent of the parties through the admission of documentary exhibits
presented by private respondents proving that the real party-in-interest was JAKA, not petitioner
Bitong. As such, No. 8, par. V (Affirmative Allegations/Defenses), Answer to the Amended Petition,
was stipulated due to inadvertence and excusable mistake and should be amended. On 10 October
1991 the Hearing Panel denied the motion for amendment.

Petitioner testified at the trial that she became the registered and beneficial owner of 997 shares
of stock of Mr. & Ms. out of the 4,088 total outstanding shares after she acquired them from JAKA
through a deed of sale executed on 25 July 1983 and recorded in the Stock and Transfer Book of
Mr. & Ms. under Certificate of Shares of Stock No. 008. She pointed out that Senator Enrile decided
that JAKA should completely divest itself of its holdings in Mr. & Ms. and this resulted in the sale to
her of JAKA's interest and holdings in that publishing firm.

Private respondents refuted the statement of petitioner that she was a stockholder of Mr. & Ms.
since 25 July 1983 as respondent Eugenia D. Apostol signed Certificate of Stock No. 008 only on 17
March 1989, and not on 25 July 1983. Respondent Eugenia D. Apostol explained that she stopped
using her long signature (Eugenia D. Apostol) in 1987 and changed it to E.D. Apostol, the signature
which appeared on the face of Certificate of Stock No. 008 bearing the date 25 July 1983. And,
since the Stock and Transfer Book which petitioner presented in evidence was not registered with
the SEC, the entries therein including Certificate of Stock No. 008 were fraudulent. Respondent
Eugenia D. Apostol claimed that she had not seen the Stock and Transfer Book at anytime until 21
March 1989 when it was delivered by petitioner herself to the office of Mr. & Ms., and that
petitioner repeatedly referred to Senator Enrile as "my principal" during the Mr. & Ms. board
meeting of 22 September 1988, seven (7) times no less.

On 3 August 1993, after trial on the merits, the SEC Hearing Panel dismissed the derivative suit
filed by petitioner and dissolved the writ of preliminary injunction barring private respondents
from disposing of their PDI shares and any of Mr. & Ms. assets. The Hearing Panel ruled that there
was no serious mismanagement of Mr. & Ms. which would warrant drastic corrective measures. It
gave credence to the assertion of respondent Eugenia D. Apostol that Mr. & Ms. was operated like
a close corporation where important matters were discussed and approved through informal
consultations at breakfast conferences. The Hearing Panel also concluded that while the evidence
presented tended to show that the real party-in-interest indeed was JAKA and/or Senator Enrile,
it viewed the real issue to be the alleged mismanagement, fraud and conflict of interest on the
part of respondent Eugenia D. Apostol, and allowed petitioner to prosecute the derivative suit if
only to resolve the real issues. Hence, for this purpose, the Hearing Panel considered petitioner to
be the real party-in-interest.

On 19 August 1993 respondent Apostol spouses sold the PDI shares registered in the name of
their holding company, JAED Management Corporation, to Edgardo B. Espiritu. On 25 August 1993
petitioner Bitong appealed to the SEC En Banc.

On 24 January 1994 the SEC En Banc 4 reversed the decision of the Hearing Panel and, among
others, ordered private respondents to account for, return and deliver to Mr. & Ms. any and all
funds and assets that they disbursed from the coffers of the corporation including shares of stock,
profits, dividends and/or fruits that they might have received as a result of their investment in
PDI, including those arising from the P150,000.00 advanced to respondents Eugenia D. Apostol,
Leticia J. Magsanoc and Adoracion G. Nuyda; account for and return any profits and fruits of all
amounts irregularly or unlawfully advanced to PDI and other third persons; and, cease and desist
from managing the affairs of Mr. & Ms. for reasons of fraud, mismanagement, disloyalty and
conflict of interest.

The SEC En Banc also declared the 19 August 1993 sale of the PDI shares of JAED Management
Corporation to Edgardo B. Espiritu to be tainted with fraud, hence, null and void, and considered
Mr. & Ms. as the true and lawful owner of all the PDI shares acquired by respondents Eugenia D.
Apostol, Magsanoc and Nuyda. It also declared all subsequent transferees of such shares as
trustees for the benefit of Mr. & Ms. and ordered them to forthwith deliver said shares to Mr. & Ms.

Consequently, respondent Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms. filed a petition for
review before respondent Court of Appeals, docketed as CA-GR No. SP 33291, while respondent
Edgardo B. Espiritu filed a petition for certiorari and prohibition also before respondent Court of
Appeals, docketed as CA-GR No. SP 33873. On 8 December 1994 the two (2) petitions were
consolidated.

On 31 August 1995 respondent appellate court rendered a decision reversing the SEC En Banc and
held that from the evidence on record petitioner was not the owner of any share of stock in Mr. &
Ms. and therefore not the real party-in-interest to prosecute the complaint she had instituted
against private respondents. Accordingly, petitioner alone and by herself as an agent could not
file a derivative suit in behalf of her principal. For not being the real party-in-interest, petitioner's
complaint did not state a cause of action, a defense which was never waived; hence, her petition
should have been dismissed. Respondent appellate court ruled that the assailed orders of the SEC
were issued in excess of jurisdiction, or want of it, and thus were null and void. 5 On 18 January
1996, petitioner's motion for reconsideration was denied for lack of merit.

Before this Court, petitioner submits that in paragraph 1 under the caption "I. The Parties" of
her Amended Petition before the SEC, she stated that she was a stockholder and director of Mr. &
Ms. In par. 1 under the caption "II. The Facts" she declared that she "is the registered owner of
1,000 shares of stock of Mr. & Ms. out of the latter's 4,088 total outstanding shares" and that she
was a member of the Board of Directors of Mr. & Ms. and treasurer from its inception until 11
April 1989. Petitioner contends that private respondents did not deny the above allegations in
their answer and therefore they are conclusively bound by this judicial admission. Consequently,
private respondents' admission that petitioner has 1,000 shares of stock registered in her name
in the books of Mr. & Ms. forecloses any question on her status and right to bring a derivative suit
on behalf of Mr. & Ms.

Not necessarily. A party whose pleading is admitted as an admission against interest is entitled to
overcome by evidence the apparent inconsistency, and it is competent for the party against whom
the pleading is offered to show that the statements were inadvertently made or were made under
a mistake of fact. In addition, a party against whom a single clause or paragraph of a pleading is
offered may have the right to introduce other paragraphs which tend to destroy the admission in
the paragraph offered by the adversary. 6

The Amended Petition before the SEC alleges —

I. THE PARTIES

1. Petitioner is a stockholder and director of Mr. & Ms. . . . .

II. THE FACTS

1. Petitioner is the registered owner of 1,000 shares of stock of Mr. & Ms. out of the
latter's 4,088 total outstanding shares. Petitioner, at all times material to this
petition, is a member of the Board of Directors of Mr. & Ms. and from the inception of
Mr. & Ms. until 11 April 1989 was its treasurer . . .

On the other hand, the Amended Answer to the Amended Petition states —

I. PARTIES

1. Respondents admit the allegations contained in Caption I, pars. 1 to 4 of the


Petition referring to the personality, addresses and capacity of the parties to the
petition except . . . but qualify said admission insofar as they are limited, qualified
and/or expanded by allegations in the Affirmative Allegations/Defenses . . .

II. THE FACTS

1. Respondents admit paragraph 1 of the Petition, but qualify said admission as to


the beneficial ownership of the shares of stock registered in the name of the
petitioner, the truth being as stated in the Affirmative Allegations/Defenses of this
Answer . . .

V. AFFIRMATIVE ALLEGATIONS/DEFENSES

Respondents respectfully allege by way of Affirmative Allegations/Defenses, that . . . .

3. Fortunately, respondent Apostol was able to convince Mr. Luis Villafuerte to take
interest in the business and he, together with the original investors, restructured the
Ex Libris Publishing Company by organizing a new corporation known as Mr. & Ms.
Publishing Co., Inc. . . . Mr. Luis Villafuerte contributed his own P100,000.00. JAKA
and respondent Jose Z. Apostol, original investors of Ex Libris contributed
P100,000.00 each; Ex Libris Publishing Company was paid 800 shares for the name
of Mr. & Ms. magazine and goodwill. Thus, the original stockholders of respondent
Mr. & Ms. were:

Cert./No./Date Name of Stockholder No. of Shares %

001-9-15-76 JAKA Investments Corp. 1,000 21%

002-9-15-76 Luis Villafuerte 1,000 21%

003-9-15-76 Ramon L. Siy 1,000 21%

004-9-15-76 Jose Z. Apostol 1,000 21%

005-9-15-76 Ex Libris Publishing Co. 800 16%

—— ——

4,800 96%

4. The above-named original stockholders of respondent Mr. & Ms. continue to be


virtually the same stockholders up to this date . . . .

8. The petitioner being herself a minor stockholder and holder-in-trust of JAKA


shares, represented and continues to represent JAKA in the Board . . . .

21. Petitioner Nora A. Bitong is not the true party to this case, the true party being
JAKA Investments Corporation which continues to be the true stockholder of
respondent Mr. & Ms. Publishing Co., Inc., consequently, she does not have the
personality to initiate and prosecute this derivative suit, and should therefore be
dismissed . . . .

The answer of private respondents shows that there was no judicial admission that petitioner was
a stockholder of Mr. & Ms. to entitle her to file a derivative suit on behalf of the corporation.
Where the statements of the private respondents were qualified with phrases such as, "insofar as
they are limited, qualified and/or expanded by," "the truth being as stated in the Affirmative
Allegations/Defenses of this Answer" they cannot be considered definite and certain enough,
cannot be construed as judicial admissions. 7

More so, the affirmative defenses of private respondents directly refute the representation of
petitioner that she is a true and genuine stockholder of Mr. & Ms. by stating unequivocally that
petitioner is not the true party to the case but JAKA which continues to be the true stockholder of
Mr. & Ms. In fact, one of the reliefs which private respondents prayed for was the dismissal of the
petition on the ground that petitioner did not have the legal interest to initiate and prosecute the
same.
When taken in its totality, the Amended Answer to the Amended Petition, or even the Answer to
the Amended Petition alone, clearly raises an issue as to the legal personality of petitioner to file
the complaint. Every alleged admission is taken as an entirety of the fact which makes for the one
side with the qualifications which limit, modify or destroy its effect on the other side. The reason
for this is, where part of a statement of a party is used against him as an admission, the court
should weigh any other portion connected with the statement, which tends to neutralize or
explain the portion which is against interest.

In other words, while the admission is admissible in evidence, its probative value is to be
determined from the whole statement and others intimately related or connected therewith as an
integrated unit. Although acts or facts admitted do not require proof and cannot be contradicted,
however, evidence aliunde can be presented to show that the admission was made through
palpable mistake. 8 The rule is always in favor of liberality in construction of pleadings so that the
real matter in dispute may be submitted to the judgment of the court. 9

Petitioner also argues that since private respondents failed to appeal the 6 December 1990 Order
and the 3 August 1993 Decision of the SEC Hearing Panel declaring that she was the real party-in-
interest and had legal personality to sue, they are now estopped from questioning her personality.

Not quite. The 6 December 1990 Order is clearly an interlocutory order which cannot be
considered as having finally resolved on the merits the issue of legal capacity of petitioner. The
SEC Hearing Panel discussed the issue of legal capacity solely for the purpose of ruling on the
application for writ of preliminary injunction as an incident to the main issues raised in the
complaint. Being a mere interlocutory order, it is not appealable.

For, an interlocutory order refers to something between the commencement and end of the suit
which decides some point or matter but it is not the final decision of the whole
controversy. 10 Thus, even though the 6 December 1990 Order was adverse to private
respondents, they had the legal right and option not to elevate the same to the SEC En Banc but
rather to await the decision which resolves all the issues raised by the parties and to appeal
therefrom by assigning all errors that might have been committed by the Hearing Panel.

On the other hand, the 3 August 1993 Decision of the Hearing Panel dismissing the derivative suit
for failure to prove the charges of mismanagement, fraud, disloyalty and conflict of interest and
dissolving the writ of preliminary injunction, was favorable to private respondents. Hence, they
were not expected to appeal therefrom.

In fact, in the 3 August 1993 Decision, the Hearing Panel categorically stated that the evidence
presented showed that the real party-in-interest was not petitioner Bitong but JAKA and/or
Senator Enrile. Petitioner was merely allowed to prosecute her complaint so as not to sidetrack
"the real issue to be resolved (which) was the allegation of mismanagement, fraud and conflict of
interest allegedly committed by respondent Eugenia D. Apostol." It was only for this reason that
petitioner was considered to be capacitated and competent to file the petition.

Accordingly, with the dismissal of the complaint of petitioner against private respondents, there
was no compelling reason for the latter to appeal to the SEC En Banc. It was in fact petitioner's
turn as the aggrieved party to exercise her right to appeal from the decision. It is worthy to note
that even during the appeal of petitioner before the SEC En Banc private respondents maintained
their vigorous objection to the appeal and reiterated petitioner's lack of legal capacity to sue
before the SEC.

Petitioner then contends that she was a holder of the proper certificates of shares of stock and
that the transfer was recorded in the Stock and Transfer Book of Mr. & Ms. She invokes Sec. 63
of The Corporation Code which provides that no transfer shall be valid except as between the
parties until the transfer is recorded in the books of the corporation, and upon its recording the
corporation is bound by it and is estopped to deny the fact of transfer of said shares. Petitioner
alleges that even in the absence of a stock certificate, a stockholder solely on the strength of the
recording in the stock and transfer book can exercise all the rights as stockholder, including the
right to file a derivative suit in the name of the corporation. And, she need not present a separate
deed of sale or transfer in her favor to prove ownership of stock.

Sec. 63 of The Corporation Code expressly provides —

Sec. 63. Certificate of stock and transfer of shares. — The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice president, countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or his attorney-in-
fact or other person legally authorized to make the transfer. No transfer however
shall be valid except as between the parties until the transfer is recorded in the
books of the corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the number of
shares transferred . . . .

This provision above quoted envisions a formal certificate of stock which can be issued only upon
compliance with certain requisites. First, the certificates must be signed by the president or vice-
president, countersigned by the secretary or assistant secretary, and sealed with the seal of the
corporation. A mere typewritten statement advising a stockholder of the extent of his ownership
in a corporation without qualification and/or authentication cannot be considered as a formal
certificate of stock. 11 Second, delivery of the certificate is an essential element of its issuance.
Hence, there is no issuance of a stock certificate where it is never detached from the stock books
although blanks therein are properly filled up if the person whose name is inserted therein has no
control over the books of the company. 12 Third, the par value, as to par value shares, or the full
subscription as to no par value shares, must first be fully paid. Fourth, the original certificate must
be surrendered where the person requesting the issuance of a certificate is a transferee from a
stockholder.

The certificate of stock itself once issued is a continuing affirmation or representation that the
stock described therein is valid and genuine and is at least prima facie evidence that it was legally
issued in the absence of evidence to the contrary. However, this presumption may be
rebutted. 13 Similarly, books and records of a corporation which include even the stock and
transfer book are generally admissible in evidence in favor of or against the corporation and its
members to prove the corporate acts, its financial status and other matters including one's status
as a stockholder. They are ordinarily the best evidence of corporate acts and proceedings.
However, the books and records of a corporation are not conclusive even against the corporation
but areprima facie evidence only. Parol evidence may be admitted to supply omissions in the
records, explain ambiguities, or show what transpired where no records were kept, or in some
cases where such records were contradicted. 14 The effect of entries in the books of the
corporation which purport to be regular records of the proceedings of its board of directors or
stockholders can be destroyed by testimony of a more conclusive character than mere suspicion
that there was an irregularity in the manner in which the books were kept. 15

The foregoing considerations are founded on the basic principle that stock issued without
authority and in violation of law is void and confers no rights on the person to whom it is issued
and subjects him to no liabilities. 16 Where there is an inherent lack of power in the corporation to
issue the stock, neither the corporation nor the person to whom the stock is issued is estopped to
question its validity since an estopped cannot operate to create stock which under the law cannot
have existence. 17

As found by the Hearing Panel and affirmed by respondent Court of Appeals, there is
overwhelming evidence that despite what appears on the certificate of stock and stock and
transfer book, petitioner was not a bona fide stockholder of Mr. & Ms. before March 1989 or at the
time the complained acts were committed to qualify her to institute a stockholder's derivative
suit against private respondents. Aside from petitioner's own admissions, several corporate
documents disclose that the true party-in-interest is not petitioner but JAKA.

Thus, while petitioner asserts in her petition that Certificate of Stock No. 008 dated 25 July 1983
was issued in her name, private respondents argue that this certificate was signed by respondent
Eugenia D. Apostol as President only in 1989 and was fraudulently antedated by petitioner who
had possession of the Certificate Book and the Stock and Transfer Book. Private respondents
stress that petitioner's counsel entered into a stipulation on record before the Hearing Panel that
the certificate was indeed signed by respondent Apostol only in 1989 and not in 1983.

In her reply, petitioner admits that while respondent Eugenia D. Apostol signed the Certificate of
Stock No. 008 in petitioner's name only in 1989, it was issued by the corporate secretary in 1983
and that the other certificates covering shares in Mr. & Ms. had not yet been signed by respondent
Eugenia D. Apostol at the time of the filing of the complaint with the SEC although they were
issued years before.

Based on the foregoing admission of petitioner, there is no truth to the statement written in
Certificate of Stock No. 008 that the same was issued and signed on 25 July 1983 by its duly
authorized officers specifically the President and Corporate Secretary because the actual date of
signing thereof was 17 March 1989. Verily, a formal certificate of stock could not be considered
issued in contemplation of law unless signed by the president or vice-president and
countersigned by the secretary or assistant secretary.

In this case, contrary to petitioner's submission, the Certificate of Stock No. 008 was only legally
issued on 17 March 1989 when it was actually signed by the President of the corporation, and not
before that date. While a certificate of stock is not necessary to make one a stockholder, e.g.,
where he is an incorporator and listed as stockholder in the articles of incorporation although no
certificate of stock has yet been issued, it is supposed to serve as paper representative of the stock
itself and of the owner's interest therein. Hence, when Certificate of Stock No. 008 was admittedly
signed and issued only on 17 March 1989 and not on 25 July 1983, even as it indicates that
petitioner owns 997 shares of stock of Mr. & Ms., the certificate has no evidentiary value for the
purpose of proving that petitioner was a stockholder since 1983 up to 1989.

And even the factual antecedents of the alleged ownership by petitioner in 1983 of shares of stock
of Mr. & Ms. are indistinctive if not enshrouded in inconsistencies. In her testimony before the
Hearing Panel, petitioner said that early in 1983, to relieve Mr. & Ms. from political pressure,
Senator Enrile decided to divest the family holdings in Mr. & Ms. as he was then part of the
government and Mr. & Ms. was evolving to be an opposition newspaper. The JAKA shares
numbering 1,000 covered by Certificate of Stock No. 001 were thus transferred to respondent
Eugenia D. Apostol in trust or in blank. 18

Petitioner now claims that a few days after JAKA's shares were transferred to respondent Eugenia
D. Apostol, Senator Enrile sold to petitioner 997 shares of JAKA. For this purpose, a deed of sale
was executed and antedated to 10 May 1983. 19 This submission of petitioner is however
contradicted by the records which show that a deed of sale was executed by JAKA transferring
1,000 shares of Mr. & Ms. to respondent Apostol on 10 May 1983 and not to petitioner. 20

Then Senator Enrile testified that in May or June 1983 he was asked at a media interview if his
family owned shares of stock in Mr. & Ms. Although he and his family were stockholders at that
time he denied it so as not to embarrass the magazine. He called up petitioner and instructed her
to work out the documentation of the transfer of shares from JAKA to respondent Apostol to be
covered by a declaration of trust. His instruction was to transfer the shares of JAKA in Mr. & Ms.
and Ex Libris to respondent Apostol as a nominal holder. He then finally decided to transfer the
shareholdings to petitioner. 21

When asked if there was any document or any written evidence of that divestment in favor of
petitioner, Senator Enrile answered that there was an endorsement of the shares of stock. He said
that there was no other document evidencing the assignment to petitioner because the stocks
were personal property that could be transferred even orally. 22 Contrary to Senator Enrile's
testimony, however, petitioner maintains that Senator Enrile executed a deed of sale in her favor.

A careful perusal of the records shows that neither the alleged endorsement of Certificate of Stock
No. 001 in the name of JAKA nor the alleged deed of sale executed by Senator Enrile directly in
favor of petitioner could have legally transferred or assigned on 25 July 1983 the shares of stock
in favor of petitioner because as of 10 May 1983 Certificate of Stock No. 001 in the name of JAKA
was already cancelled and a new one, Certificate of Stock No. 007, issued in favor of respondent
Apostol by virtue of a Declaration of Trust and Deed of Sale. 23

It should be emphasized that on 10 May 1983 JAKA executed, a deed of sale over 1,000 Mr. & Ms.
shares in favor of respondent Eugenio D. Apostol. On the same day, respondent Apostol signed a
declaration of trust stating that she was the registered owner of 1,000 Mr. & Ms. shares covered by
Certificate of Stock No. 007.

The declaration of trust further showed that although respondent Apostol was the registered
owner, she held the shares of stock and dividends which might be paid in connection therewith
solely in trust for the benefit of JAKA, her principal. It was also stated therein that being a trustee,
respondent Apostol agreed, on written request of the principal, to assign and transfer the shares
of stock and any and all such distributions or dividends unto the principal or such other person as
the principal would nominate or appoint.

Petitioner was well aware of this trust, being the person in charge of this documentation and
being one of the witnesses to the execution of this
document. 24 Hence, the mere alleged endorsement of Certificate of Stock No. 001 by Senator
Enrile or by a duly authorized officer of JAKA to effect the transfer of shares of JAKA to petitioner
could not have been legally feasible because Certificate of Stock No. 001 was already canceled by
virtue of the deed of sale to respondent Apostol.

And, there is nothing in the records which shows that JAKA had revoked the trust it reposed on
respondent Eugenia D. Apostol. Neither was there any evidence that the principal had requested
her to assign and transfer the shares of stock to petitioner. If it was true that the shares of stock
covered by Certificate of Stock No. 007 had been transferred to petitioner, the person who could
legally endorse the certificate was private respondent Eugenia D. Apostol, she being the
registered owner and trustee of the shares of stock covered by Certificate of Stock No. 007. It is a
settled rule that the trustee should endorse the stock certificate to validate the cancellation of her
share and to have the transfer recorded in the books of the corporation. 25

In fine, the records are unclear on how petitioner allegedly acquired the shares of stock of JAKA.
Petitioner being the chief executive officer of JAKA and the sole person in charge of all business
and financial transactions and affairs of JAKA 26 was supposed to be in the best position to show
convincing evidence on the alleged transfer of shares to her, if indeed there was a transfer.
Considering that petitioner's status is being questioned and several factual circumstances have
been presented by private respondents disproving petitioner's claim, it was incumbent upon her
to submit rebuttal evidence on the manner by which she allegedly became a stockholder. Her
failure to do so taken in the light of several substantial inconsistencies in her evidence is fatal to
her case.

The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or
any other person legally authorized to make the transfer shall be sufficient to effect the transfer of
shares only if the same is coupled with delivery. The delivery of the stock certificate duly
endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new
transferee.

Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must be delivery of
the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or
other persons legally authorized to make the transfer; and, (c) to be valid against third parties,
the transfer must be recorded in the books of the corporation. 27 At most, in the instant case,
petitioner has satisfied only the third requirement. Compliance with the first two requisites has
not been clearly and sufficiently shown.

Considering that the requirements provided under Sec. 63 of The Corporation Code should be
mandatorily complied with, the rule on presumption of regularity cannot apply. The regularity
and validity of the transfer must be proved. As it is, even the credibility of the stock and transfer
book and the entries thereon relied upon by petitioner to show compliance with the third
requisite to prove that she was a stockholder since 1983 is highly doubtful.
The records show that the original stock and transfer book and the stock certificate book of Mr. &
Ms. were in the possession of petitioner before their custody was transferred to the Corporate
Secretary, Atty. Augusto San Pedro. 28 On 25 May 1988, Assistant Corporate Secretary Renato Jose
Unson wrote Mr. & Ms. about the lost stock and transfer book which was also noted by the
corporation's external auditors, Punongbayan and Araullo, in their audit. Atty. Unson even
informed respondent Eugenia D. Apostol as President of Mr. & Ms. that steps would be undertaken
to prepare and register a new Stock and Transfer Book with the SEC. Incidentally, perhaps
strangely, upon verification with the SEC, it was discovered that the general file of the corporation
with the SEC was missing. Hence, it was even possible that the original Stock and Transfer Book
might not have been registered at all.

On 20 October 1988 respondent Eugenia D. Apostol wrote Atty. Augusto San Pedro noting the
changes he had made in the Stock and Transfer Book without prior notice to the corporate
officers. 29 In the 27 October 1988 directors' meeting, respondent Eugenia D. Apostol asked about
the documentation to support the changes in the Stock and Transfer Book with regard to the JAKA
shares. Petitioner answered that Atty. San Pedro made the changes upon her instructions
conformably with established practice. 30

This simply shows that as of 1988 there still existed certain issues affecting the ownership of the
JAKA shares, thus raising doubts whether the alleged transactions recorded in the Stock and
Transfer Book were proper, regular and authorized. Then, as if to magnify and compound the
uncertainties in the ownership of the shares of stock in question, when the corporate secretary
resigned, the Stock and Transfer Book was delivered not to the corporate office where the book
should be kept but to petitioner. 31

That JAKA retained its ownership of its Mr. & Ms. shares was clearly shown by its receipt of the
dividends issued in December 1986. 32 This only means, very obviously, that Mr. & Ms. shares in
question still belonged to JAKA and not to petitioner. For, dividends are distributed to
stockholders pursuant to their right to share in corporate profits. When a dividend is declared, it
belongs to the person who is the substantial and beneficial owner of the stock at the time
regardless of when the distribution profit was earned. 33

Finally, this Court takes notice of the glaring and open admissions of petitioner made, not just
seven (7) but nine (9) times, during the 22 September 1988 meeting of the board of directors that
the Enriles were her principals or shareholders, as shown by the minutes thereof which she duly
signed 34 —

5. Mrs. E. Apostol explained to the Directors that through her efforts, the asset base
of the Company has improved and profits were realized. It is for this reason that the
Company has declared a 100% cash dividend in 1986. She said that it is up for the
Board to decide based on this performance whether she should continue to act as
Board Chairman or not. In this regard, Ms. N.A. Bitong expressed her recollection of
how Ex-Libris/Mr. & Ms. were organized and her participation for and on behalf
of her principals, as follows: She recalled that her principalswere invited by Mrs. E.
Apostol to invest in Ex-Libris and eventually Mr. & Ms. The relationship between her
principals and Mrs. E. Apostol made it possible for the latter to have access to several
information concerning certain political events and issues. In many instances, her
principals supplied first hand and newsworthy information that made Mr. & Ms. a
popular
paper . . . .

6. According to Ms. Bitong, her principals were instrumental in helping Mr. & Ms.
survive during those years that it was cash strapped . . . . Ms. N.A. Bitong pointed out
that the practice of using the former Minister's influence and stature in the
government is one thing which her principalsthemselves are strongly against . . . .

7. . . . . At this point, Ms. N. Bitong again expressed her recollection of the subject
matter as follows: (a) Mrs. E. Apostol, she remembers, brought up the concept of a
cooperative-ran newspaper company in one of her breakfast session with her
principals sometime during the end of 1985. Her principals when asked for an
opinion, said that they recognized the concept as something very noble and visible . .
. . Then Ms. Bitong asked a very specific question — "When you conceptualized Ex-
Libris and Mr. & Ms., did you not think of my shareholders the Ponce Enriles as
liabilities? How come you associated yourself with them then and not now? What is
the difference?" Mrs. Apostol did not answer the question.

The admissions of a party against his interest inscribed upon the record books of a corporation
are competent and persuasive evidence against him. 35 These admissions render nugatory any
argument that petitioner is a bona fide stockholder of Mr. & Ms. at any time before 1988 or at the
time the acts complained of were committed. There is no doubt that petitioner was an employee
of JAKA as its managing officer, as testified to by Senator Enrile himself. 36 However, in the
absence of a special authority from the board of directors of JAKA to institute a derivative suit for
and in its behalf, petitioner is disqualified by law to sue in her own name. The power to sue and be
sued in any court by a corporation even as a stockholder is lodged in the board of directors that
exercises its corporate powers and not in the president or officer thereof. 37

It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust,
not of mere error of judgment or abuse of discretion, and intracorporate remedy is futile or
useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. 38The stockholder's right to institute a
derivative suit is not based on any express provision of The Corporation Code but is impliedly
recognized when the law makes corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties.

Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets
because of a special injury to him for which he is otherwise without redress. 39 In effect, the suit is
an action for specific performance of an obligation owed by the corporation to the stockholders to
assist its rights of action when the corporation has been put in default by the wrongful refusal of
the directors or management to make suitable measures for its protection. 40

The basis of a stockholder's suit is always one in equity. However, it cannot prosper without first
complying with the legal requisites for its institution. The most important of these is the bona
fide ownership by a stockholder of a stock in his own right at the time of the transaction
complained of which invests him with standing to institute a derivative action for the benefit of
the corporation. 41
WHEREFORE, the petition is DENIED. The 31 August 1995 Decision of the Court of Appeals
dismissing the complaint of petitioner Nora A. Bitong in CA-G.R. No. SP 33291, and granting the
petition for certiorari and prohibition filed by respondent Edgardo U. Espiritu as well as annulling
the 5 November 1993, 24 January 1993 and 18 February 1994 Orders of the SEC En Banc in CA-
G.R. No. SP 33873, is AFFIRMED. Costs against petitioner.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 180416 June 2, 2014

ADERITO Z. YUJUICO and BONIFACIO C. SUMBILLA, Petitioners,


vs.
CEZAR T. QUIAMBAO and ERIC C. PILAPIL, Respondents.

DECISION

PEREZ, J.:

This case is a Petition for Review on Certiorari1 from the Orders2 dated 4 June 2007 and 5 November
2007 of the Regional Trial Court (RTC), Branch 154, of Pasig City in S.C.A. No. 3047.

The facts:

Background

Strategic Alliance Development Corporation (STRADEC) is a domestic corporation operating as a


business development and investment company.

On 1 March 2004, during the annual stockholder's meeting of STRADEC, petitioner Aderito Z. Yujuico
(Yujuico) was elected as president and chairman of the company.3 Yujuico replaced respondent Cezar T.
Quiambao (Quiambao), who had been the president and chairman of STRADEC since 1994.4

With Yujuico at the helm, STRADEC appointed petitioner Bonifacio C. Sumbilla (Sumbilla) as treasurer
and one Joselito John G. Blando (Blando) as corporate secretary.5 Blando replaced respondent Eric C.
Pilapil (Pilapil), the previous corporate secretary of STRADEC.6

The Criminal Complaint

On 12 August 2005, petitioners filed a criminal complaint7 against respondents and one Giovanni T.
Casanova (Casanova) before the Office of the City Prosecutor (OCP) of Pasig City. The complaint was
docketed in the OCP as LS. No. PSG 05-08-07465.
The complaint accuses respondents and Casanova of violating Section 74 in relation to Section 144 of
Batas Pambansa Blg. 68 or the Corporation Code. The petitioners premise such accusation on the
following factual allegations:8

1. During the stockholders' meeting on 1 March 2004, Yujuico-as newly elected president and
chairman of STRADEC-demanded Quiambao for the turnover of the corporate records of the
company, particularly the accounting files, ledgers, journals and other records of the corporation's
business. Quiambao refused.

2. As it turns out, the corporate records of STRADEC were in the possession of Casanova-the
accountant of STRADEC. Casanova was keeping custody of the said records on behalf of Quiambao,
who allegedly needed the same as part of his defense in a pending case in court.

3. After the 1 March 2004 stockholders' meeting, Quiambao and Casanova caused the removal of
the corporate records of STRADEC from the company's offices in Pasig City.

4. Upon his appointment as corporate secretary on 21 June 2004, Blando likewise demanded
Pilapil for the turnover of the stock and transfer book of STRADEC. Pilapil refused.

5. Instead, on 25 June 2004, Pilapil proposed to Blando to have the stock and transfer book
deposited in a safety deposit box with Equitable PCI Bank, Kamias Road, Quezon City. Blando
acceded to the proposal and the stock and transfer book was deposited in a safety deposit box
with the bank identified. It was agreed that the safety deposit box may only be opened in the
presence of both Quiambao and Blando.

6. On 30 June 2004, however, Quiambao and Pilapil withdrew the stock and transfer book from
the safety deposit box and brought it to the offices of the Stradcom Corporation (STRADCOM) in
Quezon City. Quiambao thereafter asked Blando to proceed to the STRADCOM offices. Upon
arriving thereat, Quiambao pressured Blando to make certain entries in the stock and transfer
books. After making such entries, Blando again demanded that he be given possession of the stock
and transfer book. Quiambao refused.

7. On 1 July 2004, Blando received an order dated 30 June 2004 issued by the RTC, Branch 71, of
Pasig City in Civil Case No. 70027, which directed him to cancel the entries he made in the stock
and transfer book. Hence, on even date, Blando wrote letters to Quiambao and Pilapil once again
demanding for the turnover of the stock and transfer book. Pilapil replied thru a letter dated 2 July
2004 where he appeared to agree to Blando's demand.

8. However, upon meeting with Pilapil and Quiambao, the latter still refused to turnover the stock
and transfer book to Blando. Instead, Blando was once again constrained to agree to a proposal by
Pilapil to have the stock and transfer book deposited with the RTC, Branch 155, of Pasig City. The
said court, however, refused to accept such deposit on the ground that it had no place for
safekeeping.

9. Since Quiambao and Pilapil still refused to turnover the stock and transfer book, Blando again
acceded to have the book deposited in a safety deposit box, this time, with the Export and Industry
Bank in San Miguel A venue, Pasig City.
Petitioners theorize that the refusal by the respondents and Casanova to turnover STRADEC's corporate
records and stock and transfer book violates their right, as stockholders, directors and officers of the
corporation, to inspect such records and book under Section 7 4 of the Corporation Code. For such
violation, petitioners conclude, respondents may be held criminally liable pursuant to Section 144 of the
Corporation Code.

Preliminary investigation thereafter ensued.

Resolution of the OCP and the Informations

After receiving the counter-affidavits of the respondents and Casanova, as well as the other documentary
submissions9 by the parties, the OCP issued a Resolution10 dated 6 January 2006 in I.S. No. PSG 05-08-
07465. In the said resolution, the OCP absolved Casanova but found probable cause to hail respondents to
court on two (2) offenses: (1) for removing the stock and transfer book of STRADEC from its principal
office, and (2) for refusing access to, and examination of, the corporate records and the stock and transfer
book of STRADEC at its principal office.

Pursuant to the resolution, two (2) informations11 were filed against the respondents before the
Metropolitan Trial Court (MeTC) of Pasig City. The informations were docketed as Criminal Case No.
89723 and Criminal Case No. 89724 and were raffled to Branch 69.

Criminal Case No. 89723 is for the offense of removing the stock and transfer book of STRADEC from its
principal office. The information reads:12

On and/or about the period between March 1 and June 25, 2004, inclusive, in Pasig City and within the
jurisdiction of this Honorable Court, the above accused, being then members of the Board of Directors
and/or officers, as the case maybe, of Strategic Alliance Development Corporation (STRADEC, for short),
conspiring and confederating together and mutually helping and aiding one another, did then and there
willfully, unlawfully and feloniously, remove the stock and transfer book of the said STRADEC at its
principal office at the 24th Floor, One Magnificent Mile-CITRA City Bldg., San Miguel A venue, Ortigas
Center, Pasig City, where they should all be kept, in violation of the aforesaid law, and to the prejudice of
the said complainants.

Criminal Case No. 89724, on the other hand, covers the offense of refusing access to, and examination of,
the corporate records and the stock and transfer book of STRADEC at its principal office. The information
reads:13

On and/or about the period between March 1 and June 25, 2004, inclusive, in Pasig City, and within the
jurisdiction of this Honorable Court, the above accused, being then members of the Board of Directors
and/or officers, as the case maybe, of Strategic Alliance Development Corporation (STRADEC, for short),
conspiring and confederating together and mutually helping and aiding one another, did then and there
willfully, unlawfully and feloniously, refuse to allow complainants Bonifacio C. Sumbilla and Aderito Z.
Yujuico, being then stockholders and/or directors of STRADEC, access to, and examination of, the
corporate records, including the stock and transfer book, of STRADEC at its principal office at the 24th
Floor, One Magnificent Mile-CITRA Bldg., San Miguel Avenue, Ortigas Center, Pasig City, where they
should all be kept, in violation of the aforesaid law, and to the prejudice of the said complainants.

Urgent Omnibus Motion and the Dismissal of Criminal Case No. 89723
On 18 January 2006, respondents filed before the MeTC an Urgent Omnibus Motion for Judicial
Determination of Probable Cause and To Defer Issuance of Warrants of Arrest (Urgent Omnibus
Motion).14

On 8 May 2006, the MeTC issued an order15 partially granting the Urgent Omnibus Motion. The MeTC
dismissed Criminal Case No. 89723 but ordered the issuance of a warrant of arrest against respondents
in Criminal Case No. 89724.

In dismissing Criminal Case No. 89723, the MeTC held that Section 74, in relation to Section 144, of the
Corporation Code only penalizes the act of "refus[ing] to allow any director, trustee, stockholder or
member of the corporation to examine and copy excerpts from the records or minutes of the
corporation"16 and that act is already the subject matter of Criminal Case No. 89724. Hence, the MeTC
opined, Criminal Case No. 89723-which seeks to try respondents for merely removing the stock and
transfer book of STRADEC from its principal office-actually charges no offense and, therefore, cannot be
sustained.17

Anent directing the issuance of a warrant of arrest in Criminal Case No. 89724, the MeTC found probable
cause to do so; given the failure of the respondents to present any evidence during the preliminary
investigation showing that they do not have possession of the corporate records of STRADEC or that they
allowed petitioners to inspect the corporate records and the stock and transfer book of STRADEC.18

Unsatisfied, the respondents filed a motion for partial Reconsideration19 of the 8 May 2006 order of the
MeTC insofar as the disposition in Criminal Case No. 89724 is concerned. The MeTC, however, denied
such motion on 16 August 2006.20

Certiorari Petition and the Dismissal of Criminal Case No. 89724 After their motion for partial
reconsideration was denied, respondents filed a certiorari petition,21 with prayer for the issuance of a
temporary restraining order (TRO), before the RTC of Pasig City on 27 September 2006. The petition was
docketed as S.C.A. No. 3047.

On 16 November 2006, the RTC issued a TRO enjoining the MeTC from conducting further proceedings in
Criminal Case No. 89724 for twenty (20) days.22

On 4 June 2007, the R TC issued an Order23 granting respondents' certiorari petition and directing the
dismissal of Criminal Case No. 89724. According to the RTC, the MeTC committed grave abuse of
discretion in issuing a warrant of arrest against respondents in Criminal Case No. 89724.

The RTC found that the finding of probable cause against the respondents in Criminal Case No. 89724
was not supported by the evidence presented during the preliminary investigation but was, in fact,
contradicted by them:24

1. The R TC noted that, aside from the complaint itself, no evidence was ever submitted by
petitioners to prove that they demanded and was refused access to the corporate records of
STRADEC between 1 March to 25 June 2004. What petitioners merely submitted is their letter
dated 6 September 2004 demanding from respondents access to the corporate records of
STRADEC.
2. The allegations of petitioners in their complaint, as well as 6 September 2004 letter above-
mentioned, however, are contradicted by the sworn statement dated 1 July 2004 of
Blando25 wherein he attested that as early as 25 June 2004, Pilapil already turned over to him
"two binders containing the minutes, board resolutions, articles of incorporation, copies of
contracts, correspondences and other papers of the corporation, except the stock certificate book
and the stock and transfer book."

3. The RTC also took exception to the reason provided by the MeTC in supporting its finding of
probable cause against the respondents. The R TC held that it was not incumbent upon the
respondents to provide evidence proving their innocence. Hence, the failure of the respondents to
submit evidence showing that they do not have possession of the corporate records of STRADEC
or that they have allowed inspection of the same cannot be taken against them much less support
a finding of probable cause against them.

The RTC further pointed out that, at most, the evidence on record only supports probable cause that the
respondents were withholding the stock and transfer book of STRADEC. The RTC, however, opined that
refusing to allow inspection of the stock and transfer book, as opposed to refusing examination of other
corporate records, is not punishable as an offense under the Corporation Code.26 Hence, the directive of
the RTC dismissing Criminal Case No. 89724.

The petitioners moved for reconsideration,27 but the R TC remained steadfast.28

Hence, this petition by petitioners.

The Instant Petition

In their petition, petitioners claim that Criminal Case No. 89724 may still be sustained against the
respondents insofar as the charge of refusing to allow access to the stock and transfer book of STRADEC
is concerned. They argue that the R TC made a legal blunder when it held that the refusal to allow
inspection of the stock and transfer book of a corporation is not a punishable offense under the
Corporation Code. Petitioners contend that such a refusal still amounts to a violation of Section 74 of the
Corporation Code, for which Section 144 of the same code prescribes a penalty.

OUR RULING

The RTC indeed made an inaccurate pronouncement when it held that the act of refusing to allow
inspection of the stock and transfer book of a corporation is not a punishable offense under the
Corporation Code. Such refusal, when done in violation of Section 74(4) of the Corporation Code,
properly falls within the purview of Section 144 of the same code and thus may be penalized as an
offense.

The foregoing gaffe nonetheless, We still sustain the dismissal of Criminal Case No. 89724 as against the
respondents.

A criminal action based on the violation of a stockholder's right to examine or inspect the corporate
records and the stock and transfer book of a corporation under the second and fourth paragraphs of
Section 74 of the Corporation Code-such as Criminal Case No. 89724--can only be maintained against
corporate officers or any other persons acting on behalf of such corporation. The submissions of the
petitioners during the preliminary investigation, however, clearly suggest that respondents are neither in
relation to STRADEC.

Hence, we deny the petition.

The act of ref using to allow inspection of the


stock and transfer book of a corporation,
when done in violation of Section 74(4) of
the Corporation Code, is punishable as an
offense under Section 144 of the same code.

We first address the inaccurate pronouncement of the RTC.

Section 74 is the provision of the Corporation Code that deals with the books a corporation is required to
keep. It reads:

Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve
at its principal office a record of all business transactions and minutes of all meetings of stockholders or
members, or of the board of directors or trustees, in which shall be set forth in detail the time and place
of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if
special its object, those present and absent, and every act done or ordered done at the meeting. Upon the
demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder
or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas
and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of
any director, trustee, stockholder or member on any action or proposed action must be recorded in full
on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall be open
to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on
business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his
expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from its records or minutes, in accordance with
the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages,
and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or
trustees, the liability under this section for such action shall be imposed upon the directors or trustees
who voted for such refusal: and Provided, further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts from the corporation's records and
minutes has improperly used any information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand.

Stock corporations must also keep a book to be known as the "stock and transfer book'', in which must be
kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid
and unpaid on all stock for which subscription has been made, and the date of payment of any
installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to
whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be
kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open
for inspection by any director or stockholder of the corporation at reasonable hours on business days.

No stock transfer agent or one engaged principally in the business of registering transfers of stocks in
behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license
from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which
shall be renewable annually: Provided, That a stock corporation is not precluded from performing or
making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein provided, shall be applicable. (5 la and 32a; P.B. No.
268.) (Emphasis supplied)

Section 144 of the Corporation Code, on the other hand, is the general penal provision of the Corporation
Code. It reads:

Section 144. Violations of the Code. - Violations of any of the provisions of this Code or its amendments
not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand
(₱1,000.00) pesos but not more than ten thousand (₱10,000.00) pesos or by imprisonment for not less
than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the
violation is committed by a corporation, the same may, after notice and hearing, be dissolved in
appropriate proceedings before the Securities and Exchange Commission: Provided, That such
dissolution shall not preclude the institution of appropriate action against the director, trustee or officer
of the corporation responsible for said violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a corporation provided in this Code. (190 112 a)
(Emphasis supplied)

In the assailed Orders, the RTC expressed its opinion that the act of refusing to allow inspection of the
stock and transfer book, even though it may be a violation of Section 74(4), is not punishable as an
offense under the Corporation Code.29 In justifying this conclusion, the RTC seemingly relied on the fact
that, under Section 7 4 of the Corporation Code, the application of Section 144 is expressly mentioned
only in relation to the act of "refus[ing] to allow any director, trustees, stockholder or member of the
corporation to examine and copy excerpts from [the corporation's] records or minutes" that excludes its
stock and transfer book.

We do not agree.

While Section 74 of the Corporation Code expressly mentions the application of Section 144 only in
relation to the act of "refus[ing] to allow any director, trustees, stockholder or member of the corporation
to examine and copy excerpts from [the corporation's] records or minutes," the same does not mean that
the latter section no longer applies to any other possible violations of the former section.

It must be emphasized that Section 144 already purports to penalize "[v]iolations" of "any provision" of
the Corporation Code "not otherwise specifically penalized therein." Hence, we find inconsequential the
fact that that Section 74 expressly mentions the application of Section 144 only to a specific act, but not
with respect to the other possible violations of the former section.

Indeed, we find no cogent reason why Section 144 of the Corporation Code cannot be made to apply to
violations of the right of a stockholder to inspect the stock and transfer book of a corporation under
Section 74(4) given the already unequivocal intent of the legislature to penalize violations of a parallel
right, i.e., the right of a stockholder or member to examine the other records and minutes of a corporation
under Section 74(2). Certainly, all the rights guaranteed to corporators under Section 7 4 of the
Corporation Code are mandatory for the corporation to respect. All such rights are just the same
underpinned by the same policy consideration of keeping public confidence in the corporate vehicle thru
an assurance of transparency in the corporation's operations.

Verily, we find inaccurate the pronouncement of the RTC that the act of refusing to allow inspection of the
stock and transfer book is not a punishable offense under the Corporation Code. Such refusal, when done
in violation of Section 74(4) of the Corporation Code, properly falls within the purview of Section 144 of
the same code and thus may be penalized as an offense.

A criminal action based on the violation of a


stockholder's right to examine or inspect the
corporate records and the stock and transfer
book of a corporation under the second and
fourth paragraphs of Section 74 of the
Corporation Code can only be maintained
against corporate officers or any other persons
acting on behalf of such corporation.

The foregoing notwithstanding, and independently of the reasons provided therefor by the RTC, we
sustain the dismissal of Criminal Case No. 89724.

Criminal Case No. 89724 accuses respondents of denying petitioners' right to examine or inspect the
corporate records and the stock and transfer book of STRADEC. It is thus a criminal action that is based
on the violation of the second and fourth paragraphs of Section 7 4 of the Corporation Code.

A perusal of the second and fourth paragraphs of Section 74, as well as the first paragraph of the same
section, reveal that they are provisions that obligates a corporation: they prescribe what books or
records a corporation is required to keep; where the corporation shall keep them;

and what are the other obligations of the corporation to its stockholders or members in relation to such
books and records.1âwphi1 Hence, by parity of reasoning, the second and fourth paragraphs of Section
74, including the first paragraph of the same section, can only be violated by a corporation.

It is clear then that a criminal action based on the violation of the second or fourth paragraphs of Section
74 can only be maintained against corporate officers or such other persons that are acting on behalf of
the corporation. Violations of the second and fourth paragraphs of Section 74 contemplates a situation
wherein a corporation, acting thru one of its officers or agents, denies the right of any of its stockholders
to inspect the records, minutes and the stock and transfer book of such corporation.

The problem with the petitioners' complaint and the evidence that they submitted during preliminary
investigation is that they do not establish that respondents were acting on behalf of STRADEC. Quite the
contrary, the scenario painted by the complaint is that the respondents are merely outgoing officers of
STRADEC who, for some reason, withheld and refused to turn-over the company records of STRADEC;
that it is the petitioners who are actually acting on behalf of STRADEC; and that STRADEC is actually
merely trying to recover custody of the withheld records.
In other words, petitioners are not actually invoking their right to inspect the records and the stock and
transfer book of STRADEC under the second and fourth paragraphs of Section 74. What they seek to
enforce is the proprietary right of STRADEC to be in possession of such records and book. Such right,
though certainly legally enforceable by other means, cannot be enforced by a criminal prosecution based
on a violation of the second and fourth paragraphs of Section 74. That is simply not the situation
contemplated by the second and fourth paragraphs of Section 74 of the Corporation Code.

For this reason, we affirm the dismissal of Criminal Case No. 89724 for lack of probable cause.

WHEREFORE, premises considered, the petlt10n is hereby DENIED. The Orders dated 4 June 2007 and 5
November 2007 of the Regional Trial Court, Branch 154, of Pasig City in S.C.A. No. 3047, insofar as said
orders effectively dismissed Criminal Case No. 89724 pending before Metropolitan Trial Court, Branch
69, of Pasig City, are hereby AFFIRMED.

SO ORDERED.

THIRD DIVISION

August 24, 2016

G.R. No. 216146

ALFREDO L. CHUA, TOMAS L. CHUA and MERCEDES P. DIAZ, Petitioners,


vs.
PEOPLE OF THE PHILIPPINES, Respondent.

DECISION

REYES, J.:

Before the Court is a petition for review on certiorari1 challenging the Resolutions dated September 23,
20142 and January 6, 20153 of the Court of Appeals (CA) in CA-G.R. CR No. 36764. The assailed
resolutions affirmed the Decision4 dated March 27, 2014 of the Regional Trial Court (RTC) of Quezon City,
Branch 90, in Criminal Case No. 107079 and Judgment5 dated November 23, 2012 of the Metropolitan
Trial Court (MeTC) of Quezon City, Branch 43, which sentenced herein petitioners Alfredo L. Chua
(Alfredo), Tomas L. Chua (Tomas) and Mercedes P. Diaz (Mercedes) (collectively referred to as the
petitioners) to suffer the penalty of thirty (30) days of imprisonment for violation of Section 74, 6 in
relation to Section 144, 7 of the Corporation Code.

Antecedent Facts

The Office of the Solicitor General (OSG) aptly summed up the antecedents leading to the filing of the
Complaint-Affidavit8 of Joselyn Chua (Joselyn) against the petitioners:

[Joselyn] was a stockholder of Chua Tee Corporation of Manila. x x x [Alfredo] was the president and
chairman of the board, while [Tomas] was the corporate secretary and also a member of the board of the
same corporation. x x x [Mercedes] was the accountant/bookkeeper tasked with the physical custody of
the corporate records.
On or about August 24, 2000, Joselyn invoked her right as a stockholder pursuant to Section 74 of the
Corporation Code to inspect the records of the books of the business transactions of the corporation, the
minutes of the meetings of the board of directors and stockholders, as well as the financial statement[ s]
of the corporation. She hired a lawyer to send demand letters to each of the petitioners for her right to
inspect to be heeded. However, she was denied of such right to inspect.

Joselyn likewise hired the services of Mr. Abednego Velayo (Mr. Velayo) from the accounting firm of
Guzman Bocaling and Company to assist her in examining the books of the corporation. Armed with a
letter request[,] together with the list of schedules of audit materials, Mr. Velayo and his group visited the
corporation's premises for the supposed examination of the accounts. However, the books of accounts
were not formally presented to them and there was no list of schedules[,] which would allow them to
pursue their inspection. Mr. Velayo testified that they failed to complete their objective of inspecting the
books of accounts and examine the recorded documents.9 (Citations omitted)

In the Complaint-Affidavit filed before the Quezon City Prosecutors' Office, Joselyn alleged that despite
written demands, the petitioners conspired in refusing without valid cause the exercise of her right to
inspect Chua Tee Corporation of Manila's (CTCM) business transactions records, financial statements and
minutes of the meetings of both the board of directors and stockholders. 10

In their Counter Affidavits, 11 the petitioners denied liability. They argued that the custody of the records
sought to be inspected by Joselyn did not pertain to them. Besides, the physical records were merely kept
inside the cabinets in the corporate office. Further, they did not prevent Joselyn from inspecting the
records. What happened was that Mercedes was severely occupied with winding up the affairs of CTCM
after it ceased operations. Joselyn and her lawyers then failed to set up an appointment with Mercedes.
Joselyn, through counsel, then sent demand letters to inspect the records. Not long after, Joselyn filed two
cases, one of which was civil and the other, criminal, against the petitioners.

On July 4, 2001, an Information12 indicting the petitioners for alleged violation of Section 7 4, in relation
to Section 144, of the Corporation Code was filed before the MeTC of Quezon City. The case was docketed
as Criminal Case No. 107079, raffled to Branch 43.

The Proceedings before the MeTC and the RTC

On January 30, 2002, the petitioners filed before the MeTC a Motion to Quash 13 the Information filed
against them. They argued that CTCM had ceased to exist as a corporate entity since May 26, 1999.
Consequently, when the acts complained of by Joselyn were allegedly committed in August of 2000, the
petitioners cannot be considered anymore as responsible officers of CTCM. Thus, assuming for
argument's sake that the petitioners actually refused to let Joselyn inspect corporate records, no criminal
liability can attach to an omission to perform a duty, which no longer existed. The Me TC, however,
denied the petitioners' Motion to Quash.

Arraignment, pre-trial and trial then ensued. The prosecution offered the testimonies of Joselyn and
Abednego Velayo (Velayo ). On the other hand, the petitioners neither presented witnesses, nor filed any
documentary evidence. 14

On November 23, 2012, the MeTC rendered its Judgment15 convicting the petitioners as charged,
sentencing them to suffer the penalty of 30 days of imprisonment, and directing them to pay the costs of
suit. The MeTC cited Ang-Abaya, et al. v. Ang16to stress that in the instant case, the prosecution had amply
established the presence of the elements of the offense under Section 74 of the Corporation Code, to wit:
(a) a stockholder's prior demand in writing for the inspection of corporate records; (b) refusal by
corporate officers to allow the inspection; and (c) proofs adduced by the corporate officers of the
stockholder's prior improper or malicious use of the records in the event that the same is raised as a
defense for the refusal to allow the inspection. 17 Further invoking Gokongwei, Jr. v. Securities and
Exchange Commission, 18 the Me TC explained that a stockholder's right to inspect corporate records is
based upon the necessity of self-protection. 19 Thus, the exercise of the right at reasonable hours during
business days should be allowed.

In the Order20 dated March 26, 2013, the MeTC denied the petitioners' Motion for Reconsideration. 21

The petitioners filed an appeal, which the RTC denied in the Decision22 rendered on March 27, 2014. The
RTC agreed with the MeTC's ruling and stated that the petitioners should have presented their evidence
to contradict or rebut the evidence presented by the prosecution that has overcome their constitutional
right to be presumed innocent, before the lower court.23 In its Order24 dated July 4, 2014, the RTC denied
the petitioners' motion for reconsideration. 25

The Proceedings before the CA

The petitioners filed before the CA a petition for review under Rule 42 of the Rules of Court. On
September 23, 2014, the CA outrightly dismissed the petition on technical grounds, i.e., failure to submit
(a) true copies or duplicate originals of the MeTC's Judgment dated November 23, 2012 and Order dated
March 26, 2013, and (b) a Special Power of Attorney (SPA) authorizing Alfredo to file the petition and
sign the verification and certification of non-forum shopping in behalf of Tomas and Mercedes.26

On October 15, 2014, the petitioners filed a Motion for Reconsideration,27 to which they appended their
belated compliance with the formal requirements pointed out by the CA. Pending resolution of the
motion, Rosario Sui Lian Chua (Rosario), mother of the now deceased Joselyn, filed an Affidavit of
Desistance28 dated December 11, 2014, which in part stated that:

3. After taking stock of the situation of the [petitioners] in the above-captioned case, and considering
moreover that [Alfredo and Tomas] are both uncles of [Joselyn], and are brothers of my now also-
deceased husband, I and the rest of my family, have decided to condone any and all possible criminal
wrongdoings attributable to [the petitioners], and to absolve the latter of both civil and criminal liabilities
in connection with the above-captioned case;

4. In any event, we have reason to believe that the filing of the instant criminal case was merely the result
of serious misunderstanding anent the management and operation of [CTCM], which had long ceased to
exist as a corporate entity even prior to the alleged commission of the crime in question, rather than by
reason of any criminal intent or actuation on the part of the [petitioners].29

On January 6, 2015, the CA issued the second assailed Resolution30 denying the petitioners' motion for
reconsideration.1âwphi1

Issue
Unfazed, the petitioners filed before this Court the instant petition for review on certiorari raising the
sole issue of the propriety of their conviction for alleged violation of Section 74, in relation to Section 144,
of the Corporation Code. 31

The petitioners reiterate their stance that since CTCM had ceased business operations prior to Joselyn's
filing of her complaint before the MeTC, there was no longer any duty pertaining to corporate officers to
allow a stockholder to inspect the records.32 The petitioners also aver that the prosecution failed to prove
by competent evidence that they had actually prevented Joselyn from exercising her right of inspection.
They point out that when Joselyn was cross-examined, she admitted that the petitioners had allowed her
to see the records. However, since she had designated her accountant to conduct the inspection, she was
not able to physically view the records. Hence, she had no personal knowledge as to whether or not the
inspection of the specific records she requested was allowed or denied. 33 Further, Velayo himself stated
during the trial that the letters demanding for inspection of the records were addressed to CTCM and not
to the petitioners. Velayo also declared that he had no personal dealings with the petitioners.34 Besides,
Rosario's Affidavit of Desistance proves the frivolous nature of Joselyn's complaint and the unjustness of
the petitioners' conviction by the courts a quo.35

In its Comment, 36 the OSG points out that under Section 122 of the Corporation Code, a corporate
entity, "whose charter expires by its own limitation" shall continue as "a body corporate for three (3) years
after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs." It follows then that CTCM continued as a body
corporate until May of 2002. 37 Moreover, the board of directors is not rendered functus officio by reason
of the corporation's dissolution.38 Liabilities incurred by officers shall not be removed or impaired by the
subsequent dissolution of the corporation.39 It follows therefore that a stockholder's right to inspect
corporate records subsists during the period of liquidation. 40

The OSG also emphasizes Velayo's testimony that upon his visit to CTCM's corporate office, the books of
accounts were not formally presented and no schedule was offered as to when the requested inspection
can be conducted. 41

Ruling of the Court

The Court affirms the conviction but directs the payment of fine, in lieu of the penalty of imprisonment
imposed by the courts a quo.

Procedural Matters

The CA's outright dismissal of the


petition for review filed before it

The CA outrightly dismissed on technical grounds the petition for review filed before it under Rule 42 of
the Rules of Court. Thereafter, the petitioners filed their belated compliance to correct the procedural
flaws referred to by the CA. They explained that their failure to immediately submit the requisite SPA
authorizing Alfredo to sign the verification and certification against non-forum shopping, and act in
behalf of Tomas and Mercedes was due to the fact that the latter two were out of the country when the
petition was filed. Anent the petitioners' non-submission of true copies or duplicate originals of the Me
TC judgment and order, they admitted their negligence, and prayed for the court's indulgence. 42
Fuji Television Network, Inc. v. Espiritu43summarizes the rules on verification and certification against
forum shopping, viz.:

1) A distinction must be made between non[-]compliance with the requirement on or submission of


defective verification, and non[-] compliance with the requirement on or submission of defective
certification against forum shopping.

2) As to verification, non[-]compliance therewith or a defect therein does not necessarily render the
pleading fatally defective. The court may order its submission or correction or act on the pleading if the
attending circumstances are such that strict compliance with the Rule may be dispensed with in order
that the ends of justice may be served thereby.

3) Verification is deemed substantially complied with when one who has ample knowledge to swear to
the truth of the allegations in the complaint or petition signs the verification, and when matters alleged in
the petition have been made in good faith or are true and correct.

4) As to certification against forum shopping, non-compliance therewith or a defect therein, unlike in


verification, is generally not curable by its subsequent submission or correction thereof, unless there is a
need to relax the Rule on the ground of "substantial compliance" or presence of "special circumstances or
compelling reasons."

5) The certification against forum shopping must be signed by all the plaintiffs or petitioners in a case;
otherwise, those who did not sign will be dropped as parties to the case. Under reasonable or justifiable
circumstances, however, as when all the plaintiffs or petitioners share a common interest and invoke a
common cause of action or defense, the signature of only one of them in the certification against forum
shopping substantially complies with the Rule.

x x x x44 (Italics and underscoring deleted)

In the case at bar, the petitioners complied with the procedural requirements belatedly, defectively, or
substantially. They explained the reasons for their lapses and begged for the court's understanding. It
likewise bears noting that the petitioners share common interests and causes of action as regards the
petition for review filed before the CA.

Tible & Tible Company, Inc., et al. v. Royal Savings and Loan Association, et al. 45 is emphatic that:

Courts are not slaves or robots of technical rules, shorn of judicial discretion. In rendering justice, courts
have always been, as they ought to be, conscientiously guided by the norm that on balance, technicalities
take a backseat against substantive rights, and not the other way around. 46 (Italics in the original)

Prescinding therefrom, the Court finds that the CA had committed reversible error in outrightly
dismissing the petition filed before it.1âwphi1 The Court does not perceive intentional disregard of
procedures on the part of the petitioners. The circumstances, thus, call for a relaxation of the rules in the
interest of substantial justice.

The effect of an Affidavit of


Desistance executed after an action
has already been instituted in court
"By itself, an affidavit of desistance or pardon is not a ground for the dismissal of an action, once the
action has been instituted in court."47

In the case at bench, Rosario's affidavit, which was executed during the pendency of the petition for
review before the CA, did not abate the proceedings. This properly springs from the rule that in a criminal
action already filed in court, the private complainant loses the right or absolute privilege to decide
whether the charge should proceed.

On Substantive Matters

Despite the expiration of CTCM's


corporate term in 1999, duties as
corporate officers still pertained to
the petitioners when Joselyn 's
complaint was filed in 2000.

Yu, et al. v. Yukayguan, et al. 48 instructs that:

[T]he corporation continues to be a body corporate for three (3) years after its dissolution for purposes
of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs,
culminating in the disposition and distribution of its ,remaining assets. x x x The termination of the life of
a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such
entity x x x nor those of its owners and creditors. x x x.49

Further, as correctly pointed out by the OSG, Sections 122 and 145 of the Corporation Code explicitly
provide for the continuation of the body corporate for three years after dissolution. The rights and
remedies against, or liabilities of, the officers shall not be removed or impaired by reason of the
dissolution of the corporation. Corollarily then, a stockholder's right to inspect corporate records subsists
during the period of liquidation. Hence, Joselyn, as a stockholder, had the right to demand for the
inspection of records. Lodged upon the corporation is the corresponding duty to allow the said
inspection.

It is beyond the ambit of a


petition filed under Rule 45 of the
Rules of Court to recalibrate the
evidence considered in the
proceedings below. However, the
Court notes circumstances justifying
the modification of the assailed
resolutions.

The Court notes that in the course of the trial, the petitioners presented neither testimonial nor
documentary evidence to prove their innocence. 50 The MeTC rendered a judgment of conviction, which
the RTC and the CA affirmed in toto.

It is settled that "a re-examination of factual findings is outside the province of a petition for review
on certiorari,"51especially in the instant petition where the MeTC, RTC and CA concurred in convicting the
petitioners of the charges against them.
Be that as it may, the Court takes exception and notes the following circumstances: (a) during cross-
examination, Joselyn admitted that permission was granted for her to see the documents, but she was
unable to actually view them as she was represented by her accountant; (b) Joselyn lacked personal
knowledge as to whether or not the petitioners in fact allowed or denied the checking of the records she
had requested; (c) Velayo stated that the letter requesting for the examination of CTCM's records was
addressed to the Accounting Department, and he and his colleagues did not have personal dealings with
the petitioners. 52

From the foregoing, it is apparent that a complete examination of CTCM's records did not occur resulting
to an effective deprivation of Joselyn's right as a stockholder. However, from Joselyn and Velayo's
testimonies, it can be inferred that permission to view the records was granted, albeit not fully effected.
The petitioners, on their part, explained in the Counter-Affidavit filed before the Quezon City Prosecution
Office that they never prevented Joselyn from exercising her right of inspection, but when the latter made
her request, Mercedes was too occupied in winding up the affairs of CTCM. 53

While a cloud of doubt is cast upon the existence of criminal intent on the part of the petitioners, it is
jurisprudentially settled that proof of malice or deliberate intent (mens rea) is not essential in offenses
punishable by special laws, which are mala prohibita.54

In the case at bar, the petitioners were charged with violations of Section 74, in relation to Section 144, of
the Corporation Code, a special law. Accordingly, since Joselyn was deprived of the exercise of an effective
right of inspection, offenses had in fact been committed, regardless of the petitioners' intent. The
Corporation Code provides for penalties relative to the commission of offenses, which cannot be
trivialized, lest the public purpose for which they are crafted be defeated and put to naught.

No exceptional grounds exist justifying the reversal of the conviction previously rendered by the MeTC,
RTC and CA. However, in lieu of the penalty of 30 days of imprisonment, the Court finds it more just to
impose upon each of the petitioners a fine of Ten Thousand Pesos (₱10,000.00) considering the reasons
below. First. Malicious intent was seemingly wanting. Permission to check the records was granted,
albeit not effected. Second. Joselyn had predeceased Alfredo and Tomas, her uncles, who are in their
twilight years. Third. Joselyn's mother, Rosario, had executed an Affidavit of Desistance stating that the
filing of the complaint before was "merely the result of [a] serious misunderstanding anent the
management and operation of [CTCM], which had long ceased to exist as a corporate entity even prior to the
alleged commission of the crime in question, rather than by reason of any criminal intent or actuation on the
part of the [petitioners]. "55

WHEREFORE, IN VIEW OF THE FOREGOING, the conviction of Alfredo L. Chua, Tomas L. Chua and
Mercedes P. Diaz for violations of Section 74, in relation to Section 144, of the Corporation Code
is AFFIRMED, but MODIFIEDto the extent that in lieu of the penalty of thirty (30) days of imprisonment,
a FINE of TEN THOUSAND PESOS(₱10,000.00) each is imposed upon the petitioners.

SO ORDERED.

THIRD DIVISION

June 7, 2017

G.R. No. 211108


ALEJANDRO D.C. ROQUE, Petitioner
vs.
PEOPLE OF THE PHILIPPINES, Respondent

DECISION

TIJAM, J.:

Before Us is a Petition for Review on Certiorari under Rule 45 filed by petitioner Alejandro Roque
(Roque).

Roque assails the Decision 1 dated August 31, 2012 and the Resolution 2 dated January 22, 2014 of the
Court of Appeals 3 (CA), which set aside and annulled the Order 4 dated November 12, 2008 of the
Regional Trial Court (RTC) 5 , Third Judicial Region, Branch 11, Malolos City, Bulacan in Criminal Case No.
1011-M- 2005. Said Order granted the motion for leave of court to file demurrer to evidence filed by
Rosalyn Singson (Singson), herein petitioner's co-accused.

On November 17, 1993, Barangay Mulawin Tricycle Operators and Drivers Association, Inc. (BMTODA)
became a corporation duly registered with the Securities and Exchange Commission (SEC).

Sometime in August 2003, Oscar Ongjoco (Ongjoco), a member of BMTODA, learned that BMTODA's
funds were missing. In a letter, Ongjoco requested copies of the Association's documents pursuant to his
right to examine records under Section 74 of the Corporation Code of the Philippines (Corporation Code).
However, Singson, the Secretary of BMTODA, denied his request.

Ongjoco also learned that the incumbent officers were holding office for three years already, in violation
of the one-year period provided for in BMTODA's by-laws. He then requested from Roque, the President
of BMTODA, a copy of the list of its members with the corresponding franchise numbers of their
respective tricycle fees and the franchise fees paid by each member, but Roque denied Ongjoco's request.

Ongjoco filed an Affidavit-Complaint against Roque and Singson for violation of Section 7 4 in relation to
Section 144 of the Corporation Code because of their refusal to furnish him copies of records pertaining
to BMTODA.

The Office of the City Prosecutor of San Jose Del Monte, Bulacan found probable cause to indict Roque and
Singson. Hence, an Information was filed against them, which reads:

That sometime in December 2004, in San Jose Del Monte City, [P]rovince of Bulacan, Ph,ilippines, and
within the jurisdiction of this Honorable· Court, the said accused, Alejandro D.C. Roque and Rosalyn G.
Singson, being the President and Secretary, respectively, of Barangay Mulawin Tricycle Operators and
Drivers Association, Inc. (BMTODA), conspiring, confederating, and mutually helping each other, did then
and there willfully, unlawfully, and feloniously fail and neglect to keep in their official record of all
business transactions, minutes of all meetings or stockholders or members·, or of the board of directors
or trustees and refused to allow stockholders, members, directors or trustees to examine and copy
excerpt from the records or minutes of the association after demand in writing. 6
After the prosecution rested its case, Roque and Singson filed a Motion for Leave of Court to File
Demurrer to Evidence with Motion to Dismiss by way of Demurrer to Evidence.1âwphi1 The prosecution
failed to file any comment thereon.

In an Order 7 dated November 12, 2008, the RTC granted the motion and gave due course to Roque and
Singson's demurrer to evidence. The RTC ruled that said association failed to prove its existence as a
corporation.

Hence, a violation under the Corporation Code cannot be made applicable against its officers.
The fallo thereof reads:

Accordingly, this demurrer is GIVEN DUE COURSE and the instant case is hereby DISMISSED.

SO ORDERED. 8

On appeal, the CA reversed and set aside the Order dated November 12, 2008 of the RTC. The CA ruled
that BMTODA is a duly registered corporation. The CA stated that a Petition to Lift Order of Revocation
and the SEC Order Lifting the Revocation were presented in evidence; and that logic dictates that such
documentary evidence presupposes a duly registered and existing entity. The dispositive portion thereof
reads:

WHEREFORE, premises considered, the instant Petition for Certiorari is hereby GRANTED.

Accordingly, the court a quo's Order dated 12 November 2008 is hereby ANNULLED and SET ASIDE.

This case is hereby remanded to the court a quo for the presentation of defense evidence. SO ORDERED. 9

Hence, Roque, thru his counsel, filed the present Petition.

Petitioner contends that there is want of evidence to prove that BMTODA is a corporation duly
established and organized under the Corporation Code; thus, he cannot be prosecuted under the penal
provisions of the said code.

The appeal lacks merit.

Section 7410 of the Corporation Code provides for the liability for damages of any officer or agent of the
corporation for refusing to allow any director, trustee, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes. Section 144 of the same Code further provides
for other applicable penalties in case of violation of any provision of the Corporation Code.

Hence, to prove any violation under the aforementioned provisions, it is necessary that: (1) a director,
trustee, stockholder or member has made a prior demand in writing for a copy of excerpts from the
corporations records or minutes; (2) any officer or agent of the concerned corporation shall refuse to
allow the said director, trustee, stockholder or member of the corporation to examine and copy said
excerpts; (3) if such refusal is made pursuant to a resolution or order of the board of directors or
trustees, the liability under this section for such action spall be imposed upon the directors or trustees
who voted for such refusal;· and (4) where the officer or agent of the corporation sets up the defense that
the person demanding to examine and copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination of the records or minutes of
such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose
in making his demand, the contrary must be shown or proved. 11

Clearly, Ongjoco, as a member of BMTODA, had a right to examine documents and records pertaining to
said association. To recall, Ongjoco made a prior demand in writing for copy of pertinent records of
BMTODA from Roque and Singson. Ongjoco sent his letters dated December 13, 2003 12 and August 29,
2004 13 to Roque and Singson, respectively. However, both of them refused to furnish Ongjoco copies of
such pertinent records.

Roque argues that when the letters were received by him and Singson, BMTODA's registration
was·.already revoked. Hence, BMTODA ceased to exist as a corporation.

We are not persuaded.

While it appears that the registration of BMTODA as a corporation with the SEC was revoked on
September 30, 2003, the letter-request of Ongjoco to Singson, which was dated while BMTODA's
registration was revoked, was actually received by Singson after the revocation was lifted. In a Letter
dated October 11, 2004, the General Counsel of the SEC made it clear that the SEC lifted the revocation of
BMTODA's registration on August 30, 2004. As the CA correctly observed, the letter-request was received
by Singson on September 23, 2004 when BMTODA had regained its active status. 14

In any case, the revocation of a corporation's Certificate of Registration does not automatically warrant
the extinction of the corporation itself such that its rights and liabilities are likewise altogether
extinguished. In the case of Clemente v. Court of Appeals 15 , the Court explained that the termination of
the life of a juridical entity does not, by itself, cause the extinction or diminution of the rights and
liabilities of such entity nor those of its owners and creditors.

Thus, the revocation of BMTODA's registration does not automatically strip off Ongjoco of his right to
examine pertinent documents and records relating to such association.

Also, since Roque .admitted the revocation of BMTODA's Registration 16 , he cannot come 'forward and
disclaim BMTODA's registration with the SEC as a corporation. It is logical to presume that a registration
precedes the revocation thereof; as any registration cannot be revoked without its valid existence.

Moreover, Roque also tries to exculpate himself from liability by claiming Singson's denial of the request
of Ongjoco as Singson's personal act.

We do not agree.

A reading of this present Petition reveals that Roque admitted 17 his denial of Ongjoco's request, i.e., to
furnish him a copy of BMTODA's list of its members with the corresponding franchise body numbers of
their respective tricycles and franchise fees paid by each member. Also, what was requested from Singson
pertains to an entirely different document. Thus, Singson' s denial is immateriai, and does not detract
from Roque' s denial of Ongjoco's request to access the above-mentioned document. For his individual
and separate act, Roque should be held accountable. Hence, Roque's denial is unquestionably considered
as a violation under the Corporation Code.
WHEREFORE, the instant petition is DENIED. The Decision dated August 31, 2012 and Resolution dated
January 22, 2014 of the Court of Appeals are AFFIRMED in toto.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 165887 June 6, 2011

MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION, Petitioners,


vs.
MIGUEL LIM, in his personal capacity as Stockholder of Ruby Industrial Corporation and
representing the MINORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION and the
MANAGEMENT COMMITTEE OF RUBY INDUSTRIAL CORPORATION, Respondents.

x-----------------------x

G.R. No. 165929

CHINA BANKING CORPORATION, Petitioner,


vs.
MIGUEL LIM, in his personal capacity as a stockholder of Ruby Industrial Corporation and
representing the MINORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION, Respondent.

DECISION

VILLARAMA, JR., J.:

This case is brought to us on appeal for the fourth time, involving the same parties and interests litigating
on issues arising from rehabilitation proceedings initiated by Ruby Industrial Corporation wayback in
1983.

Following is the factual backdrop of the present controversy, as culled from the records and facts set
forth in the ponencia of Chief Justice Reynato S. Puno in Ruby Industrial Corporation v. Court of Appeals.1

The Antecedents

Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass manufacturing. Reeling
from severe liquidity problems beginning in 1980, RUBY filed on December 13, 1983 a petition for
suspension of payments with the Securities and Exchange Commission (SEC) docketed as SEC Case No.
2556. On December 20, 1983, the SEC issued an order declaring RUBY under suspension of payments and
enjoining the disposition of its properties pending hearing of the petition, except insofar as necessary in
its ordinary operations, and making payments outside of the necessary or legitimate expenses of its
business.
On August 10, 1984, the SEC Hearing Panel created the management committee (MANCOM) for RUBY,
composed of representatives from Allied Leasing and Finance Corporation (ALFC), Philippine Bank of
Communications (PBCOM), China Banking Corporation (China Bank), Pilipinas Shell Petroleum
Corporation (Pilipinas Shell), and RUBY represented by Mr. Yu Kim Giang. The MANCOM was tasked to
perform the following functions: (1) undertake the management of RUBY; (2) take custody and control
over all existing assets and liabilities of RUBY; (3) evaluate RUBY’s existing assets and liabilities, earnings
and operations; (4) determine the best way to salvage and protect the interest of its investors and
creditors; and (5) study, review and evaluate the proposed rehabilitation plan for RUBY.

Subsequently, two (2) rehabilitation plans were submitted to the SEC: the BENHAR/RUBY Rehabilitation
Plan of the majority stockholders led by Yu Kim Giang, and the Alternative Plan of the minority
stockholders represented by Miguel Lim (Lim).

Under the BENHAR/RUBY Plan, Benhar International, Inc. (BENHAR) -- a domestic corporation engaged
in the importation and sale of vehicle spare parts which is wholly owned by the Yu family and headed by
Henry Yu, who is also a director and majority stockholder of RUBY -- shall lend its ₱60 million credit line
in China Bank to RUBY, payable within ten (10) years. Moreover, BENHAR shall purchase the credits of
RUBY’s creditors and mortgage RUBY’s properties to obtain credit facilities for RUBY. Upon approval of
the rehabilitation plan, BENHAR shall control and manage RUBY’s operations. For its service, BENHAR
shall receive a management fee equivalent to 7.5% of RUBY’s net sales.

The BENHAR/RUBY Plan was opposed by 40% of the stockholders, including Lim, a minority shareholder
of RUBY. ALFC, the biggest unsecured creditor of RUBY and chairman of the management committee, also
objected to the plan as it would transfer RUBY’s assets beyond the reach and to the prejudice of its
unsecured creditors.

On the other hand, the Alternative Plan of RUBY’s minority stockholders proposed to: (1) pay all RUBY’s
creditors without securing any bank loan; (2) run and operate RUBY without charging management fees;
(3) buy-out the majority shares or sell their shares to the majority stockholders; (4) rehabilitate RUBY’s
two plants; and (5) secure a loan at 25% interest, as against the 28% interest charged in the loan under
the BENHAR/RUBY Plan.

Both plans were endorsed by the SEC to the MANCOM for evaluation.

On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY Plan. The minority
stockholders thru Lim appealed to the SEC En Banc which, in its November 15, 1988 Order, enjoined the
implementation of the BENHAR/RUBY Plan. On December 20, 1988 after the expiration of the temporary
restraining order (TRO), the SEC En Banc granted the writ of preliminary injunction against the
enforcement of the BENHAR/RUBY Plan. BENHAR, Henry Yu, RUBY and Yu Kim Giang questioned the
issuance of the writ in their petition filed in the Court of Appeals (CA), docketed as CA-G.R. SP No. 16798.
The CA denied their appeal.2 Upon elevation to this Court (G.R. No. L-88311), we issued a minute
resolution dated February 28, 1990 denying the petition and upholding the injunction against the
implementation of the BENHAR/RUBY Plan.

Meanwhile, BENHAR paid off Far East Bank & Trust Company (FEBTC), one of RUBY’s secured creditors.
By May 30, 1988, FEBTC had already executed a deed of assignment of credit and mortgage rights in
favor of BENHAR. BENHAR likewise paid the other secured creditors who, in turn, assigned their rights in
favor of BENHAR. These acts were done by BENHAR despite the SEC’s TRO and injunction and even
before the SEC Hearing Panel approved the BENHAR/RUBY Plan on October 28, 1988.

ALFC and Miguel Lim moved to nullify the deeds of assignment executed in favor of BENHAR and cite the
parties thereto in contempt for willful violation of the December 20, 1983 SEC order enjoining RUBY from
disposing its properties and making payments pending the hearing of its petition for suspension of
payments. They also charged that in paying off FEBTC’s credits, FEBTC was given undue preference over
the other creditors of RUBY. Acting on the motions, the SEC Hearing Panel nullified the deeds of
assignment executed by RUBY’s creditors in favor of BENHAR and declared the parties thereto guilty of
indirect contempt. BENHAR and RUBY appealed to the SEC En Banc which denied their appeal. BENHAR
and RUBY joined by Henry Yu and Yu Kim Giang appealed to the CA (CA-G.R. SP No. 18310). By
Decision3 dated August 29, 1990, the CA affirmed the SEC ruling nullifying the deeds of assignment. The
CA also declared its decision final and executory as to RUBY and Yu Kim Giang for their failure to file their
pleadings within the reglementary period. By Resolution dated August 26, 1991 in G.R. No. 96675, 4 this
Court affirmed the CA’s decision.

Earlier, on May 29, 1990, after the SEC En Banc enjoined the implementation of BENHAR/RUBY Plan,
RUBY filed with the SEC En Banc an ex parte petition to create a new management committee and to
approve its revised rehabilitation plan (Revised BENHAR/RUBY Plan). Under the revised plan, BENHAR
shall receive ₱34.068 million of the ₱60.437 Million credit facility to be extended to RUBY, as
reimbursement for BENHAR’s payment to some of RUBY’s creditors. The SEC En Banc directed RUBY to
submit its revised rehabilitation plan to its creditors for comment and approval while the petition for the
creation of a new management committee was remanded for further proceedings to the SEC Hearing
Panel. The Alternative Plan of RUBY’s minority stockholders was also forwarded to the hearing panel for
evaluation.

On April 26, 1991, over ninety percent (90%) of RUBY’s creditors objected to the Revised BENHAR/RUBY
Plan and the creation of a new management committee. Instead, they endorsed the minority
stockholders’ Alternative Plan. At the hearing of the petition for the creation of a new management
committee, three (3) members of the original management committee (Lim, ALFC and Pilipinas Shell)
opposed the Revised BENHAR/RUBY Plan on grounds that: (1) it would legitimize the entry of BENHAR, a
total stranger, to RUBY as BENHAR would become the biggest creditor of RUBY; (2) it would put RUBY’s
assets beyond the reach of the unsecured creditors and the minority stockholders; and (3) it was not
approved by RUBY’s stockholders in a meeting called for the purpose.

Notwithstanding the objections of 90% of RUBY’s creditors and three members of the MANCOM, the SEC
Hearing Panel approved on September 18, 1991 the Revised BENHAR/RUBY Plan and dissolved the
existing management committee. It also created a new management committee and appointed BENHAR
as one of its members. In addition to the powers originally conferred to the management committee
under Presidential Decree (P.D.) No. 902-A, the new management committee was tasked to oversee the
implementation by the Board of Directors of the revised rehabilitation plan for RUBY.

The original management committee (MANCOM), Lim and ALFC appealed to the SEC En Banc which
affirmed the approval of the Revised BENHAR/RUBY Plan and the creation of a new management
committee on July 30, 1993. To ensure that the management of RUBY will not be controlled by any group,
the SEC appointed SEC lawyers Ruben C. Ladia and Teresita R. Siao as additional members of the new
management committee. Further, it declared that BENHAR’s membership in the new management
committee is subject to the condition that BENHAR will extend its credit facilities to RUBY without using
the latter’s assets as security or collateral.

Lim, ALFC and MANCOM moved for reconsideration while RUBY and BENHAR asked the SEC to
reconsider the portion of its Order prohibiting BENHAR from utilizing RUBY’s assets as collateral. On
October 15, 1993, the SEC denied the motion of Lim, ALFC and the original management committee but
granted RUBY and BENHAR’s motion and allowed BENHAR to use RUBY’s assets as collateral for loans,
subject to the approval of the majority of all the members of the new management committee. Lim, ALFC
and MANCOM appealed to the CA (CA-G.R. SP Nos. 32404, 32469 & 32483) which by Decision5 dated
March 31, 1995 set aside the SEC’s approval of the Revised BENHAR/RUBY Plan and remanded the case
to the SEC for further proceedings. The CA ruled that the revised plan circumvented its earlier decision
(CA-G.R. SP No. 18310) nullifying the deeds of assignment executed by RUBY’s creditors in favor of
BENHAR. Since under the revised plan, BENHAR was to receive ₱34.068 Million of the ₱60.437 Million
credit facility to be extended to RUBY, as settlement for its advance payment to RUBY’s seven (7) secured
creditors, such payments made by BENHAR under the void Deeds of Assignment, in effect were
recognized as payable to BENHAR under the revised plan. The motion for reconsideration filed by
BENHAR and RUBY was likewise denied by the CA.6

Undaunted, RUBY and BENHAR filed a petition for review in this Court (G.R. Nos. 124185-87 entitled
Ruby Industrial Corporation v. Court of Appeals) alleging that the CA gravely abused its discretion in
substituting its judgment for that of the SEC, and in allowing Lim, ALFC and MANCOM to file separate
petitions prepared by lawyers representing themselves as belonging to different firms. By
Decision7 dated January 20, 1998, we sustained the CA’s ruling that the Revised BENHAR/RUBY Plan
contained provisions which circumvented its final decision in CA-G.R. SP No. 18310, nullifying the deeds
of assignment of credits and mortgages executed by RUBY’s creditors in favor of BENHAR, as well as this
Court’s Resolution in G.R. No. 96675, affirming the said CA’s decision. We thus held:

…Specifically, the Revised BENHAR/RUBY Plan considered as valid the advance payments made by
BENHAR in favor of some of RUBY’s creditors. The nullity of BENHAR’s unauthorized dealings with
RUBY’s creditors is settled. The deeds of assignment between BENHAR and RUBY’s creditors had been
categorically declared void by the SEC Hearing Panel in two (2) orders issued on January 12, 1989 and
March 15, 1989. x x x

xxxx

These orders were upheld by the SEC en banc and the Court of Appeals. In CA-G.R. SP No. 18310, the
Court of Appeals ruled as follows:

"x x x xxx xxx

"1) x x x when the Deed of Assignment was executed on May 30, 1988 by and between Ruby
Industrial Corp., Benhar International, Inc., and FEBTC, the Rehabilitation Plan proposed by
petitioner Ruby Industrial Corp. for Benhar International, Inc. to assume all petitioner’s obligation
has not been approved by the SEC. The Rehabilitation Plan was not approved until October 28,
1988. There was a willful and blatant violation of the SEC order dated December 20, 1983 on the
part of petitioner Ruby Industrial Corp., represented by Yu Kim Giang, by Benhar International,
Inc., represented by Henry Yu and by FEBTC….
"2) The magnitude and coverage of the transactions involved were such that Yu Kim Giang and the
other signatories cannot feign ignorance or pretend lack of knowledge thereto in view of the fact
that they were all signatories to the transaction and privy to all the negotiations leading to the
questioned transactions. In executing the Deeds of Assignment, the petitioners totally disregarded
the mandate contained in the SEC order not to dispose the properties of Ruby Industrial Corp. in
any manner whatsoever pending the approval of the Rehabilitation Plan and rendered illusory the
SEC efforts to rehabilitate the petitioner corporation to the best interests of all the creditors.

"3) The assignments were made without prior approval of the Management Committee created by
the SEC in an Order dated August 10, 1984. Under Sec. 6, par. d, sub. par. (2) of P.D. 902-A as
amended by P.D. 1799, the Management Committee, rehabilitation receiver, board or body shall
have the power to take custody and control over all existing assets of such entities under
management notwithstanding any provision of law, articles of incorporation or by-law to the
contrary. The SEC therefore has the power and authority, through a Management Committee
composed of petitioner’s creditors or through itself directly, to declare all assignment of assets of
the petitioner Corporation declared under suspension of payments, null and void, and to conserve
the same in order to effect a fair, equitable and meaningful rehabilitation of the insolvent
corporation."

"4) x x x. The acts for which petitioners were held in indirect contempt by the SEC arose from the
failure or willful refusal by petitioners to obey the lawful order of the SEC not to dispose of any of
its properties in any manner whatsoever without authority or approval of the SEC. The execution
of the Deeds of Assignment tend to defeat or obstruct the administration of justice. Such acts are
offenses against the SEC because they are calculated to embarrass, hinder and obstruct the
tribunal in the administration of justice or lessen its authority.

"x x x

Even the SEC en banc, in its July 30, 1993 Order affirming the approval of the Revised BENHAR/RUBY
Plan, has acknowledged the invalidity of the subject deeds of assignment. However, to justify it’s approval
of the plan and the appointment of BENHAR to the new management committee, it gave the lame excuse
that BENHAR became RUBY’s creditor for having paid RUBY’s debts. x x x

xxxx

For its part, the Court of Appeals noted that the approved Revised BENHAR/RUBY Plan gave undue
preference to BENHAR. The records, indeed, show that BENHAR’s offer to lend its credit facility in favor
of RUBY is conditioned upon the payment of the amount it advanced to RUBY’s creditors, x x x

xxxx

In fact, BENHAR shall receive P34.068 Million out of the P60.437 Million credit facility to be extended to
RUBY for the latter’s rehabilitation.

Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency. When a distressed
company is placed under rehabilitation, the appointment of a management committee follows to avoid
collusion between the previous management and creditors it might favor, to the prejudice of the other
creditors. All assets of a corporation under rehabilitation receivership are held in trust for the equal
benefit of all creditors to preclude one from obtaining an advantage or preference over another by the
expediency of attachment, execution or otherwise. As between the creditors, the key phrase is equality in
equity. Once the corporation threatened by bankruptcy is taken over by a receiver, all the creditors ought
to stand on equal footing. Not any one of them should be paid ahead of the others. This is precisely the
reason for suspending all pending claims against the corporation under receivership.8(Additional
emphasis supplied.)

Aside from the undue preference that would have been given to BENHAR under the Revised
BENHAR/RUBY Plan, we also found RUBY’s dealing with BENHAR highly irregular and its proposed
financing scheme more costly and ultimately prejudicial to RUBY. Thus:

Parenthetically, BENHAR is a domestic corporation engaged in importing and selling vehicle spare parts
with an authorized capital stock of thirty million pesos. Yet, it offered to lend its credit facility in the
amount of sixty to eighty million pesos to RUBY. It is to be noted that BENHAR is not a lending or
financing corporation and lending its credit facilities, worth more than double its authorized
capitalization, is not one of the powers granted to it under its Articles of Incorporation. Significantly,
Henry Yu, a director and a majority stockholder of RUBY is, at the same time, a stockholder of BENHAR, a
corporation owned and controlled by his family. These circumstances render the deals between BENHAR
and RUBY highly irregular.

xxxx

Moreover, when RUBY initiated its petition for suspension of payments with the SEC, BENHAR was not
listed as one of RUBY’s creditors. BENHAR is a total stranger to RUBY. If at all, BENHAR only served as a
conduit of RUBY. As aptly stated in the challenged Court of Appeals decision:

"Benhar’s role in the Revised Benhar/Ruby Plan, as envisioned by the majority stockholders, is to
contract the loan for Ruby and, serving the role of a financier, relend the same to Ruby. Benhar is merely
extending its credit line facility with China Bank, under which the bank agrees to advance funds to the
company should the need arise. This is unlikely a loan in which the entire amount is made available to the
borrower so that it can be used and programmed for the benefit of the company’s financial and
operational needs. Thus, it is actually China Bank which will be the source of the funds to be relent to
Ruby. Benhar will not shell out a single centavo of its own funds. It is the assets of Ruby which will be
mortgaged in favor of Benhar. Benhar’s participation will only make the rehabilitation plan more costly
and, because of the mortgage of its (Ruby’s) assets to a new creditor, will create a situation which is
worse than the present. x x x"

We need not say more.9 (Additional emphasis supplied.)

After the finality of the above decision, the SEC set the case for further proceedings.10 On March 14, 2000,
Bank of the Philippine Islands (BPI), one of RUBY’s secured creditors, filed a Motion to Vacate Suspension
Order11 on grounds that there is no existing management committee and that no decision has been
rendered in the case for more than 16 years already, which is beyond the period mandated by Sec. 3-8 of
the Rules of Procedure on Corporate Recovery. RUBY filed its opposition,12 asserting that the MANCOM
never relinquished its status as the duly appointed management committee as it resisted the orders of
the second and third management committees subsequently created, which have been nullified by the CA
and later this Court. As to the applicability of the cited rule under the Rules on Corporate Recovery, RUBY
pointed out that this case was filed long before the effectivity of said rules. It also pointed out that the
undue delay in the approval of the rehabilitation plan being due to the numerous appeals taken by the
minority stockholders and MANCOM to the CA and this Court, from the SEC approval of the
BENHAR/RUBY Plan. Since there have already been steps taken to finally settle RUBY’s obligations with
its creditors, it was contended that the application of the mandatory period under the cited provision
would cause prejudice and injustice to RUBY.

It appears that even earlier during the pendency of the appeals in the CA, BENHAR and RUBY have
performed other acts in pursuance of the BENHAR/RUBY Plan approved by the SEC.

On September 1, 1996, Lim received a Notice of Stockholders’ Meeting scheduled on September 3, 1996
signed by a certain Mr. Edgardo M. Magtalas, the "Designated Secretary" of RUBY and stating the matters
to be taken up in said meeting, which include the extension of RUBY’s corporate term for another twenty-
five (25) years and election of Directors.13 At the scheduled stockholders’ meeting of September 3, 1996,
Lim together with other minority stockholders, appeared in order to put on record their objections on the
validity of holding thereof and the matters to be taken therein. Specifically, they questioned the
percentage of stockholders present in the meeting which the majority claimed stood at 74.75% of the
outstanding capital stock of RUBY.

The aforesaid stockholders meeting was the subject of the Motion to Cite For Contempt14 and Supplement
to Motion to Cite For Contempt15 filed by Lim before the CA where their petitions for review (CA-G.R. Nos.
32404, 32469 and 32483) were then pending. Lim argued that the majority stockholders claimed to have
increased their shares to 74.75% by subscribing to the unissued shares of the authorized capital stock
(ACS). Lim pointed out that such move of the majority was in implementation of the BENHAR/RUBY Plan
which calls for capital infusion of ₱11.814 Million representing the unissued and unsubscribed portion of
the present ACS of ₱23.7 Million, and the Revised BENHAR/RUBY Plan which proposed an additional
subscription of ₱30 Million. Since the implementation of both majority plans have been enjoined by the
SEC and CA, the calling of the special stockholders meeting by the majority stockholders clearly violated
the said injunction orders. This circumstance certainly affects the determination of quorum, the voting
requirements for corporate term extension, as well as the election of Directors pursuant to the July 30,
1993 Order and October 15, 1993 Resolution of the SEC enjoining not only the implementation of the
revised plan but also the doing of any act that may render the appeal from the approval of the said plan
moot and academic.

The aforementioned capital infusion was taken up by RUBY’s board of directors in a special
meeting16 held on October 2, 1991 following the issuance by the SEC of its Order dated September 18,
199117 approving the Revised BENHAR/RUBY Plan and creating a new management committee to
oversee its implementation. During the said meeting, the board asserted its authority and resolved to
take over the management of RUBY’s funds, properties and records and to demand an accounting from
the MANCOM which was ordered dissolved by the SEC. The board thus resolved that:

The corporation be authorized to issue out of the unissued portion of the authorized capital stocks of the
corporation in the form of common stocks 11.8134.00 [Million] after comparing this with the audited
financial statement prepared by SGV as of December 31, 1982, to be subscribed and paid in full by the
present stockholders in proportion to their present stockholding in the corporation on staggered basis
starting October 28, December 27 then February 28 and April 28 as the last installment date at 25% for
each period. It was also moved and seconded that should any of the stockholders fail to exercise their
rights to buy the number of shares they are qualified to buy by making the first installment payment of
25% on or before October 13, 1991, then the other stockholders may buy the same and that only when
none of the present stockholders are interested in the shares may there be a resort to selling them by
public auction.18

As reflected in the Minutes of the special board meeting, a representative of the absent directors (Tan
Chai, Tomas Lim, Miguel Lim and Yok Lim) came to submit their letter addressed to the Chairman
suggesting that said meeting be deferred until the September 18, 1991 SEC Order becomes final and
executory. The directors present nevertheless proceeded with the meeting upon their belief that neither
appeal nor motion for reconsideration can stay the SEC order.19

The resolution to extend RUBY’s corporate term, which was to expire on January 2, 1997, was approved
during the September 3, 1996 stockholders meeting, as recommended by the board of directors
composed of Henry Yu (Chairman), James Yu, David Yukimteng, Harry L. Yu, Yu Kim Giang, Mary L. Yu
and Vivian L. Yu. The board certified that said resolution was approved by stockholders representing
two-thirds (2/3) of RUBY’s outstanding capital stock.20 Per Certification21 dated August 31, 1995 issued
by Yu Kim Giang as Executive Vice-President of RUBY, the majority stockholders own 74.75% of RUBY’s
outstanding capital stock as of October 27, 1991. The Amended Articles of Incorporation was filed with
the SEC on September 24, 1996.22

On March 17, 2000, Lim filed a Motion23 informing the SEC of acts being performed by BENHAR and
RUBY through directors who were illegally elected, despite the pendency of the appeal before this Court
questioning the SEC approval of the BENHAR/RUBY Plan and creation of a new management committee,
and after this Court had denied their motion for reconsideration of the January 20, 1998 decision in G.R.
Nos. 124185-87. Lim reiterated that before the matter of extension of corporate life can be passed upon
by the stockholders, it is necessary to determine the percentage ownership of the outstanding shares of
the corporation. The majority stockholders claimed that they have increased their shareholdings from
59.828% to 74.75% as a result of the illegal and invalid stockholders’ meeting on September 3, 1996. The
additional subscription of shares cannot be done as it implements the BENHAR/RUBY Plan against which
an existing injunction is still effective based on the SEC Order dated January 6, 1989, and which was
struck down under the final decision of this Court in G.R. Nos. 124185-87. Hence, the implementation of
the new percentage stockholdings of the majority stockholders and the calling of stockholders’ meeting
and the subsequent resolution approving the extension of corporate life of RUBY for another twenty-five
(25) years, were all done in violation of the decisions of the CA and this Court, and without compliance
with the legal requirements under the Corporation Code. There being no valid extension of corporate
term, RUBY’s corporate life had legally ceased. Consequently, Lim moved that the SEC: (1) declare as null
and void the infusion of additional capital made by the majority stockholders and restore the capital
structure of RUBY to its original structure prior to the time injunction was issued; and (2) declare as null
and void the resolution of the majority stockholders extending the corporate life of RUBY for another
twenty-five (25) years.

The MANCOM concurred with Lim and made a similar manifestation/comment24 regarding the irregular
and invalid capital infusion and extension of RUBY’s corporate term approved by stockholders
representing only 60% of RUBY’s outstanding capital stock. It further stated that the foregoing acts were
perpetrated by the majority stockholders without even consulting the MANCOM, which technically
stepped into the shoes of RUBY’s board of directors. Since RUBY was still under a state of suspension of
payment at the time the special stockholders’ meeting was called, all corporate acts should have been
made in consultation and close coordination with the MANCOM.
Lim likewise filed an Opposition25 to BPI’s Motion to Vacate Suspension Order, asserting that the
management committee originally created by the SEC continues to control the corporate affairs and
properties of RUBY. He also contended that the SEC Rules of Procedure on Corporate Recovery cannot
apply in this case which was filed long before the effectivity of said rules.

On the other hand, RUBY filed its Opposition26 to the Motion filed by Lim denying the allegation of Lim
that RUBY’s corporate existence had ceased. RUBY claimed that due notice were given to all stockholders
of the October 2, 1991 special meeting in which the infusion of additional capital was discussed. It further
contended that the CA decision setting aside the SEC orders approving the Revised BENHAR/RUBY Plan,
which was subsequently affirmed by this Court on January 20, 1998, did not nullify the resolution of
RUBY’s board of directors to issue the previously unissued shares. The amendment of its articles of
incorporation on the extension of RUBY’s corporate term was duly submitted with and approved by the
SEC as per the Certification dated September 24, 1996.

The MANCOM also filed its Opposition27 to BPI’s Motion to Vacate Suspension Order, stating that it has
continuously performed its primary function of preserving the assets of RUBY and undertaken the
management of RUBY’s day-to-day affairs. It expressed belief that between chaotic foreclosure
proceedings and collection suits that would be triggered by the vacation of the suspension order and an
orderly settlement of creditors’ claims before the SEC, the latter path is the more prudent and logical
course of action. On April 28, 2000, it submitted to the court copies of the minutes of meetings held from
January 18, 1999 to December 1, 1999 in pursuance of its mandate to preserve the assets and administer
the business affairs of RUBY.28

On August 23, 2000, China Bank filed a Manifestation29 echoing the contentions of BPI that as there is no
existing management committee and no rehabilitation plan approved even after the 240-day period,
warrants the application of Sec. 4-9 of the SEC Rules of Procedure on Corporate Recovery such that the
petition is "deemed ipso facto denied and dismissed." China Bank lamented that the length of time that
has lapsed, as well as the parties’ actuations, completely betrays a genuine attempt to rehabilitate RUBY’s
moribund operations – all to the dismay, damage and prejudice of RUBY’s creditors. It stressed that the
proceedings cannot be prolonged nor used as a ploy to defer indefinitely the payment of long overdue
obligations of RUBY to its creditors. With the case having been ipso facto dismissed, there is no need of
further action from the parties or an order from the SEC. Consequently, RUBY’s creditors may now take
whatever legal action they may deem appropriate to protect their rights including, but not limited to
extrajudicial foreclosure.

On September 11, 2000, the SEC granted Lim’s request for the issuance of subpoena duces tecum/ad
testificandum to Ms. Jocelyn Sta. Ana of BPI for the latter to testify and bring all documents and records
pertaining to RUBY.30Earlier, Lim moved for a hearing to verify the information that China Bank and BPI
had separately executed deeds of assignment in favor of Greener Investment Corporation, a company
owned by Yu Kim Giang, one of RUBY’s majority stockholders.31 Said hearing, however, did not push
through in view of RUBY’s proposal for a compromise agreement.32 Lim submitted his comments on the
Proposed Compromise Agreement, but there was no response from RUBY and the majority
stockholders.33 The minority stockholders likewise served a copy of the revised Compromise Agreement
to the majority stockholders.34 Lim moved that the case be assigned to a new Panel of Hearing Officers
and the majority stockholders be made to declare in a hearing whether they accept the counterproposals
of the minority in their draft Amicable Settlement in order that the case can proceed immediately to
liquidation.35
On January 25, 2001, the MANCOM filed with the SEC its Resolution unanimously adopted on January 19,
2001 affirming that: (1) MANCOM was never informed nor advised of the supposed capital infusion by
the majority stockholders in October 1991 and it never actually received any such additional subscription
nor signed any document attesting to or authorizing the said increase of RUBY’s capital stock or the
extension of its corporate life; (2) MANCOM continuously recognizes the 60%-40% ratio of shareholding
profile between the majority and minority stockholders, with the majority having 59.828% while the
minority holds 40.172% shareholding; (3) as there was no valid increase in the shareholding of the
majority and consequently no valid extension of corporate term, the liquidation of RUBY is thus in order;
(4) to date, the majority stockholders or Yu Kim Giang have not complied with the December 22, 1989
SEC order for them to turn over the cash including bank deposits, all other financial records and
documents of RUBY including transfer certificates of title over its real properties, and render an
accounting of all the money received by RUBY; and (5) pursuant to this Court’s ruling in G.R. No. 96675
dated August 26, 1991, the previous deeds of assignment made in favor of BENHAR by Florence Damon,
Philippine Bank of Communications, Philippine Commercial International Bank, Philippine Trust
Company, PCI Leasing and Finance, Inc. and FEBTC, having been earlier declared void by the SEC Hearing
Panel, and the CA decision in CA-G.R. SP No. 18310 affirmed by this Court – have no legal effect and are
deemed void.36

On the other hand, Lim filed a Supplement (to Manifestation and Motion dated January 18,
2001)37 reiterating his pending motion filed on March 15, 2000 for the SEC to implement this Court’s
January 20, 1998 Decision in G.R. Nos. 124185-87 which states in part that "[t]he SEC therefore has the
power and authority, directly to declare all assignment of assets of the petitioner Corporation declared
under suspension of payments, null and void, and to conserve the same in order to effect a fair, equitable
and meaningful rehabilitation of the insolvent corporation." Lim contended that the SEC retains
jurisdiction over pending suspension of payment/rehabilitation cases filed as of June 30, 2000 until these
are finally disposed, pursuant to Sec. 5.2 of the Securities Regulation Code (Republic Act [R.A.] No. 8799).
Considering that the Management Committee is intact, the majority stockholders cannot act in an illegal
manner with regard to RUBY’s assets. He thus concluded that the continued disobedience of the majority
stockholders to the orders and decisions of the SEC and CA, as affirmed by this Court, have certainly
rendered any additional assignments, such as the Deeds of Assignment executed by BPI and China Bank
with BENHAR, Henry Yu or conduits of the majority stockholders, null and void.

The MANCOM manifested that it is adopting in toto the Manifestation and Motion dated January 18, 2001
filed by Lim. It also moved for the SEC to conduct further proceedings as directed by this Court.
Considering that there is no chance at all for the proposed rehabilitation of RUBY in light of strict
implementation by government authorities of environmental laws particularly on pollution control, and
MANCOM’s assent to effect a liquidation, the MANCOM asserted that a hearing should focus on the
eventual liquidation of RUBY. It added that a dismissal under the circumstances would be tantamount to
a perceived shirking by the SEC of its mandate to afford all creditors ample opportunity to recover on
their respective financial exposure with RUBY.38

On May 15, 2001, the MANCOM submitted copies of minutes of meetings held from April 13, 2000 to
December 29, 2000.39

On September 20, 2001, the SEC issued an Order directing the Management Committee to submit a
detailed report – not mere minutes of meetings -- on the status of the rehabilitation process and financial
condition of RUBY, which should contain a statement on the feasibility of the rehabilitation plan.40 The
MANCOM complied with the said order on February 15, 2002.41 The majority stockholders and RUBY
moved to dismiss the petition and strike from the records the Compliance/Report. MANCOM filed its
omnibus opposition to the said motions. There was further exchange of pleadings by the parties on the
matter of whether the SEC should already dismiss the petition of RUBY as prayed for by the majority
stockholders and RUBY, or proceed with supervised liquidation of RUBY as proposed by the MANCOM
and minority stockholders.

The SEC’s Ruling

On September 18, 2002, the SEC issued its Order42 denying the petition for suspension of payments, as
follows:

WHEREFORE, in view of the foregoing, the Commission hereby resolves to terminate the proceedings and
DENY the instant petition.

Accordingly, pursuant to Sec. 5-5 of the SEC’s Rules of Procedure on Corporate Recovery, which provides:

"Discharge of the Management Committee -- The Management Committee shall be discharged and
dissolved under the following circumstances:

a. Whenever the Commission, on motion or motu prop[r]io, has determined that the necessity for
the Management Committee no longer exists;

b. Upon the appointment of a liquidator under these Rules;

c. By agreement of the parties;

d. Upon termination of the proceedings.

Upon its discharge and dissolution, the Management Committee shall submit its final report and render
an accounting of its management within such reasonable time as the Commission may allow."

the Management Committee is hereby DISSOLVED. It is likewise ordered to:

(1) Make an inventory of the assets, funds and properties of the petitioner;

(2) Turn-over the aforementioned assets, funds and properties to the proper party(ies);

(3) Render an accounting of its management; and

(4) Submit its Final Report to the Commission.

The MANCOM is ordered to comply with the foregoing within a non-extendible period of thirty (30) days
from receipt of this Order. Relative to any compensation owing to the MANCOM, it is left to the
determination of the parties concerned.

No pronouncement as to costs.

SO ORDERED.43
The SEC declared that since its order declaring RUBY under a state of suspension of payments was issued
on December 20, 1983, the 180-day period provided in Sec. 4-9 of the Rules of Procedure on Corporate
Recovery had long lapsed. Being a remedial rule, said provision can be applied retroactively in this case.
The SEC also overruled the objections raised by the minority stockholders regarding the questionable
issuance of shares of stock by the majority stockholders and extension of RUBY’s corporate term, citing
the presumption of regularity in the act of a government entity which obtains upon the SEC’s approval of
RUBY’s amendment of articles of incorporation. It pointed out that Lim raised the issue only in the year
2000. Moreover, the SEC found that notwithstanding his allegations of fraud, Lim never proved the
illegality of the additional infusion of the capitalization by RUBY so as to warrant a finding that there was
indeed an unlawful act.44

Lim, in his personal capacity and in representation of the minority stockholders of RUBY, filed a petition
for review with prayer for a temporary restraining order and/or writ of preliminary injunction before the
CA (CA-G.R. SP No. 73195) assailing the SEC order dismissing the petition and dissolving the MANCOM.

Ruling of the CA

On May 26, 2004, the CA rendered its Decision,45 the dispositive portion of which states:

WHEREFORE, the Questioned Order dated 18 September 2002 issued by the Securities and Exchange
Commission in SEC Case No. 2556 entitled "In the Matter of the Petition for Suspension of Payments,
Ruby Industrial Corporation, Petitioner," is hereby SET ASIDE, and consequently:

(1) the infusion of additional capital made by the majority stockholders be declared null and void
and restoring the capital structure of Ruby to its original structure prior to the time the injunction
was issued, that is, majority stockholders – 59.828% and the minority stockholders – 40.172% of
the authorized capital stock of Ruby Industrial Corporation.

(2) the resolution of the majority stockholders, who represents only 59.828% of the outstanding
capital stock of Ruby, extending the corporate life of Ruby for another twenty-five (25) years
which was made during the supposed stockholders’ meeting held on 03 September 1996 be
declared null and void;

(3) implementing the invalidation of any and all illegal assignments of credit/purchase of credits
and the cancellation of mortgages connected therewith made by the creditors of Ruby Industrial
Corporation during the effectivity of the suspension of payments order including that of China
Bank and BPI and to deliver to MANCOM or the Liquidator all the original of the Deeds of
Assignments and the registered titles thereto and any other documents related thereto; and order
their unwinding and requiring the majority stockholders to account for all illegal assignments
(amounts, dates, interests, etc. and present the original documents supporting the same); and

(4) ordering the Securities and Exchange Commission to supervise the liquidation of Ruby
Industrial Corporation after the foregoing steps shall have been undertaken.

SO ORDERED.46
According to the CA, the SEC erred in not finding that the October 2, 1991 meeting held by RUBY’s board
of directors was illegal because the MANCOM was neither involved nor consulted in the resolution
approving the issuance of additional shares of RUBY.

The CA further noted that the October 2, 1991 board meeting was conducted on the basis of the
September 18, 1991 order of the SEC Hearing Panel approving the Revised BENHAR/RUBY Plan, which
plan was set aside under this Court’s January 20, 1998 Decision in G.R. Nos. 124185-87. The CA pointed
out that records confirmed the proposed infusion of additional capital for RUBY’s rehabilitation,
approved during said meeting, as implementing the Revised BENHAR/RUBY Plan. Necessarily then, such
capital infusion is covered by the final injunction against the implementation of the revised plan. It must
be recalled that this Court affirmed the CA’s ruling that the revised plan not only recognized the void
deeds of assignments entered into with some of RUBY’s creditors in violation of the CA’s decision in CA-
G.R. SP No. 18310, but also maintained a financing scheme which will just make the rehabilitation plan
more costly and create a worse situation for RUBY.

On the supposed delay of the minority stockholders in raising the issue of the validity of the infusion of
additional capital effected by the board of directors, the CA held that laches is inapplicable in this case. It
noted that Lim sought relief while the case is still pending before the SEC. If ever there was delay, the
same is not fatal to the cause of the minority stockholders.

The CA likewise faulted the SEC in relying on the presumption of regularity on the matter of the extension
of RUBY’s corporate term through the filing of amended articles of incorporation. In doing so, the CA
totally disregarded the evidence which rebutted said presumption, as demonstrated by Lim: (1) it was
the board of directors and not the stockholders which conducted the meeting without the approval of the
MANCOM; (2) there was no written waivers of the minority stockholders’ pre-emptive rights and thus it
was irregular to merely notify them of the board of directors’ meeting and ask them to exercise their
option; (3) there was an existing permanent injunction against any additional capital infusion on the
BENHAR/RUBY Plan, while the CA and this Court both rejected the Revised BENHAR/RUBY Plan; (4)
there was no General Information Sheet reports made to the SEC on the alleged capital infusion, as per
certification by the SEC; (5) the Certification stating the present percentage of majority shareholding,
dated December 21, 1993 and signed by Yu Kim Giang -- which was not sworn to before a Notary Public --
was supposedly filed in 1996 with the SEC but it does not bear a stamped date of receipt, and was only
attached in a 2000 motion long after the October 1991 board meeting; (6) said Certification was
contradicted by the SEC list of all stockholders of RUBY, in which the majority remained at 59.828% and
the minority shareholding at 40.172% as of October 27, 1991; (7) certain receipts for the amount of ₱1.7
million was presented by the majority stockholders only in the year 2000, long after Lim questioned the
inclusion of extension of corporate term in the Notice of Meeting when Lim filed before the CA a motion
to cite for contempt (CA-G.R. Nos. 32404, 32469 and 32483); and (8) this Court’s decisions in the cases
elevated to it had recognized the 40% stockholding of the minority. Upon the foregoing grounds, the CA
said that the SEC should have invalidated the resolution extending the corporate term of RUBY for
another twenty-five (25) years.

With the expiration of the RUBY’s corporate term, the CA ruled that it was error for the SEC in not
commencing liquidation proceedings. As to the dismissal of RUBY’s petition for suspension of payments,
the CA held that the SEC erred when it retroactively applied Sec. 4-9 of the Rules of Procedure on
Corporate Recovery. Such retroactive application of procedural rules admits of exceptions, as when it
would impair vested rights or cause injustice. In this case, the CA emphasized that the two decisions of
this Court still have to be implemented by the SEC, but to date the SEC has failed to unwound the illegal
assignments and order the assignees to surrender the Deeds of Assignment to the MANCOM.

On the issue of violation of the rule against forum shopping, the CA held that this is not applicable
because the parties in CA-G.R. SP No. 73169 (filed by MANCOM) and CA-G.R. SP No. 73195 (filed by Lim)
are not the same and they do not have the same interest. This issue was in fact already resolved in G.R.
Nos. 124185-87 wherein this Court, citing Ramos, Sr. v. Court of Appeals47 declared that private
respondents Lim, the unsecured creditors (ALFC) and MANCOM cannot be considered to have engaged in
forum shopping in filing separate petitions with the CA as each have distinct rights to protect.

The CA also found that the belated submission of the special power of attorney executed by the other
minority stockholders representing 40.172% of RUBY’s ownership has no bearing to the continuation of
the petition filed with the appellate court. Moreover, since the petition is in the nature of a derivative suit,
Lim clearly can file the same not only in representation of the minority stockholders but also in behalf of
the corporation itself which is the real party in interest. Thus, notwithstanding that Lim’s ownership in
RUBY comprises only 1.4% of the outstanding capital stock, as claimed by the majority stockholders, his
petition may not be dismissed on this ground.

The Consolidated Petitions

From the Decision of the CA, China Bank and the Majority Stockholder joined by RUBY, filed separate
petitions before this Court.

In G.R. No. 165887, petitioners Majority Stockholders and RUBY raised the following grounds for the
reversal of the assailed decision and the reinstatement of the SEC’s September 18, 2002 Order:

First Reason

THE COURT OF APPEALS ERRED – AND WHEN IT DID, IT ACTED CONTRARY TO LAW AND
PRECEDENTS – WHEN IT GAVE DUE COURSE TO, AND, THEREAFTER, SUSTAINED, A FORMALLY
AND SUBSTANTIALLY DEFECTIVE PETITION FOR REVIEW.

Second Reason

THE COURT OF APPEALS ERRED – AND WHEN IT DID, IT ACTED IN A MANNER AT WAR WITH
ORDERLY PROCEDURE AND APPLICABLE JURISPRUDENCE – WHEN IT REVERSED THE ORDER
OF DISMISSAL OF THE SECURITIES AND EXCHANGE COMMISSION AND SUBSTITUTED ITS
JUDGMENT FOR THAT OF THE LATTER IN THE DETERMINATION OF ISSUES WELL WITHIN THE
EXPERTISE OF THE COMMISSION.

Third Reason

THE COURT OF APPEALS ERRED – AND WHEN IT DID, IT ACTED IN GRAVE ABUSE OF ITS
DISCRETION AND, IN FACT, IN EXCESS OR LACK OF JURISDICTION -- WHEN IT SUSTAINED
COLLATERAL ATTACKS OF FINAL ADJUDICATIONS OF THE SECURITIES AND EXCHANGE
COMMISSION.48
On the other hand, petitioner China Bank in G.R. No. 165929 puts forth the argument that the principle of
stare decisis cannot be given effect in this case considering the prevailing factual circumstances, as to do
so would result in manifest injustice. It contends that the reason for the declaration of nullity of the Deed
of Assignment pronounced more than a decade ago, has become legally inefficacious by its obsolescence.
The creditors of RUBY have the right to recover their credit. But when the CA ordered the nullification of
China Bank’s Deed of Assignment in favor of Greener Investment Corporation, it practically dashed its
last hope for ever recovering its credit.

China Bank is of the view that the CA overstretched the import of this Court’s January 20, 1998 decision
in G.R. Nos. 124185-87 when the SEC was ordered to "conduct further proceedings," as to include the
unwinding of the alleged illegal assignment of credits. The rehabilitation of RUBY, if it still may be capable
of, is not made dependent on the unwinding by the SEC of the illegal assignments, as the same concerns
only the issue of who shall now become the creditors of RUBY, and does not alter the fact that RUBY has
hefty loan obligations and it has not enough cash flow to pay for the same.

Deploring the principal parties’ penchant for prolonged litigation resulting considerably in irreversible
losses to RUBY, China Bank maintains that from the report submitted by the MANCOM to the SEC, it can
be clearly seen that no attempt at rehabilitation whatsoever had been pursued. Given the current
situation, China Bank prays that the CA Decision be reversed and its Deed of Assignment in favor of
Greener Investment Corporation be recognized and given full legal effect.

In fine, main issues to be resolved are: (1) whether private respondents MANCOM and Lim engaged in
forum shopping when they filed separate petitions before the CA assailing the September 18, 2002 SEC
Order; (2) whether the defects in the certification of non-forum shopping submitted by Lim warrant the
dismissal of his petition before the CA; (3) whether the CA was correct in reversing the SEC’s order
dismissing the petition for suspension of payment.

Our Ruling

The petitions have no merit.

On the charge of forum shopping, we have already ruled on the matter in G.R. Nos. 124185-87. Thus:

We hold that private respondents are not guilty of forum-shopping. In Ramos, Sr. v. Court of Appeals, we
ruled:

"The private respondents can be considered to have engaged in forum shopping if all of them, acting as
one group, filed identical special civil actions in the Court of Appeals and in this Court. There must be
identity of parties or interests represented, rights asserted and relief sought in different tribunals. In the
case at bar, two groups of private respondents appear to have acted independently of each other when
they sought relief from the appellate court. Both groups sought relief from the same tribunal.

"It would not matter even if there are several divisions in the Court of Appeals. The adverse party can
always ask for the consolidation of the two cases. x x x"

In the case at bar, private respondents represent different groups with different interests – the minority
stockholders’ group, represented by private respondent Lim; the unsecured creditors group, Allied
Leasing & Finance Corporation; and the old management group. Each group has distinct rights to protect.
In line with our ruling in Ramos, the cases filed by private respondents should be consolidated. In fact,
BENHAR and RUBY did just that – in their urgent motions filed on December 1, 1993 and December 6,
1993, respectively, they prayed for the consolidation of the cases before the Court of Appeals.49

In the present case, no consolidation of CA-G.R. SP Nos. 73169 (filed by MANCOM) which was earlier
assigned to the Thirteenth Division and CA-G.R. SP No. 73195 (filed by Lim) decided by the Second
Division, took place. In their Comment filed before CA-G.R. SP No. 73169, the Majority Stockholders and
RUBY (private respondents therein) prayed for the dismissal of said case arguing that MANCOM, of which
Lim is a member, circumvented the proscription against forum shopping. The CA’s Thirteenth Division,
however, disagreed with private respondents and granted the motion to withdraw petition filed by
MANCOM which manifested that the Second Division in CA-G.R. SP No. 73195 by Decision dated May 26,
2004 had granted the reliefs similar to those prayed for in their petition, said decision being binding on
MANCOM which was also impleaded in said case (CA-G.R. SP No. 73195). The Thirteenth Division also
cited our pronouncement in G.R. Nos. 124185-87 to the effect that there was no violation on the rule on
forum shopping because MANCOM and Lim or the minority shareholders of RUBY represent different
interests.50

As to the alleged defects in the certificate of non-forum shopping submitted by Lim, we find no error
committed by the CA in holding that the belated submission of a special power of attorney executed in
Lim’s favor by the minority stockholders has no bearing to the continuation of the case as supported by
ample jurisprudence. To appreciate the liberal stance adopted by the CA, one must take into account the
previous history of the petitions for review before the CA involving the SEC September 18, 2002 Order. It
was actually the third time that Lim and/or MANCOM have challenged certain acts perpetrated by the
majority stockholders which are prejudicial to RUBY, such as the execution of deeds of assignment during
the effectivity of the suspension order in pursuit of two rehabilitation plans submitted by them together
with BENHAR. The assignment of RUBY’s credits to BENHAR gave the secured creditors undue advantage
over RUBY’s prime properties and put these assets beyond the reach of the unsecured creditors. Each
time they go to court, Lim and MANCOM essentially advance the interest of the corporation itself. They
have consistently taken the position that RUBY’s assets should be preserved for the equal benefit of all its
creditors, and vigorously resisted any attempt of the controlling stockholders to favor any or some of its
creditors by entering into questionable deals or financing schemes under two BENHAR/RUBY Plans.
Viewed in this light, the CA was therefore correct in recognizing Lim’s right to institute a stockholder’s
action in which the real party in interest is the corporation itself.

A derivative action is a suit by a shareholder to enforce a corporate cause of action.51 It is a remedy


designed by equity and has been the principal defense of the minority shareholders against abuses by the
majority.52 For this purpose, it is enough that a member or a minority of stockholders file a derivative suit
for and in behalf of a corporation.53 An individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever officials of the corporation refuse to sue or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as the nominal party, with the corporation
as the party in interest.54

Now, on the third and substantive issue concerning the SEC’s dismissal of RUBY’s petition for suspension
of payment.

The SEC based its action on Sec. 4-9 of the Rules of Procedure on Corporate Recovery,55 which provides:
SEC. 4-9. Period of Suspension Order. – The suspension order shall be effective for a period of sixty (60)
days from the date of its issuance. The order shall be automatically vacated upon the lapse of the sixty-
day period unless extended by the Commission. Upon motion, the Commission may grant an extension
thereof for a period of not more than sixty (60) days in each application if the Commission is satisfied
that the debtor and its officers have been acting in good faith and with due diligence, and that the debtor
would likely be able to make a viable rehabilitation plan. After the lapse of one hundred and eighty (180)
days from the issuance of the suspension order, no extension of the said order shall be granted by the
Commission if opposed in writing by a majority of any class of creditors. The Commission may grant an
extension beyond one hundred eighty (180) days only if it appears by convincing evidence that there is a
good chance for the successful rehabilitation of the debtor and the opposition thereto by the creditor
appears manifestly unreasonable.

In any event, the petition is deemed ipso facto denied and dismissed if no Rehabilitation Plan was
approved by the Commission upon the lapse of the order or the last extension thereof. In such case, the
debtor shall come under the dissolution and liquidation proceedings of Rule V of these Rules. (Emphasis
supplied.)

According to the SEC, even if the 180 days maximum period of suspension order is counted from the
finality of this Court’s decision in G.R. Nos. 124185-87 in December 1998, still this case had gone beyond
the period mandated in the Rules for a corporation under suspension of payment to have a rehabilitation
plan approved by the Commission.

While it is true that the Rules of Procedure on Corporate Recovery authorizes the dismissal of a petition
for suspension of payment where there is no rehabilitation plan approved within the maximum period of
the suspension order, it must be recalled that there was in fact not one, but two rehabilitation plans
(BENHAR/RUBY Plan and Revised BENHAR/RUBY Plan) submitted by the majority stockholders which
were approved by the SEC. The implementation of the first plan was enjoined when it was seriously
challenged in the courts by the minority stockholders through Lim. The second revised plan superseded
the first plan, but eventually nullified by the CA and the CA decision declaring it void was affirmed by this
Court in G.R. Nos. 124185-87. Given this factual milieu, the automatic application of the lifting of the
suspension order as interpreted by the SEC in its September 18, 2002 Order would be unfair and highly
prejudicial to the financially distressed corporation.

Moreover, records reveal that the delay in the proceedings after the case was set for hearing following
this Court’s final judgment in G.R. Nos. 124185-87, was not due to any fault or neglect on the part of
MANCOM or the minority stockholders. The idea propounded by the petitioners majority stockholders
that this case is about a minority in a corporation holding hostage the majority indefinitely by simple
assertion that the former’s rights have been transgressed by the latter is, downright misleading.

First, the SEC did not even mention in its September 18, 2002 Order that when this Court remanded to it
the case for further proceedings, there remained only the Alternative Plan of RUBY’s minority
stockholders which had earlier been forwarded to the SEC Hearing Panel. With the CA Decision setting
aside the SEC approval of the Revised BENHAR/RUBY Plan, as affirmed by this Court, it behooves on the
SEC to recognize the fact that the Alternative Plan was endorsed by 90% of the RUBY’s creditors who had
objected to the Revised BENHAR/RUBY Plan. Yet, not a single step was taken by the SEC to address those
findings and conclusions made by the CA and this Court on the highly disadvantageous and onerous
provisions of the Revised BENHAR/RUBY Plan.
Moreover, the SEC failed to act on motions filed by Lim and MANCOM to implement this Court’s January
20, 1998 Decision in G.R. Nos. 124185-87, by declaring all deeds of assignment with BENHAR and/or the
conduits of Henry Yu of no force and legal effect, which of course necessitates the surrender by the
concerned creditors of those void deeds of assignment. Petitioner China Bank dismisses it as unnecessary
and immaterial to the continued inability of RUBY to settle its long overdue debts. However, the CA said
that the foregoing acts should have been done by the SEC for proper documentation and orderly
settlement after proper accounting of the assignment transactions. The appellate court then concluded
that dismissal of the petition under Sec. 4-9 of the Rules of Procedure on Corporate Recovery would
impair the vested rights of the minority stockholders under this Court’s decision invalidating the
aforesaid deeds of assignment, thus:

We agree with the observations of the petition that if the illegal assignments not having been unwound
and the mortgages not canceled, the majority, their alter ego, and/or cohorts will claim to be secured
creditors and freely collect extra-judicially the obligations covered by the illegal assignments. Ruby has
very little money compared to the P200 Million probable liability to the illegal assignees as unilaterally
stated by Ruby without audit (previously merely totaled to P34 Million in 1998 as stated in the revised
rehabilitation plan). Foreclosure of the mortgages by the illegal assignees will follow; Ruby will lose all its
prime properties; there will be no assets left for unsecured creditors; and there will be no residual P600
Million assets to divide.56

Evidently, the minority stockholders and MANCOM had already foreseen the impossibility of
implementing a viable rehabilitation plan if the illegal assignments made by its creditors with BENHAR
and the majority stockholders, and subsequently, with conduits of RUBY or Henry Yu, are not properly
unwound and those directors responsible for the void transactions not required to make a full
accounting. Contrary to petitioner China Bank’s insinuation that the minority stockholders merely want
to prolong the litigation to the great prejudice and damage to RUBY’s creditors, MANCOM and Lim had
determined and moved for SEC-supervised liquidation proceedings as the more prudent course of action
for an orderly and equitable settlement of RUBY’s liabilities.

Records likewise revealed that the SEC chose to keep silent and failed to assist the MANCOM and
minority stockholders in their efforts to demand compliance from the majority stockholders or Yu Kim
Giang (who headed the first MANCOM) with the December 22, 1989 Order directing them to turn over
the cash, financial records and documents of RUBY, including certificates of title over RUBY’s real
properties, and render an accounting of all moneys received and payments made by RUBY. On January
18, 2002, the MANCOM even filed a Motion57 to require Yu Kim Giang to render report/accounting of
RUBY from 1983 to the 1st quarter of 1990, stating that despite a commitment from Mr. Giang, he has
seemingly delayed his compliance, hence frustrating the desire of MANCOM to submit a comprehensive
and complete report for the whole period of 1983 up to the present. To underscore the importance of
making the said records available for scrutiny of the SEC and MANCOM, Lim manifested before the SEC
that--

Indeed, the majority is actually unwilling (and not merely unable) to submit such records because these
will show, among others:

(1) The majority to minority ratio in the corporate ownership is 59.828% :40.172%;

(2) The actual amounts of the bank loans paid off by Benhar International[,] Inc. and/or Henry Yu
would be very low;
(3) The illegal payment of the bank loans and illegal assignments of the mortgages to
Benhar/Henry Yu are contrary to the Honorable Commission’s Order of 20 December 1983 for
suspension of payments;

(4) The earnings of the corporation from 1983 to 1989 amounted to millions and cannot be
accounted for by the majority and the first Mancom;

(5) The money may have been spent to pay off some of the loans to the bank but Benhar and
Henry Yu fraudulently claim credit therefor.58

It must be noted that MANCOM had rejected the two rehabilitation plans proposed by BENHAR and the
majority stockholders. In shifting the blame to the MANCOM and minority stockholders for the delay in
the approval of a viable rehabilitation plan, the SEC apparently overlooked that from the time the SEC
approved the Revised BENHAR/RUBY Plan and dissolved the MANCOM, the majority stockholders has
denied MANCOM access to corporate papers, documents evidencing the amounts actually paid to creditor
banks/assignors, financial statements and titles over RUBY’s real properties.

Although the SEC granted MANCOM and Lim’s request for a hearing and direct a representative from BPI
to bring all documents relative to the assignment of RUBY’s credit, said hearing did not materialize after
the majority stockholders proposed a compromise agreement with the minority stockholders. But as it
turned out, this development only caused further delay because the majority stockholders were unwilling
to turn over documents, funds and properties in their possession, and would neither make a full
accounting or disclosure of RUBY’s transactions, especially the actual amounts paid and rates of interest
on the loan assignments. In this state of things, the MANCOM and minority stockholders resolved that the
more reasonable and practical option is to move for a SEC-supervised liquidation proceedings.

The other ground invoked by Lim and MANCOM for the propriety of liquidation is the expiration of
RUBY’s corporate term. The SEC, however, held that the filing of the amendment of articles of
incorporation by RUBY in 1996 complied with all the legal requisites and hence the presumption of
regularity stands. Records show that the validity of the infusion of additional capital which resulted in the
alleged increase in the shareholdings of petitioners majority stockholders in October 1991 was
questioned by MANCOM and Lim even before the majority stockholders filed their motion to dismiss in
the year 2000.

A stock corporation is expressly granted the power to issue or sell stocks.59 The power to issue shares of
stock in a corporation is lodged in the board of directors and no stockholders’ meeting is required to
consider it because additional issuances of shares of stock does not need approval of the
stockholders.60 What is only required is the board resolution approving the additional issuance of shares.
The corporation shall also file the necessary application with the SEC to exempt these from the
registration requirements under the Revised Securities Act (now the Securities Regulation Code).

The new management committee created pursuant to SEC Order dated September 18, 1991 apparently
had no participation in the October 2, 1991 board resolution approving the issuance of additional shares.
The move was part of the board’s assertion of control over the management in RUBY following the
approval of the Revised BENHAR/RUBY Plan. The minority stockholders registered their objection
during the said meeting by asking the board to defer action as the SEC September 18, 1991 Order was
still on appeal with the SEC En Banc. When the SEC En Banc denied their appeal and motion for
reconsideration under its July 30, 1993 and October 15, 1993 orders, Lim, MANCOM and ALFC filed
petitions for review with the CA which set aside the said orders. As already mentioned, this Court
affirmed the CA ruling in G.R. Nos. 124185-87.

Contrary to the assertion of petitioners majority stockholders, our decision in G.R. Nos. 124185-87
nullified the deeds of assignment not solely on the ground of violation of the injunction orders issued by
the SEC and CA. As earlier mentioned, we affirmed the CA’s finding that the re-lending scheme under the
Revised BENHAR/RUBY Plan will not only make rehabilitation more costly for RUBY, but also worsen its
financial condition because of the mortgage of its assets to a new creditor. To better illumine this point,
we quote from the CA decision in CA-G.R. SP Nos. 32404, 32469 and 32483 comparing the provisions of
the rehabilitation proposals submitted by the majority stockholders (Revised BENHAR/RUBY Plan) and
the minority stockholders (Alternative Plan):

…there is no need for Benhar to act as financier, as Ruby itself can very well secure such credit
accommodation using its assets as collateral. Verily, Benhar’s pretext at magnanimity is deception of the
highest order considering that: (1) as embodied in the heading Sources and Uses of Funds in the Revised
Benhar/Ruby Plan, the ₱80-Million loan/credit facility to be extended by Benhar will be used to pay
₱60.437-Million loans of Ruby. Of the ₱60.437-Million, ₱34.068-Million will be paid to Benhar as payment
for the amounts it paid in consideration of the nullified assignments; (2) The Deed of Assignment of
Credit Facility will be executed by Benhar in favor of Ruby only upon payment of Ruby of such amount
already advanced by Benhar, i.e. the ₱34.068-Million credit assigned to Benhar by the seven (7) secured
creditors.

The Revised Benhar/Ruby Plan, in fact, gives Benhar undue preference on the matter of repayment.
Under the said plan, the creditors of Ruby will be paid in accordance with the following schedules:

"Secured ₱17.022M To be paid in cash with


Creditors 12% interest p.a.
China Banking
Corp.
BPI
Philippine Orient
Unsecured ₱ 9.347M To be paid in cash
Creditors Allied interest-f[r]ee
Leasing
Filcor Finance
Benhar ₱34.068M To be paid in cash
For having paid with interest charge
Ruby obligations
to 7 creditors
Trade/Other ₱2.871M Totalling ₱8.614M to be
Creditors (p.a. for 3 paid in 3- year
years) installment, interest-
free"

(Rollo, CA-G.R. SP No. 32404, p. 727)


Needless to state, the foregoing payment schedules as embodied in the said plan which gives Benhar
undue advantage over the other creditors goes against the very essence of rehabilitation, which requires
that no creditor should be preferred over the other. Indeed, a comparison of the salient features of the
Revised Benhar/Ruby Plan and the Alternative Plan will readily show just how stacked in favor of Benhar
are the provisions of the former plan:

1âwphi1
Benhar/Ruby Plan Alternative Plan

1. Benhar plays a major role. It 1. The original creditors are the


will be paid ₱34.068M out of ones recognized. The amount
₱60.437 M total amount due to payable is lower because
creditors but not explained as interests are not capitalized.
to how arrived at.

2. Benhar will not assign the 2. Direct credit of P80M loan


credit facility of ₱80M unless and will be borrowed from the
the ₱34.068M above stated is bank(s) like Allied, UCPB,
paid. Metrobank or Equitable Bank
or even China Bank.

3. The main assets are to be 3. Mortgaged


mortgaged to the creditor- to bank(s) directly.
assignor of Benhar and if the
illegal assignments are
recognized, then Benhar shall
have to be recognized as
mortgagee even when it is a
disqualified creditor and/or
mortgagee.

4. Start up cost ₱16,880 and 4. Plant B = ₱25,640


based on 1988 figures and
projections. Year IV estimated ₱40. M

Plant A = 22.40

Year V estimated ₱30. M

5. Rehabilitation only of Plant 5. Rehabilitation of both plants.


B.

6. Recognition of Benhar re- 6. None


lender/financier.
7. Because of the SEC Order he 7. Pilipinas Shell representative
got an MC seat and and the be retained.
Pilipinas Shell representative
of trade creditors was retained.

8. Credit facility is being 8. Credit facility directly to


assigned or re-lent by Benhar. Ruby.

9. Authorized Benhar to 9. None going to the minority


mortgage assets of Ruby itself. but to actual lenders.
Only remaining unencumbered
asset is one (1) real property.
Two (2) prime properties
already encumbered to
Assignor of Benhar.

10. Capacity of only one (1) 10. Capacity of two (2) plants
plant stated at 72% progressive to 75% or 80%
(overrated) with purchase of new
machines.

11. Projection figures based on 11. Minority RP can be updated


May, 1990 forex exchange rate. at current foreign exchange
Cost of importation and other rate.
local supplier currently cannot
be met.

12. Market and economic slow 12. Taken into consideration so


down not taken into will upgrade to meet
consideration. competition.

13. Discriminatory to creditors 13. Not discriminatory.


Benhar-capitalized with
undisclosed rates of interest.

14. Original Figures of illegally 14. Original figures will be used


assigned loans from FEBTC, original figures plans 12%
PCIB, PTC which totaled to interest only.
₱11,419,036.87 but now
entered as ₱21,378,002.71. The
interest is undisclosed and may
have been capitalized. Figures
for the other four (4) secured
lenders not available
individually. Total of seven (7)
secured lenders given as
₱34.068 M.

15. Interest is 28% with 15. Interest is 25% payable to


Benhar as conduit. the bank. This is still subject to
current market rates to be
negotiated by the minority.

16. Call on unissued shares for 15. Additional subscription of


₱11.814 M and if minority will ₱16M within 6 months by the
take up their pre-emptive minority stockholders.
rights and dilute minority
shareholdings.

x x x x61

Prior to the September 18, 1991 Order approving the Revised BENHAR/RUBY Plan and dissolving the
MANCOM, majority of RUBY’s creditors (90%) have already withdrawn their support to the revised plan
and manifested that they were only lately informed about another plan submitted by the minority
stockholders. Hence, these creditors wrote individual letters to the SEC Hearing Panel expressing their
agreement with and endorsement of the Alternative Plan of the minority stockholders.62

The Revised BENHAR/RUBY Plan had proposed the calling for subscription of unissued shares through a
Board Resolution from the ₱11.814 million of the ₱23.7 million ACS "in order to allow the long overdue
program of the REHAB Program." RUBY will offer for subscription 118,140 shares of stocks at par value
of ₱100 each to all stockholders on record, payable within 15 days, or within a reasonable period from
SEC approval of the revised plan.63 This was implemented by the October 2, 1991 meeting of the Board of
Directors led by Yu Kim Giang. The minority directors claimed they were not notified of said board
meeting. At any rate, the CA decision nullifying the Revised BENHAR/RUBY Plan was affirmed by this
Court on January 20, 1998. Hence, the legitimate concerns of the minority stockholders and MANCOM
who objected to the capital infusion which resulted in the dilution of their shareholdings, the expiration
of RUBY’s corporate term and the pending incidents on the void deeds of assignment of credit – all these
should have been duly considered and acted upon by the SEC when the case was remanded to it for
further proceedings. With the final rejection of the courts of the Revised BENHAR/RUBY Plan, it was
grave error for the SEC not to act decisively on the motions filed by the minority stockholders who have
maintained that the issuance of additional shares did not help improve the situation of RUBY except to
stifle the opposition coming from the MANCOM and minority stockholders by diluting the latter’s
shareholdings. Worse, the SEC ignored the evidence adduced by the minority stockholders indicating that
the correct amount of subscription of additional shares was not paid by the majority stockholders and
that SEC official records still reflect the 60%-40% percentage of ownership of RUBY.

The SEC remained indifferent to the reliefs sought by the minority stockholders, saying that the issue of
the validity of the additional capital infusion was belatedly raised. Even assuming the October 2, 1991
board meeting indeed took place, the SEC did nothing to ascertain whether indeed, as the minority
claimed: (1) the minority stockholders were not given notice as required and reasonable time to exercise
their pre-emptive rights; and (2) the capital infusion was not for the purpose of rehabilitation but a mere
ploy to divest the minority stockholders of their 40.172% shareholding and reduce it to a mere 25.25%.

The foregoing matters, along with the persistent refusal of the majority stockholders, led by Yu Kim
Giang, to give a full accounting of their transactions involving RUBY’s credits and properties, were
extensively argued by the minority stockholders in their opposition to the motions to dismiss/vacate
suspension order filed by the majority stockholders and BPI, as follows:

Their receipts only show supposed payment by the majority of a total of P1,759,150.00 out of the correct
amount of P7,068,079.92.00 (sic) (59.828% of P11.814 million required capital infusion under the MRP
and RRP) which should have been the amount paid by them under the RRP which requires full payment.
Thus, they sought to attain a 74.75% equity from a 59.828% original equity by playing more tricks and
stating that, under the general rule, they are supposedly allowed to pay-up only 25% of their
subscription. Unfortunately for them, in a rehabilitation supervised by the SEC and with an existing
Mancom, the general rule does not apply. What is stated in the rehabilitation plan must be strictly
followed provided the rehabilitation plan has been finally approved.

It must be remembered that in October 2 to 17, 1991, the amounts owed by Ruby to the banks who
illegally assigned their loans/credit was stated at P34 Million. Operations needed another P20 Million
plus. A capital infusion of P1,759,150.00 was so miniscule and clearly not for rehabilitation but was
intended to deprive the minority of its blocking position and property rights since distribution after
liquidation is based on the percentage of stockholdings. It is not only unfair, inequitable and not
meaningful – it is clearly dishonest.

xxxx

Assuming arguendo that the Board of Directors could act independently and this did not violate any
injunction, if the capital infusion was actually made, the Board of Directors had the duty to report this to
the Mancom because they would then fall under "existing assets" and would be part of the evaluation of
the proposed RRP, necessary for management and in the overall plan of rehabilitation. Nothing of this
kind happened and the belated proof cannot correct this situation.

xxxx

It is not true that there is benevolence on the part of the majority when they maneuvered the illegal
assignments and paid the banks. The loan obligations remain as accounts payable of Ruby and have even
been bloated to gigantic proportions and yet the SEC does not even ask them to account how much these
obligations are now and the majority should have reported these to the Mancom, but the majority has
not. These anomalous situations have been made to continue long enough and, we pray, should be
addressed by the Honorable Commission.

xxxx

…The SEC must understand that, being head of the first Mancom, YU KIM GIANG had the same obligation
to render a report to the SEC as the present Mancom now. To single out the present Mancom to do this
when a complete report cannot be made without these starting records is discriminatory, unfair and
violates the rules of accountancy. For example, where is the report on the illegal assignments and
mortgages complete with details? Where did the rentals for the period from 1983 to 1989 go? This
amounted to millions. There are no reports on these. By not requiring the first Mancom to Report, the
SEC is preventing the complete picture on the liabilities and finances of Ruby from being seen and is
sheltering Ruby and the majority.64 (Additional emphasis supplied.)

Pre-emptive right under Sec. 39 of the Corporation Code refers to the right of a stockholder of a stock
corporation to subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings. The right may be restricted or denied under the articles of incorporation, and
subject to certain exceptions and limitations. The stockholder must be given a reasonable time within
which to exercise their preemptive rights. Upon the expiration of said period, any stockholder who has
not exercised such right will be deemed to have waived it.65

The validity of issuance of additional shares may be questioned if done in breach of trust by the
controlling stockholders. Thus, even if the pre-emptive right does not exist, either because the issue
comes within the exceptions in Section 39 or because it is denied or limited in the articles of
incorporation, an issue of shares may still be objectionable if the directors acted in breach of trust and
their primary purpose is to perpetuate or shift control of the corporation, or to "freeze out" the minority
interest.66 In this case, the following relevant observations should have signaled greater circumspection
on the part of the SEC -- upon the third and last remand to it pursuant to our January 20, 1998 decision --
to demand transparency and accountability from the majority stockholders, in view of the illegal
assignments and objectionable features of the Revised BENHAR/RUBY Plan, as found by the CA and as
affirmed by this Court:

There can be no gainsaying the well-established rule in corporate practice and procedure that the will of
the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted
by-laws not proscribed by law. It is, however, equally true that other stockholders are afforded the right
to intervene especially during critical periods in the life of a corporation like reorganization, or in this
case, suspension of payments, more so, when the majority seek to impose their will and through
fraudulent means, attempt to siphon off Ruby’s valuable assets to the great prejudice of Ruby itself, as
well as the minority stockholders and the unsecured creditors.

Certainly, the minority stockholders and the unsecured creditors are given some measure of protection
by the law from the abuses and impositions of the majority, more so in this case, considering the give-
away signs of private respondents’ perfidy strewn all over the factual landscape. Indeed, equity cannot
deprive the minority of a remedy against the abuses of the majority, and the present action has been
instituted precisely for the purpose of protecting the true and legitimate interests of Ruby against the
Majority Stockholders. On this score, the Supreme Court, has ruled that:

"Generally speaking, the voice of the majority of the stockholders is the law of the corporation, but there
are exceptions to this rule. There must necessarily be a limit upon the power of the majority. Without
such a limit the will of the majority will be absolute and irresistible and might easily degenerate into
absolute tyranny. x x x"67 (Additional emphasis supplied.)

Lamentably, the SEC refused to heed the plea of the minority stockholders and MANCOM for the SEC to
order RUBY to commence liquidation proceedings, which is allowed under Sec. 4-9 of the Rules on
Corporate Recovery. Under the circumstances, liquidation was the only hope of the minority stockholders
for effecting an orderly and equitable settlement of RUBY’s obligations, and compelling the majority
stockholders to account for all funds, properties and documents in their possession, and make full
disclosure on the nullified credit assignments. Oblivious to these pending incidents so crucial to the
protection of the interest of the majority of creditors and minority shareholders, the SEC simply stated
that in the interim, RUBY’s corporate term was validly extended, as if such extension would provide the
solution to RUBY’s myriad problems.

Extension of corporate term requires the vote of 2/3 of the outstanding capital stock in a stockholders’
meeting called for the purpose.68 The actual percentage of shareholdings in RUBY as of September 3,
1996 -- when the majority stockholders allegedly ratified the board resolution approving the extension of
RUBY’s corporate life to another 25 years – was seriously disputed by the minority stockholders, and we
find the evidence of compliance with the notice and quorum requirements submitted by the majority
stockholders insufficient and doubtful. Consequently, the SEC had no basis for its ruling denying the
motion of the minority stockholders to declare as without force and effect the extension of RUBY’s
corporate existence.

Liquidation, or the settlement of the affairs of the corporation, consists of adjusting the debts and claims,
that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and
the payment of its just debts.69 It involves the winding up of the affairs of the corporation, which means
the collection of all assets, the payment of all its creditors, and the distribution of the remaining assets, if
any, among the stockholders thereof in accordance with their contracts, or if there be no special contract,
on the basis of their respective interests.70

Section 122 of the Corporation Code, which is applicable to the present case, provides:

SEC. 122. Corporate liquidation. -- Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it
and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, said corporation is authorized and empowered to convey all of its
property to trustees for the benefit of stockholders, members, creditors, and other persons in interest.
From and after any such conveyance by the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all interests which the corporation had in the
property terminates, the legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.

Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or
member who is unknown or cannot be found shall be escheated to the city or municipality where such
assets are located.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute
any of its assets or property except upon lawful dissolution and after payment of all its debts and
liabilities.

Since the corporate life of RUBY as stated in its articles of incorporation expired, without a valid
extension having been effected, it was deemed dissolved by such expiration without need of further
action on the part of the corporation or the State.71 With greater reason then should liquidation ensue
considering that the last paragraph of Sec. 4-9 of the Rules of Procedure on Corporate Recovery mandates
the SEC to order the dissolution and liquidation proceedings under Rule VI. Sec. 6-1, Rule VI likewise
authorizes the SEC on motion or motu proprio, or upon recommendation of the management committee,
to order dissolution of the debtor corporation and the liquidation of its remaining assets, appointing a
Liquidator for the purpose, if "the continuance in business of the debtor is no longer feasible or profitable
or no longer works to the best interest of the stockholders, parties-litigants, creditors, or the general
public."

It cannot be denied that with the current divisiveness, distrust and antagonism between the majority and
minority stockholders, the long agony and extreme prejudice caused by numerous litigations to the
creditors, and the bleak prospects for business recovery in the light of problems with the local
government which are implementing more restrictions and anti-pollution measures that practically
banned the operation of RUBY’s glass plant – liquidation becomes the only viable course for RUBY to
stave off any further losses and dissipation of its assets. Liquidation would also ensure an orderly and
equitable settlement of all creditors of RUBY, both secured and unsecured.

The SEC’s utter disregard of the rights of the minority in applying the provisions of the Rules of
Procedure on Corporate Recovery is inconsistent with the policy of liberal construction of the said rules
"to assist the parties in obtaining a just, expeditious and inexpensive settlement of cases. 72 Petitioners
majority stockholders, however, assert that the findings and conclusions of the SEC on the matter of the
dismissal of RUBY’s petition are binding and conclusive upon the CA and this Court. They contend that
reviewing courts are not supposed to substitute their judgment for those made by administrative bodies
specifically clothed with authority to pass upon matters over which they have acquired expertise.73 Given
our foregoing findings clearly showing that the SEC acted arbitrarily and committed patent errors and
grave abuse of discretion, this case falls under the exception to the general rule.

As we held in Ruby Industrial Corporation v. Court of Appeals:

The settled doctrine is that factual findings of an administrative agency are accorded respect and, at
times, finality for they have acquired the expertise inasmuch as their jurisdiction is confined to specific
matters. Nonetheless, these doctrines do not apply when the board or official has gone beyond his
statutory authority, exercised unconstitutional powers or clearly acted arbitrarily and without regard to
his duty or with grave abuse of discretion. In Leongson vs. Court of Appeals, we held: "once the actuation
of the administrative official or administrative board or agency is tainted by a failure to abide by the
command of the law, then it is incumbent on the courts of justice to set matters right, with this Tribunal
having the last say on the matter."74

Petitioners majority stockholders further insist that the minority stockholders were mistaken when they
contended that the rehabilitation of RUBY is dependent on the unwinding by the SEC of the illegal
assignments and mortgages. They assert that aside from the fact that the SEC had nothing to unwind
because the alleged illegal assignments and mortgages were already declared null and void, the said
assignments and mortgages will not affect the rehabilitation of Ruby; the same affecting only the issue of
how, as to who will be its creditors.

Such contention is untenable and contrary to our previous ruling in G.R. Nos. 124185-87. With the
nullification of the deeds of assignments of credit executed by some of Ruby’s secured creditors in favor
of BENHAR, it logically follows that the assignors or the original bank creditors remain as the creditors on
record of RUBY. We have noted that BENHAR, which is controlled by the family of Henry Yu who is also a
director and stockholder of RUBY, was not listed as one of RUBY’s creditors at the time RUBY filed the
petition for suspension of payment. Petitioners majority stockholders’ insinuation that RUBY’s credits
may have been assigned to third parties, if not referring to BENHAR or its conduits, implies two things:
either the assignments declared void by this Court’s January 20, 1998 decision continues to be recognized
by the majority stockholders, in violation of the said decision, or other third parties in connivance with
BENHAR and/or the controlling stockholders had subsequently entered the picture, without approval of
the SEC and while the SEC December 20, 1983 Order enjoining the disposition of RUBY’s properties was
in force.

The majority stockholders’ eagerness to have the suspension order lifted or vacated by the SEC without
any order for its liquidation evinces a total disregard of the mandate of Sec. 4-9 of the Rules of Procedure
on Corporate Recovery, and their obvious lack of any intent to render an accounting of all funds,
properties and details of the unlawful assignment transactions to the prejudice of RUBY, minority
stockholders and the majority of RUBY’s creditors. The majority stockholders and BENHAR’s conduits
must not be allowed to evade the duty to make such full disclosure and account any money due to RUBY
to enable the latter to effect a fair, orderly and equitable settlement of all its obligations, as well as
distribution of any remaining assets after paying all its debtors.

In fine, no error was committed by the CA when it set aside the September 18, 2002 Order of the SEC and
declared the nullity of the acts of majority stockholders in implementing capital infusion through
issuance of additional shares in October 1991, the board resolution approving the extension of RUBY’s
corporate term for another 25 years, and any illegal assignment of credit executed by RUBY’s creditors in
favor of third parties and/or conduits of the controlling stockholders. The CA likewise correctly ordered
the delivery of all documents relative to the said assignment of credits to the MANCOM or the Liquidator,
the unwinding of these void deeds of assignment, and their full accounting by the majority stockholders.

The petitioners majority stockholders and China Bank cannot be permitted to raise any issue again
regarding the validity of any assignment of credit made during the effectivity of the suspension order and
before the finality of the September 18, 2002 Order lifting the same. While China Bank is not precluded
from questioning the validity of the December 20, 1983 suspension order on the basis of res judicata, it is,
however, barred from doing so by the principle of law of the case. We have held that when the validity of
an interlocutory order has already been passed upon on appeal, the Decision of the Court on appeal
becomes the law of the case between the same parties. Law of the case has been defined as "the opinion
delivered on a former appeal. More specifically, it means that whatever is once irrevocably established as
the controlling legal rule of decision between the same parties in the same case continues to be the law of
the case, whether correct on general principles or not, so long as the facts on which such decision was
predicated continue to be the facts of the case before the court."75

The unwinding process of all such illegal assignment of RUBY’s credits is critical and necessary, in
keeping with good faith and as a matter of fairness and justice to all parties affected, particularly the
unsecured creditors who stands to suffer most if left with nothing of the assets of RUBY, and the minority
stockholders who waged legal battles to defend the interest of RUBY and protect the rights of the
minority from the abuses of the controlling stockholders. As correctly stated by the CA:

Liquidation is imperative because the unsecured creditor must negotiate the amount of the imputable
interest rate on its long unpaid credit, the decision on which assets are to be sold to liquidate the illegally
assigned credits must be made, the other secured credits and the trade credits must be determined, and
most importantly, the restoration of the 40.172% minority percentage of ownership must be done. 76
However, we do not agree that it is the SEC which has the authority to supervise RUBY’s liquidation.

In the case of Union Bank of the Philippines v. Concepcion,77 the Court is presented with the issue of
whether the SEC had jurisdiction to proceed with insolvency proceedings after it was shown that the
debtor corporation can no longer be rehabilitated. We held that although jurisdiction over a petition to
declare a corporation in a state of insolvency strictly lies with regular courts, the SEC possessed ample
power under P.D. No. 902-A, as amended, to declare a corporation insolvent as an incident of and in
continuation of its already acquired jurisdiction over the petition to be declared in a state of suspension
of payments in the two instances provided in Sec. 5 (d)78 thereof.

Subsequently, in Consuelo Metal Corporation v. Planters Development Bank79 the Court was again
confronted with the same issue. The original petition filed by the debtor corporation was for suspension
of payment, rehabilitation and appointment of a rehabilitation receiver or management committee.
Finding the petition sufficient in form and substance, the SEC issued an order suspending immediately all
actions for claims against the petitioner pending before any court, tribunal or body until further orders
from the court. It also created a management committee to undertake petitioner’s rehabilitation. Four
years later, upon the management committee’s recommendation, the SEC issued an omnibus order
directing the dissolution and liquidation of the petitioner, and that the proceedings on and
implementation of the order of liquidation be commenced at the Regional Trial Court to which the case
was transferred. However, the trial court refused to act on the motion filed by the petitioner who
requested for the issuance of a TRO against the extrajudicial foreclosure initiated by one of its creditors.
The trial court ruled that since the SEC had already terminated and decided on the merits the petition for
suspension of payment, the trial court no longer had legal basis to act on petitioner’s motion. It likewise
denied the motion for reconsideration stating that petition for suspension of payment could not be
converted into a petition for dissolution and liquidation because they covered different subject matters
and were governed by different rules. Petitioner’s remedy thus was to file a new petition for dissolution
and liquidation either with the SEC or the trial court.

When the case was elevated to the CA, the petition was dismissed affirming that under Sec. 121 of
the Corporation Code, the SEC had jurisdiction to hear the petition for dissolution and liquidation. On
motion for reconsideration, the CA remanded the case to the SEC for proceedings under Sec. 121 of
the Corporation Code. The CA denied the motion for reconsideration filed by the respondent creditor,
who then filed a petition for review with this Court.1âwphi1

We ruled that the SEC observed the correct procedure under the present law, in cases where it merely
retained jurisdiction over pending cases for suspension of payments/rehabilitation, thus:

Republic Act No. 8799 (RA 8799) transferred to the appropriate regional trial courts the SEC’s
jurisdiction defined under Section 5(d) of Presidential Decree No. 902-A. Section 5.2 of RA 8799 provides:

The Commission’s jurisdiction over all cases enumerated under Sec. 5 of Presidential Decree No. 902-A is
hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided,
That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches
that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending
cases involving intra-corporate disputes submitted for final resolution which should be resolved within
one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending
suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally
disposed. (Emphasis supplied)
The SEC assumed jurisdiction over CMC’s petition for suspension of payment and issued a suspension
order on 2 April 1996 after it found CMC’s petition to be sufficient in form and substance. While CMC’s
petition was still pending with the SEC as of 30 June 2000, it was finally disposed of on 29 November
2000 when the SEC issued its Omnibus Order directing the dissolution of CMC and the transfer of the
liquidation proceedings before the appropriate trial court. The SEC finally disposed of CMC’s petition for
suspension of payment when it determined that CMC could no longer be successfully rehabilitated.

However, the SEC’s jurisdiction does not extend to the liquidation of a corporation. While the SEC has
jurisdiction to order the dissolution of a corporation, jurisdiction over the liquidation of the corporation
now pertains to the appropriate regional trial courts. This is the reason why the SEC, in its 29 November
2000 Omnibus Order, directed that "the proceedings on and implementation of the order of liquidation
be commenced at the Regional Trial Court to which this case shall be transferred." This is the correct
procedure because the liquidation of a corporation requires the settlement of claims for and against the
corporation, which clearly falls under the jurisdiction of the regular courts. The trial court is in the best
position to convene all the creditors of the corporation, ascertain their claims, and determine their
preferences.80 (Additional emphasis supplied.)

In view of the foregoing, the SEC should now be directed to transfer this case to the proper RTC which
shall supervise the liquidation proceedings under Sec. 122 of the Corporation Code. Under Sec. 6 (d) of
P.D. 902-A, the SEC is empowered, on the basis of the findings and recommendations of the management
committee or rehabilitation receiver, or on its own findings, to determine that the continuance in
business of a debtor corporation under suspension of payment or rehabilitation would not be feasible or
profitable nor work to the best interest of the stockholders, parties-litigants, creditors, or the general
public, order the dissolution of such corporation and its remaining assets liquidated accordingly. As
mentioned earlier, the procedure is governed by Rule VI of the SEC Rules of Procedure on Corporate
Recovery.

However, R.A. No. 1014281 otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA) of
2010, now provides for court proceedings in the rehabilitation or liquidation of debtors, both juridical
and natural persons, in a manner that will "ensure or maintain certainty and predictability in commercial
affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and
respect priority of claims, and ensure equitable treatment of creditors who are similarly situated."
Considering that this case was still pending when the new law took effect last year, the RTC to which this
case will be transferred shall be guided by Sec. 146 of said law, which states:

SEC. 146. Application to Pending Insolvency, Suspension of Payments and Rehabilitation Cases. – This Act
shall govern all petitions filed after it has taken effect. All further proceedings in insolvency, suspension
of payments and rehabilitation cases then pending, except to the extent that in opinion of the court their
application would not be feasible or would work injustice, in which event the procedures set forth in
prior laws and regulations shall apply.

WHEREFORE, the petitions for review on certiorari are DENIED. The Decision dated May 26, 2004 and
Resolution dated November 4, 2004 of the Court of Appeals in CA-G.R. SP No. 73195 are hereby
AFFIRMED with MODIFICATION in that the Securities and Exchange Commission is hereby ordered to
TRANSFER SEC Case No. 2556 to the appropriate Regional Trial Court which is hereby DIRECTED to
supervise the liquidation of Ruby Industrial Corporation under the provisions of R.A. No. 10142.

With costs against the petitioners.


SO ORDERED.

FIRST DIVISION

G.R. No. 150976 October 18, 2004

CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES, XERXES NAVARRO, MARIA ANTONIA
TEMPLO and MEDICAL CENTER PARAÑAQUE, INC., petitioners,
vs.
ANGELES BALINGHASAY, RENATO BERNABE, ALODIA DEL ROSARIO, ROMEO FUNTILA, TERESITA
GAYANILO, RUSTICO JIMENEZ, ARACELI** JO, ESMERALDA MEDINA, CECILIA MONTALBAN,
VIRGILIO OBLEPIAS, CARMENCITA PARRENO, CESAR REYES, REYNALDO SAVET, SERAPIO TACCAD,
VICENTE VALDEZ, SALVACION VILLAMORA, and HUMBERTO VILLAREAL, respondents.

DECISION

QUISUMBING, J.:

For review on certiorari is the Partial Judgment1 dated November 26, 2001 in Civil Case No. 01-0140, of
the Regional Trial Court (RTC) of Parañaque City, Branch 258. The trial court declared the February 9,
2001, election of the board of directors of the Medical Center Parañaque, Inc. (MCPI) valid. The Partial
Judgment dismissed petitioners’ first cause of action, specifically, to annul said election for depriving
petitioners their voting rights and to be voted on as members of the board.

The facts, as culled from records, are as follows:

Petitioners and the respondents are stockholders of MCPI, with the former holding Class "B"
shares and the latter owning Class "A" shares.

MCPI is a domestic corporation with offices at Dr. A. Santos Avenue, Sucat, Parañaque City. It was
organized sometime in September 1977. At the time of its incorporation, Act No. 1459, the old
Corporation Law was still in force and effect. Article VII of MCPI’s original Articles of Incorporation, as
approved by the Securities and Exchange Commission (SEC) on October 26, 1977, reads as follows:

SEVENTH. That the authorized capital stock of the corporation is TWO MILLION (₱2,000,000.00)
PESOS, Philippine Currency, divided into TWO THOUSAND (2,000) SHARES at a par value of ₱100
each share, whereby the ONE THOUSAND SHARES issued to, and subscribed by, the incorporating
stockholders shall be classified as Class A shares while the other ONE THOUSAND unissued shares
shall be considered as Class B shares. Only holders of Class A shares can have the right to vote and
the right to be elected as directors or as corporate officers.2 (Stress supplied)

On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was amended, to read thus:

SEVENTH. That the authorized capital stock of the corporation is FIVE MILLION (₱5,000,000.00)
PESOS, divided as follows:

CLASS NO. OF SHARES PAR VALUE


"A" 1,000 ₱1,000.00
"B" 4,000 ₱1,000.00

Only holders of Class A shares have the right to vote and the right to be elected as directors or as
corporate officers.3 (Emphasis supplied)

The foregoing amendment was approved by the SEC on June 7, 1983. While the amendment granted the
right to vote and to be elected as directors or corporate officers only to holders of Class "A" shares,
holders of Class "B" stocks were granted the same rights and privileges as holders of Class "A" stocks with
respect to the payment of dividends.

On September 9, 1992, Article VII was again amended to provide as follows:

SEVENTH: That the authorized capital stock of the corporation is THIRTY TWO MILLION PESOS
(P32,000,000.00) divided as follows:

CLASS NO. OF SHARES PAR VALUE


"A" 1,000 ₱1,000.00
"B" 31,000 1,000.00

Except when otherwise provided by law, only holders of Class "A" shares have the right to vote
and the right to be elected as directors or as corporate officers4 (Stress and underscoring
supplied).

The SEC approved the foregoing amendment on September 22, 1993.

On February 9, 2001, the shareholders of MCPI held their annual stockholders’ meeting and election for
directors. During the course of the proceedings, respondent Rustico Jimenez, citing Article VII, as
amended, and notwithstanding MCPI’s history, declared over the objections of herein petitioners, that no
Class "B" shareholder was qualified to run or be voted upon as a director. In the past, MCPI had seen
holders of Class "B" shares voted for and serve as members of the corporate board and some Class "B"
share owners were in fact nominated for election as board members. Nonetheless, Jimenez went on to
announce that the candidates holding Class "A" shares were the winners of all seats in the corporate
board. The petitioners protested, claiming that Article VII was null and void for depriving them, as Class
"B" shareholders, of their right to vote and to be voted upon, in violation of the Corporation Code (Batas
Pambansa Blg. 68), as amended.

On March 22, 2001, after their protest was given short shrift, herein petitioners filed a Complaint for
Injunction, Accounting and Damages, docketed as Civil Case No. CV-01-0140 before the RTC of Parañaque
City, Branch 258. Said complaint was founded on two (2) principal causes of action, namely:

a. Annulment of the declaration of directors of the MCPI made during the February 9, 2001 Annual
Stockholders’ Meeting, and for the conduct of an election whereat all stockholders, irrespective of
the classification of the shares they hold, should be afforded their right to vote and be voted for;
and

b. Stockholders’ derivative suit challenging the validity of a contract entered into by the Board of
Directors of MCPI for the operation of the ultrasound unit.5
Subsequently, the complaint was amended to implead MCPI as party-plaintiff for purposes only of the
second cause of action.

Before the trial court, the herein petitioners alleged that they were deprived of their right to vote and to
be voted on as directors at the annual stockholders’ meeting held on February 9, 2001, because
respondents had erroneously relied on Article VII of the Articles of Incorporation of MCPI, despite Article
VII being contrary to the Corporation Code, thus null and void. Additionally, respondents were in
estoppel, because in the past, petitioners were allowed to vote and to be elected as members of the board.
They further claimed that the privilege granted to the Class "A" shareholders was more in the nature of a
right granted to founder’s shares.

In their Answer, the respondents averred that the provisions of Article VII clearly and categorically state
that only holders of Class "A" shares have the exclusive right to vote and be elected as directors and
officers of the corporation. They denied that the exclusivity was intended only as a privilege granted to
founder’s shares, as no such proviso is found in the Articles of Incorporation. The respondents further
claimed that the exclusivity of the right granted to Class "A" holders cannot be defeated or impaired by
any subsequent legislative enactment, e.g. the New Corporation Code, as the Articles of Incorporation is
an intra-corporate contract between the corporation and its members; between the corporation and its
stockholders; and among the stockholders. They submit that to allow Class "B" shareholders to vote and
be elected as directors would constitute a violation of MCPI’s franchise or charter as granted by the State.

At the pre-trial, the trial court ruled that a partial judgment could be rendered on the first cause of action
and required the parties to submit their respective position papers or memoranda.

On November 26, 2001, the RTC rendered the Partial Judgment, the dispositive portion of which reads:

WHEREFORE, viewed in the light of the foregoing, the election held on February 9, 2001 is VALID
as the holders of CLASS "B" shares are not entitled to vote and be voted for and this case based on
the First Cause of Action is DISMISSED.

SO ORDERED.6

In finding for the respondents, the trial court ruled that corporations had the power to classify their
shares of stocks, such as "voting and non-voting" shares, conformably with Section 67 of the Corporation
Code of the Philippines. It pointed out that Article VII of both the original and amended Articles of
Incorporation clearly provided that only Class "A" shareholders could vote and be voted for to the
exclusion of Class "B" shareholders, the exception being in instances provided by law, such as those
enumerated in Section 6, paragraph 6 of the Corporation Code. The RTC found merit in the respondents’
theory that the Articles of Incorporation, which defines the rights and limitations of all its shareholders, is
a contract between MCPI and its shareholders. It is thus the law between the parties and should be
strictly enforced as to them. It brushed aside the petitioners’ claim that the Class "A" shareholders were
in estoppel, as the election of Class "B" shareholders to the corporate board may be deemed as a mere act
of benevolence on the part of the officers. Finally, the court brushed aside the "founder’s shares" theory
of the petitioners for lack of factual basis.

Hence, this petition submitting the sole legal issue of whether or not the Court a quo, in rendering the
Partial Judgment dated November 26, 2001, has decided a question of substance in a way not in accord
with law and jurisprudence considering that:
1. Under the Corporation Code, the exclusive voting right and right to be voted granted by the
Articles of Incorporation of the MCPI to Class A shareholders is null and void, or already
extinguished;

2. Hence, the declaration of directors made during the February 9, 2001 Annual Stockholders’
Meeting on the basis of the purported exclusive voting rights is null and void for having been done
without the benefit of an election and in violation of the rights of plaintiffs and Class B
shareholders; and

3. Perforce, another election should be conducted to elect the directors of the MCPI, this time
affording the holders of Class B shares full voting right and the right to be voted.8

The issue for our resolution is whether or not holders of Class "B" shares of the MCPI may be deprived of
the right to vote and be voted for as directors in MCPI.

Before us, petitioners assert that Article VII of the Articles of Incorporation of MCPI, which denied them
voting rights, is null and void for being contrary to Section 6 of the Corporation Code. They point out that
Section 6 prohibits the deprivation of voting rights except as to preferred and redeemable shares only.
Hence, under the present law on corporations, all shareholders, regardless of classification, other than
holders of preferred or redeemable shares, are entitled to vote and to be elected as corporate directors or
officers. Since the Class "B" shareholders are not classified as holders of either preferred or redeemable
shares, then it necessarily follows that they are entitled to vote and to be voted for as directors or officers.

The respondents, in turn, maintain that the grant of exclusive voting rights to Class "A" shares is clearly
provided in the Articles of Incorporation and is in accord with Section 59 of the Corporation Law (Act No.
1459), which was the prevailing law when MCPI was incorporated in 1977. They likewise submit that as
the Articles of Incorporation of MCPI is in the nature of a contract between the corporation and its
shareholders and Section 6 of the Corporation Code could not retroactively apply to it without violating
the non-impairment clause10 of the Constitution.

We find merit in the petition.

When Article VII of the Articles of Incorporation of MCPI was amended in 1992, the phrase "except when
otherwise provided by law" was inserted in the provision governing the grant of voting powers to Class
"A" shareholders. This particular amendment is relevant for it speaks of a law providing for exceptions to
the exclusive grant of voting rights to Class "A" stockholders. Which law was the amendment referring to?
The determination of which law to apply is necessary. There are two laws being cited and relied upon by
the parties in this case. In this instance, the law in force at the time of the 1992 amendment was the
Corporation Code (B.P. Blg. 68), not the Corporation Law (Act No. 1459), which had been repealed by
then.

We find and so hold that the law referred to in the amendment to Article VII refers to the Corporation
Code and no other law. At the time of the incorporation of MCPI in 1977, the right of a corporation to
classify its shares of stock was sanctioned by Section 5 of Act No. 1459. The law repealing Act No. 1459,
B.P. Blg. 68, retained the same grant of right of classification of stock shares to corporations, but with a
significant change. Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting rights
were explicitly provided for, such that "no share may be deprived of voting rights except those classified
and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code" and that
"there shall always be a class or series of shares which have complete voting rights." Section 6 of the
Corporation Code being deemed written into Article VII of the Articles of Incorporation of MCPI, it
necessarily follows that unless Class "B" shares of MCPI stocks are clearly categorized to be "preferred"
or "redeemable" shares, the holders of said Class "B" shares may not be deprived of their voting rights.
Note that there is nothing in the Articles of Incorporation nor an iota of evidence on record to show that
Class "B" shares were categorized as either "preferred" or "redeemable" shares. The only possible
conclusion is that Class "B" shares fall under neither category and thus, under the law, are allowed to
exercise voting rights.

One of the rights of a stockholder is the right to participate in the control and management of the
corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to the
ownership of corporate stock, and as such is a property right. The stockholder cannot be deprived of the
right to vote his stock nor may the right be essentially impaired, either by the legislature or by the
corporation, without his consent, through amending the charter, or the by-laws.11

Neither do we find merit in respondents’ position that Section 6 of the Corporation Code cannot apply to
MCPI without running afoul of the non-impairment clause of the Bill of Rights. Section 14812 of the
Corporation Code expressly provides that it shall apply to corporations in existence at the time of the
effectivity of the Code. Hence, the non-impairment clause is inapplicable in this instance. When Article VII
of the Articles of Incorporation of MCPI were amended in 1992, the board of directors and stockholders
must have been aware of Section 6 of the Corporation Code and intended that Article VII be construed in
harmony with the Code, which was then already in force and effect. Since Section 6 of the Corporation
Code expressly prohibits the deprivation of voting rights, except as to "preferred" and "redeemable"
shares, then Article VII of the Articles of Incorporation cannot be construed as granting exclusive voting
rights to Class "A" shareholders, to the prejudice of Class "B" shareholders, without running afoul of the
letter and spirit of the Corporation Code.

The respondents then take the tack that the phrase "except when otherwise provided by law" found in
the amended Articles is only a handwritten insertion and could have been inserted by anybody and that
no board resolution was ever passed authorizing or approving said amendment.

Said contention is not for this Court to pass upon, involving as it does a factual question, which is not
proper in this petition. In an appeal via certiorari, only questions of law may be reviewed.13 Besides,
respondents did not adduce persuasive evidence, but only bare allegations, to support their suspicion.
The presumption that in the amendment process, the ordinary course of business has been
followed14 and that official duty has been regularly performed15on the part of the SEC, applies in this case.

WHEREFORE, the petition is GRANTED. The Partial Judgment dated November 26, 2001 of the Regional
Trial Court of Parañaque City, Branch 258, in Civil Case No. 01-0140 is REVERSED AND SET ASIDE. No
pronouncement as to costs.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC
G.R. No. L-21601 December 17, 1966

NIELSON & COMPANY, INC., plaintiff-appellant,


vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.

W. H. Quasha and Associates for plaintiff-appellant.


Ponce Enrile, Siguion-Reyna, Montecillo and Belo for defendant-appellee.

ZALDIVAR, J.:

On February 6, 1958, plaintiff brought this action against defendant before the Court of First Instance of
Manila to recover certain sums of money representing damages allegedly suffered by the former in view
of the refusal of the latter to comply with the terms of a management contract entered into between them
on January 30, 1937, including attorney's fees and costs.

Defendant in its answer denied the material allegations of the complaint and set up certain special
defenses, among them, prescription and laches, as bars against the institution of the present action.

After trial, during which the parties presented testimonial and numerous documentary evidence, the
court a quo rendered a decision dismissing the complaint with costs. The court stated that it did not find
sufficient evidence to establish defendant's counterclaim and so it likewise dismissed the same.

The present appeal was taken to this Court directly by the plaintiff in view of the amount involved in the
case.

The facts of this case, as stated in the decision appealed from, are hereunder quoted for purposes of this
decision:

It appears that the suit involves an operating agreement executed before World War II between
the plaintiff and the defendant whereby the former operated and managed the mining properties
owned by the latter for a management fee of P2,500.00 a month and a 10% participation in the net
profits resulting from the operation of the mining properties. For brevity and convenience,
hereafter the plaintiff shall be referred to as NIELSON and the defendant, LEPANTO.

The antecedents of the case are: The contract in question (Exhibit `C') was made by the parties on
January 30, 1937 for a period of five (5) years. In the latter part of 1941, the parties agreed to
renew the contract for another period of five (5) years, but in the meantime, the Pacific War broke
out in December, 1941.

In January, 1942 operation of the mining properties was disrupted on account of the war. In
February of 1942, the mill, power plant, supplies on hand, equipment, concentrates on hand and
mines, were destroyed upon orders of the United States Army, to prevent their utilization by the
invading Japanese Army. The Japanese forces thereafter occupied the mining properties, operated
the mines during the continuance of the war, and who were ousted from the mining properties
only in August of 1945.
After the mining properties were liberated from the Japanese forces, LEPANTO took possession
thereof and embarked in rebuilding and reconstructing the mines and mill; setting up new
organization; clearing the mill site; repairing the mines; erecting staff quarters and bodegas and
repairing existing structures; installing new machinery and equipment; repairing roads and
maintaining the same; salvaging equipment and storing the same within the bodegas; doing police
work necessary to take care of the materials and equipment recovered; repairing and renewing
the water system; and remembering (Exhibits "D" and "E"). The rehabilitation and reconstruction
of the mine and mill was not completed until 1948 (Exhibit "F"). On June 26, 1948 the mines
resumed operation under the exclusive management of LEPANTO (Exhibit "F-l").

Shortly after the mines were liberated from the Japanese invaders in 1945, a disagreement arose
between NIELSON and LEPANTO over the status of the operating contract in question which as
renewed expired in 1947. Under the terms thereof, the management contract shall remain in
suspense in case fortuitous event orforce majeure, such as war or civil commotion, adversely
affects the work of mining and milling.

"In the event of inundations, floodings of mine, typhoon, earthquake or any other force
majeure, war, insurrection, civil commotion, organized strike, riot, injury to the machinery
or other event or cause reasonably beyond the control of NIELSON and which adversely
affects the work of mining and milling; NIELSON shall report such fact to LEPANTO and
without liability or breach of the terms of this Agreement, the same shall remain in
suspense, wholly or partially during the terms of such inability." (Clause II of Exhibit "C").

NIELSON held the view that, on account of the war, the contract was suspended during the war;
hence the life of the contract should be considered extended for such time of the period of
suspension. On the other hand, LEPANTO contended that the contract should expire in 1947 as
originally agreed upon because the period of suspension accorded by virtue of the war did not
operate to extend further the life of the contract.

No understanding appeared from the record to have been bad by the parties to resolve the
disagreement. In the meantime, LEPANTO rebuilt and reconstructed the mines and was able to
bring the property into operation only in June of 1948, . . . .

Appellant in its brief makes an alternative assignment of errors depending on whether or not the
management contract basis of the action has been extended for a period equivalent to the period of
suspension. If the agreement is suspended our attention should be focused on the first set of errors
claimed to have been committed by the court a quo; but if the contrary is true, the discussion will then be
switched to the alternative set that is claimed to have been committed. We will first take up the question
whether the management agreement has been extended as a result of the supervening war, and after this
question shall have been determined in the sense sustained by appellant, then the discussion of the
defense of laches and prescription will follow as a consequence.

The pertinent portion of the management contract (Exh. C) which refers to suspension should any event
constitutingforce majeure happen appears in Clause II thereof which we quote hereunder:

In the event of inundations, floodings of the mine, typhoon, earthquake or any other force
majeure, war, insurrection, civil commotion, organized strike, riot, injury to the machinery or
other event or cause reasonably beyond the control of NIELSON and which adversely affects the
work of mining and milling; NIELSON shall report such fact to LEPANTO and without liability or
breach of the terms of this Agreement, the same shall remain in suspense, wholly or partially
during the terms of such inability.

A careful scrutiny of the clause above-quoted will at once reveal that in order that the management
contract may be deemed suspended two events must take place which must be brought in a satisfactory
manner to the attention of defendant within a reasonable time, to wit: (1) the event constituting the force
majeure must be reasonably beyond the control of Nielson, and (2) it must adversely affect the work of
mining and milling the company is called upon to undertake. As long as these two condition exist the
agreement is deem suspended.

Does the evidence on record show that these two conditions had existed which may justify the conclusion
that the management agreement had been suspended in the sense entertained by appellant? Let us go to
the evidence.

It is a matter that this Court can take judicial notice of that war supervened in our country and that the
mines in the Philippines were either destroyed or taken over by the occupation forces with a view to
their operation. The Lepanto mines were no exception for not was the mine itself destroyed but the mill,
power plant, supplies on hand, equipment and the like that were being used there were destroyed as
well. Thus, the following is what appears in the Lepanto Company Mining Report dated March 13, 1946
submitted by its President C. A. DeWitt to the defendant:1 "In February of 1942, our mill, power plant,
supplies on hand, equipment, concentrates on hand, and mine, were destroyed upon orders of the U.S.
Army to prevent their utilization by the enemy." The report also mentions the report submitted by Mr.
Blessing, an official of Nielson, that "the original mill was destroyed in 1942" and "the original power
plant and all the installed equipment were destroyed in 1942." It is then undeniable that beginning
February, 1942 the operation of the Lepanto mines stopped or became suspended as a result of the
destruction of the mill, power plant and other important equipment necessary for such operation in view
of a cause which was clearly beyond the control of Nielson and that as a consequence such destruction
adversely affected the work of mining and milling which the latter was called upon to undertake under
the management contract. Consequently, by virtue of the very terms of said contract the same may be
deemed suspended from February, 1942 and as of that month the contract still had 60 months to go.

On the other hand, the record shows that the defendant admitted that the occupation forces operated its
mining properties subject of the management contract,2 and from the very report submitted by President
DeWitt it appears that the date of the liberation of the mine was August 1, 1945 although at the time
there were still many booby traps.3 Similarly, in a report submitted by the defendant to its stockholders
dated August 25, 1948, the following appears: "Your Directors take pleasure in reporting that June 26,
1948 marked the official return to operations of this Company of its properties in Mankayan, Mountain
Province, Philippines."4

It is, therefore, clear from the foregoing that the Lepanto mines were liberated on August 1, 1945, but
because of the period of rehabilitation and reconstruction that had to be made as a result of the
destruction of the mill, power plant and other necessary equipment for its operation it cannot be said
that the suspension of the contract ended on that date. Hence, the contract must still be deemed
suspended during the succeeding years of reconstruction and rehabilitation, and this period can only be
said to have ended on June 26, 1948 when, as reported by the defendant, the company officially resumed
the mining operations of the Lepanto. It should here be stated that this period of suspension from
February, 1942 to June 26, 1948 is the one urged by plaintiff.5
It having been shown that the operation of the Lepanto mines on the part of Nielson had been suspended
during the period set out above within the purview of the management contract, the next question that
needs to be determined is the effect of such suspension. Stated in another way, the question now to be
determined is whether such suspension had the effect of extending the period of the management
contract for the period of said suspension. To elucidate this matter, we again need to resort to the
evidence.

For appellant Nielson two witnesses testified, declaring that the suspension had the effect of extending
the period of the contract, namely, George T. Scholey and Mark Nestle. Scholey was a mining engineer
since 1929, an incorporator, general manager and director of Nielson and Company; and for some time he
was also the vice-president and director of the Lepanto Company during the pre-war days and, as such,
he was an officer of both appellant and appellee companies. As vice-president of Lepanto and general
manager of Nielson, Scholey participated in the negotiation of the management contract to the extent that
he initialed the same both as witness and as an officer of both corporations. This witness testified in this
case to the effect that the standard force majeure clause embodied in the management contract was taken
from similar mining contracts regarding mining operations and the understanding regarding the nature
and effect of said clause was that when there is suspension of the operation that suspension meant the
extension of the contract. Thus, to the question, "Before the war, what was the understanding of the
people in the particular trend of business with respect to the force majeure clause?", Scholey answered:
"That was our understanding that the suspension meant the extension of time lost."6

Mark Nestle, the other witness, testified along similar line. He had been connected with Nielson since
1937 until the time he took the witness stand and had been a director, manager, and president of the
same company. When he was propounded the question: "Do you know what was the custom or usage at
that time in connection with force majeure clause?", Nestle answered, "In the mining world the force
majeure clause is generally considered. When a calamity comes up and stops the work like in war, flood,
inundation or fire, etc., the work is suspended for the duration of the calamity, and the period of the
contract is extended after the calamity is over to enable the person to do the big work or recover his
money which he has invested, or accomplish what his obligation is to a third person ."7

And the above testimonial evidence finds support in the very minutes of the special meeting of the Board
of Directors of the Lepanto Company issued on March 10, 1945 which was then chairmaned by Atty. C. A.
DeWitt. We read the following from said report:

The Chairman also stated that the contract with Nielson and Company would soon expire if the
obligations were not suspended, in which case we should have to pay them the retaining fee of
P2,500.00 a month. He believes however, that there is a provision in the contract suspending the
effects thereof in cases like the present, and that even if it were not there, the law itself would
suspend the operations of the contract on account of the war. Anyhow, he stated, we shall have no
difficulty in solving satisfactorily any problem we may have with Nielson and Company.8

Thus, we can see from the above that even in the opinion of Mr. DeWitt himself, who at the time was the
chairman of the Board of Directors of the Lepanto Company, the management contract would then expire
unless the period therein rated is suspended but that, however, he expressed the belief that the period
was extended because of the provision contained therein suspending the effects thereof should any of the
case of force majeure happen like in the present case, and that even if such provision did not exist the law
would have the effect of suspending it on account of the war. In substance, Atty. DeWitt expressed the
opinion that as a result of the suspension of the mining operation because of the effects of the war the
period of the contract had been extended.

Contrary to what appellant's evidence reflects insofar as the interpretation of the force majeure clause is
concerned, however, appellee gives Us an opposite interpretation invoking in support thereof not only a
letter Atty. DeWitt sent to Nielson on October 20, 1945,9 wherein he expressed for the first time an
opinion contrary to what he reported to the Board of Directors of Lepanto Company as stated in the
portion of the minutes of its Board of Directors as quoted above, but also the ruling laid down by our
Supreme Court in some cases decided sometime ago, to the effect that the war does not have the effect of
extending the term of a contract that the parties may enter into regarding a particular transaction, citing
in this connection the cases of Victorias Planters Association v. Victorias Milling Company, 51 O.G.
4010; Rosario S. Vda. de Lacson, et al. v. Abelardo G. Diaz, 87 Phil. 150; and Lo Ching y So Young Chong Co.
v. Court of Appeals, et al., 81 Phil. 601.

To bolster up its theory, appellee also contends that the evidence regarding the alleged custom or usage
in mining contract that appellant's witnesses tried to introduce was incompetent because (a) said custom
was not specifically pleaded; (b) Lepanto made timely and repeated objections to the introduction of said
evidence; (c) Nielson failed to show the essential elements of usage which must be shown to exist before
any proof thereof can be given to affect the contract; and (d) the testimony of its witnesses cannot prevail
over the very terms of the management contract which, as a rule, is supposed to contain all the terms and
conditions by which the parties intended to be bound.

It is here necessary to analyze the contradictory evidence which the parties have presented regarding the
interpretation of the force majeure clause in the management contract.

At the outset, it should be stated that, as a rule, in the construction and interpretation of a document the
intention of the parties must be sought (Rule 130, Section 10, Rules of Court). This is the basic rule in the
interpretation of contracts because all other rules are but ancilliary to the ascertainment of the meaning
intended by the parties. And once this intention has been ascertained it becomes an integral part of the
contract as though it had been originally expressed therein in unequivocal terms (Shoreline Oil Corp. v.
Guy, App. 189, So., 348, cited in 17A C.J.S., p. 47). How is this intention determined?

One pattern is to ascertain the contemporaneous and subsequent acts of the contracting parties in
relation to the transaction under consideration (Article 1371, Civil Code). In this particular case, it is
worthy of note what Atty. C. A. DeWitt has stated in the special meeting of the Board of Directors of
Lepanto in the portion of the minutes already quoted above wherein, as already stated, he expressed the
opinion that the life of the contract, if not extended, would last only until January, 1947 and yet he said
that there is a provision in the contract that the war had the effect of suspending the agreement and that
the effect of that suspension was that the agreement would have to continue with the result that Lepanto
would have to pay the monthly retaining fee of P2,500.00. And this belief that the war suspended the
agreement and that the suspension meant its extension was so firm that he went to the extent that even if
there was no provision for suspension in the agreement the law itself would suspend it.

It is true that Mr. DeWitt later sent a letter to Nielson dated October 20, 1945 wherein apparently he
changed his mind because there he stated that the contract was merely suspended, but not extended, by
reason of the war, contrary to the opinion he expressed in the meeting of the Board of Directors already
adverted to, but between the two opinions of Atty. DeWitt We are inclined to give more weight and
validity to the former not only because such was given by him against his own interest but also because it
was given before the Board of Directors of Lepanto and in the presence, of some Nielson officials 10 who,
on that occasion were naturally led to believe that that was the true meaning of the suspension clause,
while the second opinion was merely self-serving and was given as a mere afterthought.

Appellee also claims that the issue of true intent of the parties was not brought out in the complaint, but
anent this matter suffice it to state that in paragraph No. 19 of the complaint appellant pleaded that the
contract was extended. 11 This is a sufficient allegation considering that the rules on pleadings must as a
rule be liberally construed.

It is likewise noteworthy that in this issue of the intention of the parties regarding the meaning and usage
concerning the force majeure clause, the testimony adduced by appellant is uncontradicted. If such were
not true, appellee should have at least attempted to offer contradictory evidence. This it did not do. Not
even Lepanto's President, Mr. V. E. Lednicky who took the witness stand, contradicted said evidence.

In holding that the suspension of the agreement meant the extension of the same for a period equivalent
to the suspension, We do not have the least intention of overruling the cases cited by appellee. We simply
want to say that the ruling laid down in said cases does not apply here because the material facts
involved therein are not the same as those obtaining in the present. The rule of stare decisis cannot be
invoked where there is no analogy between the material facts of the decision relied upon and those of the
instant case.

Thus, in Victorias Planters Association vs. Victorias Milling Company, 51 O.G. 4010, there was no evidence
at all regarding the intention of the parties to extend the contract equivalent to the period of suspension
caused by the war. Neither was there evidence that the parties understood the suspension to mean
extension; nor was there evidence of usage and custom in the industry that the suspension meant the
extension of the agreement. All these matters, however, obtain in the instant case.

Again, in the case of Rosario S. Vda. de Lacson vs. Abelardo G. Diaz, 87 Phil. 150, the issue referred to the
interpretation of a pre-war contract of lease of sugar cane lands and the liability of the lessee to pay rent
during and immediately following the Japanese occupation and where the defendant claimed the right of
an extension of the lease to make up for the time when no cane was planted. This Court, in holding that
the years which the lessee could not use the land because of the war could not be discounted from the
period agreed upon, held that "Nowhere is there any insinuation that the defendant-lessee was to have
possession of lands for seven years excluding years on which he could not harvest sugar." Clearly,
this ratio decidendi is not applicable to the case at bar wherein there is evidence that the parties
understood the "suspension clause by force majeure" to mean the extension of the period of agreement.

Lastly, in the case of Lo Ching y So Young Chong Co. vs. Court of Appeals, et al., 81 Phil. 601, appellant
leased a building from appellee beginning September 13, 1940 for three years, renewable for two years.
The lessee's possession was interrupted in February, 1942 when he was ousted by the Japanese who
turned the same over to German Otto Schulze, the latter occupying the same until January, 1945 upon the
arrival of the liberation forces. Appellant contended that the period during which he did not enjoy the
leased premises because of his dispossession by the Japanese had to be deducted from the period of the
lease, but this was overruled by this Court, reasoning that such dispossession was merely a simple
"perturbacion de merohecho y de la cual no responde el arrendador" under Article 1560 of the old Civil
Code Art. 1664). This ruling is also not applicable in the instant case because in that case there was no
evidence of the intention of the parties that any suspension of the lease by force majeure would be
understood to extend the period of the agreement.
In resume, there is sufficient justification for Us to conclude that the cases cited by appellee are
inapplicable because the facts therein involved do not run parallel to those obtaining in the present case.

We shall now consider appellee's defense of laches. Appellee is correct in its contention that the defense
of laches applies independently of prescription. Laches is different from the statute of limitations.
Prescription is concerned with the fact of delay, whereas laches is concerned with the effect of delay.
Prescription is a matter of time; laches is principally a question of inequity of permitting a claim to be
enforced, this inequity being founded on some change in the condition of the property or the relation of
the parties. Prescription is statutory; laches is not. Laches applies in equity, whereas prescription applies
at law. Prescription is based on fixed time, laches is not. (30 C.J.S., p. 522; See also Pomeroy's Equity
Jurisprudence, Vol. 2, 5th ed., p. 177).

The question to determine is whether appellant Nielson is guilty of laches within the meaning
contemplated by the authorities on the matter. In the leading case of Go Chi Gun, et al. vs. Go Cho, et al., 96
Phil. 622, this Court enumerated the essential elements of laches as follows:

(1) conduct on the part of the defendant, or of one under whom he claims, giving rise to the
situation of which complaint is made and for which the complaint seeks a remedy; (2) delay in
asserting the complainant's rights, the complainant having had knowledge or notice of the
defendant's conduct and having been afforded an opportunity to institute a suit; (3) lack of
knowledge or notice on the part of the defendant that the complainant would assert the right on
which he bases his suit; and (4) injury or prejudice to the defendant in the event relief is accorded
to the complainant, or the suit is not held barred.

Are these requisites present in the case at bar?

The first element is conceded by appellant Nielson when it claimed that defendant refused to pay its
management fees, its percentage of profits and refused to allow it to resume the management operation.

Anent the second element, while it is true that appellant Nielson knew since 1945 that appellee Lepanto
has refused to permit it to resume management and that since 1948 appellee has resumed operation of
the mines and it filed its complaint only on February 6, 1958, there being apparent delay in filing the
present action, We find the delay justified and as such cannot constitute laches. It appears that appellant
had not abandoned its right to operate the mines for even before the termination of the suspension of the
agreement as early as January 20, 194612 and even before March 10, 1945, it already claimed its right to
the extension of the contract,13 and it pressed its claim for the balance of its share in the profits from the
1941 operation14 by reason of which negotiations had taken place for the settlement of the claim15 and it
was only on June 25, 1957 that appellee finally denied the claim. There is, therefore, only a period of less
than one year that had elapsed from the date of the final denial of the claim to the date of the filing of the
complaint, which certainly cannot be considered as unreasonable delay.

The third element of laches is absent in this case. It cannot be said that appellee Lepanto did not know
that appellant would assert its rights on which it based suit. The evidence shows that Nielson had been
claiming for some time its rights under the contract, as already shown above.

Neither is the fourth element present, for if there has been some delay in bringing the case to court it was
mainly due to the attempts at arbitration and negotiation made by both parties. If Lepanto's documents
were lost, it was not caused by the delay of the filing of the suit but because of the war.
Another reason why appellant Nielson cannot be held guilty of laches is that the delay in the filing of the
complaint in the present case was the inevitable of the protracted negotiations between the parties
concerning the settlement of their differences. It appears that Nielson asked for arbitration16 which was
granted. A committee consisting of Messrs. DeWitt, Farnell and Blessing was appointed to act on said
differences but Mr. DeWitt always tried to evade the issue17 until he was taken ill and died. Mr. Farnell
offered to Nielson the sum of P13,000.58 by way of compromise of all its claim arising from the
management contract18 but apparently the offer was refused. Negotiations continued with the exchange
of letters between the parties but with no satisfactory result.19 It can be said that the delay due to
protracted negotiations was caused by both parties. Lepanto, therefore, cannot be permitted to take
advantage of such delay or to question the propriety of the action taken by Nielson. The defense of laches
is an equitable one and equity should be applied with an even hand. A person will not be permitted to
take advantage of, or to question the validity, or propriety of, any act or omission of another which was
committed or omitted upon his own request or was caused by his conduct (R. H. Stearns Co. vs. United
States, 291 U.S. 54, 78 L. Ed. 647, 54 S. Ct., 325; United States vs. Henry Prentiss & Co., 288 U.S. 73, 77 L.
Ed., 626, 53 S. Ct., 283).

Had the action of Nielson prescribed? The court a quo held that the action of Nielson is already barred by
the statute of limitations, and that ruling is now assailed by the appellant in this appeal. In urging that the
court a quo erred in reaching that conclusion the appellant has discussed the issue with reference to
particular claims.

The first claim is with regard to the 10% share in profits of 1941 operations. Inasmuch as appellee
Lepanto alleges that the correct basis of the computation of the sharing in the net profits shall be as
provided for in Clause V of the Management Contract, while appellant Nielson maintains that the basis
should be what is contained in the minutes of the special meeting of the Board of Directors of Lepanto on
August 21, 1940, this question must first be elucidated before the main issue is discussed.

The facts relative to the matter of profit sharing follow: In the management contract entered into
between the parties on January 30, 1937, which was renewed for another five years, it was stipulated
that Nielson would receive a compensation of P2,500.00 a month plus 10% of the net profits from the
operation of the properties for the preceding month. In 1940, a dispute arose regarding the computation
of the 10% share of Nielson in the profits. The Board of Directors of Lepanto, realizing that the mechanics
of the contract was unfair to Nielson, authorized its President to enter into an agreement with Nielson
modifying the pertinent provision of the contract effective January 1, 1940 in such a way that Nielson
shall receive (1) 10% of the dividends declared and paid, when and as paid, during the period of the
contract and at the end of each year, (2) 10% of any depletion reserve that may be set up, and (3) 10% of
any amount expended during the year out of surplus earnings for capital account. 20 Counsel for the
appellee admitted during the trial that the extract of the minutes as found in Exhibit B is a faithful copy
from the original. 21 Mr. George Scholey testified that the foregoing modification was agreed upon. 22

Lepanto claims that this new basis of computation should be rejected (1) because the contract was clear
on the point of the 10% share and it was so alleged by Nielson in its complaint, and (2) the minutes of the
special meeting held on August 21, 1940 was not signed.

It appearing that the issue concerning the sharing of the profits had been raised in appellant's complaint
and evidence on the matter was introduced 23 the same can be taken into account even if no amendment
of the pleading to make it conform to the evidence has been made, for the same is authorized by Section
4, Rule 17, of the old Rules of Court (now Section 5, Rule 10, of the new Rules of Court).
Coming now to the question of prescription raised by defendant Lepanto, it is contended by the latter that
the period to be considered for the prescription of the claim regarding participation in the profits is only
four years, because the modification of the sharing embodied in the management contract is merely
verbal, no written document to that effect having been presented. This contention is untenable. The
modification appears in the minutes of the special meeting of the Board of Directors of Lepanto held on
August 21, 1940, it having been made upon the authority of its President, and in said minutes the terms of
the modification had been specified. This is sufficient to have the agreement considered, for the purpose
of applying the statute of limitations, as a written contract even if the minutes were not signed by the
parties (3 A.L.R., 2d, p. 831). It has been held that a writing containing the terms of a contract if adopted
by two persons may constitute a contract in writing even if the same is not signed by either of the parties
(3 A.L.R., 2d, pp. 812-813). Another authority says that an unsigned agreement the terms of which are
embodied in a document unconditionally accepted by both parties is a written contract (Corbin on
Contracts, Vol. 1, p. 85)

The modification, therefore, made in the management contract relative to the participation in the profits
by appellant, as contained in the minutes of the special meeting of the Board of Directors of Lepanto held
on August 21, 1940, should be considered as a written contract insofar as the application of the statutes
of limitations is concerned. Hence, the action thereon prescribes within ten (10) years pursuant to
Section 43 of Act 190.

Coming now to the facts, We find that the right of Nielson to its 10% participation in the 1941 operations
accrued on December 21, 1941 and the right to commence an action thereon began on January 1, 1942 so
that the action must be brought within ten (10) years from the latter date. It is true that the complaint
was filed only on February 6, 1958, that is sixteen (16) years, one (1) month and five (5) days after the
right of action accrued, but the action has not yet prescribed for various reasons which We will hereafter
discuss.

The first reason is the operation of the Moratorium Law, for appellant's claim is undeniably a claim for
money. Said claim accrued on December 31, 1941, and Lepanto is a war sufferer. Hence the claim was
covered by Executive Order No. 32 of March 10, 1945. It is well settled that the operation of the
Moratorium Law suspends the running of the statue of limitations (Pacific Commercial Co. vs. Aquino,
G.R. No. L-10274, February 27, 1957).

This Court has held that the Moratorium Law had been enforced for eight (8) years, two (2) months and
eight (8) days (Tioseco vs. Day, et al., L-9944, April 30, 1957; Levy Hermanos, Inc. vs. Perez, L-14487,
April 29, 1960), and deducting this period from the time that had elapsed since the accrual of the right of
action to the date of the filing of the complaint, the extent of which is sixteen (16) years, one (1) month
and five (5) days, we would have less than eight (8) years to be counted for purposes of prescription.
Hence appellant's action on its claim of 10% on the 1941 profits had not yet prescribed.

Another reason that may be taken into account in support of the no-bar theory of appellant is the
arbitration clause embodied in the management contract which requires that any disagreement as to any
amount of profits before an action may be taken to court shall be subject to arbitration. 24 This agreement
to arbitrate is valid and binding. 25 It cannot be ignored by Lepanto. Hence Nielson could not bring an
action on its participation in the 1941 operations-profits until the condition relative to arbitration had
been first complied with. 26 The evidence shows that an arbitration committee was constituted but it
failed to accomplish its purpose on June 25, 1957. 27 From this date to the filing of the complaint the
required period for prescription has not yet elapsed.
Nielson claims the following: (1) 10% share in the dividends declared in 1941, exclusive of interest,
amounting to P17,500.00; (2) 10% in the depletion reserves for 1941; and (3) 10% in the profits for
years prior to 1948 amounting to P19,764.70.

With regard to the first claim, the Lepanto's report for the calendar year of 1954 28 shows that it declared
a 10% cash dividend in December, 1941, the amount of which is P175,000.00. The evidence in this
connection (Exhibits L and O) was admitted without objection by counsel for Lepanto. 29 Nielson claims
10% share in said amount with interest thereon at 6% per annum. The document (Exhibit L) was even
recognized by Lepanto's President V. L. Lednicky, 30 and this claim is predicated on the provision of
paragraph V of the management contract as modified pursuant to the proposal of Lepanto at the special
meeting of the Board of Directors on August 21, 1940 (Exh. B), whereby it was provided that Nielson
would be entitled to 10% of any dividends to be declared and paid during the period of the contract.

With regard to the second claim, Nielson admits that there is no evidence regarding the amount set aside
by Lepanto for depletion reserve for 1941 31 and so the 10% participation claimed thereon cannot be
assessed.

Anent the third claim relative to the 10% participation of Nielson on the sum of P197,647.08, which
appears in Lepanto's annual report for 1948 32 and entered as profit for prior years in the statement of
income and surplus, which amount consisted "almost in its entirety of proceeds of copper concentrates
shipped to the United States during 1947," this claim should to denied because the amount is not
"dividend declared and paid" within the purview of the management contract.

The fifth assignment of error of appellant refers to the failure of the lower court to order Lepanto to pay
its management fees for January, 1942, and for the full period of extension amounting to P150,000.00, or
P2,500.00 a month for sixty (60) months, — a total of P152,500.00 — with interest thereon from the date
of judicial demand.

It is true that the claim of management fee for January, 1942 was not among the causes of action in the
complaint, but inasmuch as the contract was suspended in February, 1942 and the management fees
asked for included that of January, 1942, the fact that such claim was not included in a specific manner in
the complaint is of no moment because an appellate court may treat the pleading as amended to conform
to the evidence where the facts show that the plaintiff is entitled to relief other than what is asked for in
the complaint (Alonzo vs. Villamor, 16 Phil. 315). The evidence shows that the last payment made by
Lepanto for management fee was for November and December, 1941. 33 If, as We have declared, the
management contract was suspended beginning February 1942, it follows that Nielson is entitled to the
management fee for January, 1942.

Let us now come to the management fees claimed by Nielson for the period of extension. In this respect, it
has been shown that the management contract was extended from June 27, 1948 to June 26, 1953, or for
a period of sixty (60) months. During this period Nielson had a right to continue in the management of
the mining properties of Lepanto and Lepanto was under obligation to let Nielson do it and to pay the
corresponding management fees. Appellant Nielson insisted in performing its part of the contract but
Lepanto prevented it from doing so. Hence, by virtue of Article 1186 of the Civil Code, there was a
constructive fulfillment an the part of Nielson of its obligation to manage said mining properties in
accordance with the contract and Lepanto had the reciprocal obligation to pay the corresponding
management fees and other benefits that would have accrued to Nielson if Lepanto allowed it (Nielson)
to continue in the management of the mines during the extended period of five (5) years.
We find that the preponderance of evidence is to the effect that Nielson had insisted in managing the
mining properties soon after liberation. In the report 34 of Lepanto, submitted to its stockholders for the
period from 1941 to March 13, 1946, are stated the activities of Nielson's officials in relation to Nielson's
insistence in continuing the management. This report was admitted in evidence without objection. We
find the following in the report:

Mr. Blessing, in May, 1945, accompanied Clark and Stanford to San Fernando (La Union) to await the
liberation of the mines. (Mr. Blessing was the Treasurer and Metallurgist of Nielson). Blessing with Clark
and Stanford went to the property on July 16 and found that while the mill site had been cleared of the
enemy the latter was still holding the area around the staff houses and putting up a strong defense. As a
result, they returned to San Fernando and later went back to the mines on July 26. Mr. Blessing made the
report, dated August 6, recommending a program of operation. Mr. Nielson himself spent a day in the
mine early in December, 1945 and reiterated the program which Mr. Blessing had outlined. Two or three
weeks before the date of the report, Mr. Coldren of the Nielson organization also visited the mine and told
President C. A. DeWitt of Lepanto that he thought that the mine could be put in condition for the delivery
of the ore within ten (10) days. And according to Mark Nestle, a witness of appellant, Nielson had several
men including engineers to do the job in the mines and to resume the work. These engineers were in fact
sent to the mine site and submitted reports of what they had done. 35

On the other hand, appellee claims that Nielson was not ready and able to resume the work in the mines,
relying mainly on the testimony of Dr. Juan Nabong, former secretary of both Nielson and Lepanto, given
in the separate case of Nancy Irving Romero vs. Lepanto Consolidated Mining Company (Civil Case No.
652, CFI, Baguio), to the effect that as far as he knew "Nielson and Company had not attempted to operate
the Lepanto Consolidated Mining Company because Mr. Nielson was not here in the Philippines after the
last war. He came back later," and that Nielson and Company had no money nor stocks with which to
start the operation. He was asked by counsel for the appellee if he had testified that way in Civil Case No.
652 of the Court of First Instance of Baguio, and he answered that he did not confirm it fully. When this
witness was asked by the same counsel whether he confirmed that testimony, he said that when he
testified in that case he was not fully aware of what happened and that after he learned more about the
officials of the corporation it was only then that he became aware that Nielson had really sent his men to
the mines along with Mr. Blessing and that he was aware of this fact personally. He further said that Mr.
Nielson was here in 1945 and "he was going out and contacting his people." 36

Lepanto admits, in its own brief, that Nielson had really insisted in taking over the management and
operation of the mines but that it (Lepanto) unequivocally refuse to allow it. The following is what
appears in the brief of the appellee:

It was while defendant was in the midst of the rehabilitation work which was fully described
earlier, still reeling under the terrible devastation and destruction wrought by war on its mine
that Nielson insisted in taking over the management and operation of the mine. Nielson thus put
Lepanto in a position where defendant, under the circumstances, had to refuse, as in fact it did,
Nielson's insistence in taking over the management and operation because, as was obvious, it was
impossible, as a result of the destruction of the mine, for the plaintiff to manage and operate the
same and because, as provided in the agreement, the contract was suspended by reason of the
war. The stand of Lepanto in disallowing Nielson to assume again the management of the mine in
1945 was unequivocal and cannot be misinterpreted, infra.37
Based on the foregoing facts and circumstances, and Our conclusion that the management contract was
extended, We believe that Nielson is entitled to the management fees for the period of extension. Nielson
should be awarded on this claim sixty times its monthly pay of P2,500.00, or a total of P150,000.00.

In its sixth assignment of error Nielson contends that the lower court erred in not ordering Lepanto to
pay it (Nielson) the 10% share in the profits of operation realized during the period of five (5) years from
the resumption of its post-war operations of the Mankayan mines, in the total sum of P2,403,053.20 with
interest thereon at the rate of 6% per annum from February 6, 1958 until full payment. 38

The above claim of Nielson refers to four categories, namely: (1) cash dividends; (2) stock dividends; (3)
depletion reserves; and (4) amount expended on capital investment.

Anent the first category, Lepanto's report for the calendar year 1954 39 contains a record of the cash
dividends it paid up to the date of said report, and the post-war dividends paid by it corresponding to the
years included in the period of extension of the management contract are as follows:

POST-WAR

8 10% November 1949 P 200,000.00


9 10% July 1950 300,000.00
10 10% October 1950 500,000.00
11 20% December 1950 1,000,000.00
12 20% March 1951 1,000,000.00
13 20% June 1951 1,000,000.00
14 20% September 1951 1,000,000.00
15 40% December 1951 2,000,000.00
16 20% March 1952 1,000,000.00
17 20% May 1952 1,000,000.00
18 20% July 1952 1,000,000.00
19 20% September 1952 1,000,000.00
20 20% December 1952 1,000,000.00
21 20% March 1953 1,000,000.00
22 20% June 1953 1,000,000.00
TOTAL P14,000,000.00

According to the terms of the management contract as modified, appellant is entitled to 10% of the
P14,000,000.00 cash dividends that had been distributed, as stated in the above-mentioned report, or the
sum of P1,400,000.00.
With regard to the second category, the stock dividends declared by Lepanto during the period of
extension of the contract are: On November 28, 1949, the stock dividend declared was 50% of the
outstanding authorized capital of P2,000,000.00 of the company, or stock dividends worth
P1,000,000.00; and on August 22, 1950, the stock dividends declared was 66-2/3% of the standing
authorized capital of P3,000,000.00 of the company, or stock dividends worth P2,000,000.00. 40

Appellant's claim that it should be given 10% of the cash value of said stock dividends with interest
thereon at 6% from February 6, 1958 cannot be granted for that would not be in accordance with the
management contract which entitles Nielson to 10% of any dividends declared paid, when and as paid.
Nielson, therefore, is entitled to 10% of the stock dividends and to the fruits that may have accrued to
said stock dividends pursuant to Article 1164 of the Civil Code. Hence to Nielson is due shares of stock
worth P100,000.00, as per stock dividends declared on November 28, 1949 and all the fruits accruing to
said shares after said date; and also shares of stock worth P200,000.00 as per stock dividends declared
on August 20, 1950 and all fruits accruing thereto after said date.

Anent the third category, the depletion reserve appearing in the statement of income and surplus
submitted by Lepanto corresponding to the years covered by the period of extension of the contract, may
be itemized as follows:

In 1948, as per Exh. F, p. 36 and Exh. Q, p. 5, the depletion reserve set up was P11,602.80.

In 1949, as per Exh. G, p. 49 and Exh. Q, p. 5, the depletion reserve set up was P33,556.07.

In 1950, as per Exh. H, p. 37, Exh. Q, p. 6 and Exh. I, p. 37, the depletion reserve set up was
P84,963.30.

In 1951, as per Exh. I, p. 45, Exh. Q, p. 6, and Exh. J, p. 45, the depletion reserve set up was
P129,089.88.

In 1952, as per Exh. J, p. 45, Exh. Q, p. 6 and Exh. K p. 41, the depletion reserve was P147,141.54.

In 1953, as per Exh. K, p. 41, and Exh. Q, p. 6, the depletion reserve set up as P277,493.25.

Regarding the depletion reserve set up in 1948 it should be noted that the amount given was for the
whole year. Inasmuch as the contract was extended only for the last half of the year 1948, said amount of
P11,602.80 should be divided by two, and so Nielson is only entitled to 10% of the half amounting to
P5,801.40.

Likewise, the amount of depletion reserve for the year 1953 was for the whole year and since the
contract was extended only until the first half of the year, said amount of P277,493.25 should be divided
by two, and so Nielson is only entitled to 10% of the half amounting to P138,746.62. Summing up the
entire depletion reserves, from the middle of 1948 to the middle of 1953, we would have a total of
P539,298.81, of which Nielson is entitled to 10%, or to the sum of P53,928.88.

Finally, with regard to the fourth category, there is no figure in the record representing the value of the
fixed assets as of the beginning of the period of extension on June 27, 1948. It is possible, however, to
arrive at the amount needed by adding to the value of the fixed assets as of December 31, 1947 one-half
of the amount spent for capital account in the year 1948. As of December 31, 1947, the value of the fixed
assets was P1,061,878.88 41 and as of December 31, 1948, the value of the fixed assets was
P3,270,408.07. 42 Hence, the increase in the value of the fixed assets for the year 1948 was P2,208,529.19,
one-half of which is P1,104,264.59, which amount represents the expenses for capital account for the first
half of the year 1948. If to this amount we add the fixed assets as of December 31, 1947 amounting to
P1,061,878.88, we would have a total of P2,166,143.47 which represents the fixed assets at the beginning
of the second half of the year 1948.

There is also no figure representing the value of the fixed assets when the contract, as extended, ended on
June 26, 1953; but this may be computed by getting one-half of the expenses for capital account made in
1953 and adding the same to the value of the fixed assets as of December 31, 1953 is
P9,755,840.41 43 which the value of the fixed assets as of December 31, 1952 is P8,463,741.82, the
difference being P1,292,098.69. One-half of this amount is P646,049.34 which would represent the
expenses for capital account up to June, 1953. This amount added to the value of the fixed assets as of
December 31, 1952 would give a total of P9,109,791.16 which would be the value of fixed assets at the
end of June, 1953.

The increase, therefore, of the value of the fixed assets of Lepanto from June, 1948 to June, 1953 is
P6,943,647.69, which amount represents the difference between the value of the fixed assets of Lepanto
in the year 1948 and in the year 1953, as stated above. On this amount Nielson is entitled to a share of
10% or to the amount of P694,364.76.

Considering that most of the claims of appellant have been entertained, as pointed out in this decision,
We believe that appellant is entitled to be awarded attorney's fees, especially when, according to the
undisputed testimony of Mr. Mark Nestle, Nielson obliged himself to pay attorney's fees in connection
with the institution of the present case. In this respect, We believe, considering the intricate nature of the
case, an award of fifty thousand (P50,000.00) pesos for attorney's fees would be reasonable.

IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court a quo and
enter in lieu thereof another, ordering the appellee Lepanto to pay appellant Nielson the different
amounts as specified hereinbelow:

(1) 10% share of cash dividends of December, 1941 in the amount of P17,500.00, with legal interest
thereon from the date of the filing of the complaint;

(2) management fee for January, 1942 in the amount of P2,500.00, with legal interest thereon from the
date of the filing of the complaint;

(3) management fees for the sixty-month period of extension of the management contract, amounting to
P150,000.00, with legal interest from the date of the filing of the complaint;

(4) 10% share in the cash dividends during the period of extension of the management contract,
amounting to P1,400,000.00, with legal interest thereon from the date of the filing of the complaint;

(5) 10% of the depletion reserve set up during the period of extension, amounting to P53,928.88, with
legal interest thereon from the date of the filing of the complaint;

(6) 10% of the expenses for capital account during the period of extension, amounting to P694,364.76,
with legal interest thereon from the date of the filing of the complaint;
(7) to issue and deliver to Nielson and Co., Inc. shares of stock of Lepanto Consolidated Mining Co. at par
value equivalent to the total of Nielson's l0% share in the stock dividends declared on November 28,
1949 and August 22, 1950, together with all cash and stock dividends, if any, as may have been declared
and issued subsequent to November 28, 1949 and August 22, 1950, as fruits that accrued to said shares;

If sufficient shares of stock of Lepanto's are not available to satisfy this judgment, defendant-appellee
shall pay plaintiff-appellant an amount in cash equivalent to the market value of said shares at the time of
default (12 C.J.S., p. 130), that is, all shares of the stock that should have been delivered to Nielson before
the filing of the complaint must be paid at their market value as of the date of the filing of the complaint;
and all shares, if any, that should have been delivered after the filing of the complaint at the market value
of the shares at the time Lepanto disposed of all its available shares, for it is only then that Lepanto placed
itself in condition of not being able to perform its obligation (Article 1160, Civil Code);

(8) the sum of P50,000.00 as attorney's fees; and

(9) the costs. It is so ordered.

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

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

JOSE REMO, JR., petitioner,


vs.
THE HON. INTERMEDIATE APPELLATE COURT and E.B. MARCHA TRANSPORT COMPANY, INC.,
represented by APIFANIO B. MARCHA, respondents.

Orbos, Cabusora, Dumlao & Sta. Ana for petitioner.

GANCAYCO, J.:

A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a
person, the law treats a corporation as though it were a person by process of fiction or by regarding it as
an artificial person distinct and separate from its individual stockholders. 1

However, the corporate fiction or the notion of legal entity may be disregarded when it "is used to defeat
public convenience, justify wrong, protect fraud, or defend crime" in which instances "the law will regard
the corporation as an association of persons, or in case of two corporations, will merge them into one."
The corporate fiction may also be disregarded when it is the "mere alter ego or business conduit of a
person." 2 There are many occasions when this Court pierced the corporate veil because of its use to
protect fraud and to justify wrong. 3 The herein petition for review of a. resolution of the Intermediate
Appellate Court dated February 8, 1984 seeking the reversal thereof and the reinstatement of its earlier
decision dated June 30, 1983 in AC-G.R. No. 68496-R 4 calls for the application of the foregoing principles.
In the latter part of December, 1977 the board of directors of Akron Customs Brokerage Corporation
(hereinafter referred to as Akron), composed of petitioner Jose Remo, Jr., Ernesto Bañares, Feliciano
Coprada, Jemina Coprada, and Dario Punzalan with Lucia Lacaste as Secretary, adopted a resolution
authorizing the purchase of thirteen (13) trucks for use in its business to be paid out of a loan the
corporation may secure from any lending institution. 5

Feliciano Coprada, as President and Chairman of Akron, purchased thirteen trucks from private
respondent on January 25, 1978 for and in consideration of P525,000.00 as evidenced by a deed of
absolute sale. 6 In a side agreement of the same date, the parties agreed on a downpayment in the
amount of P50,000.00 and that the balance of P475,000.00 shall be paid within sixty (60) days from the
date of the execution of the agreement. The parties also agreed that until said balance is fully paid, the
down payment of P50,000.00 shall accrue as rentals of the 13 trucks; and that if Akron fails to pay the
balance within the period of 60 days, then the balance shall constitute as a chattel mortgage lien covering
said cargo trucks and the parties may allow an extension of 30 days and thereafter private respondent
may ask for a revocation of the contract and the reconveyance of all said trucks. 7

The obligation is further secured by a promissory note executed by Coprada in favor of Akron. It is stated
in the promissory note that the balance shall be paid from the proceeds of a loan obtained from the
Development Bank of the Philippines (DBP) within sixty (60) days. 8 After the lapse of 90 days, private
respondent tried to collect from Coprada but the latter promised to pay only upon the release of the DBP
loan. Private respondent sent Coprada a letter of demand dated May 10, 1978. 9 In his reply to the said
letter, Coprada reiterated that he was applying for a loan from the DBP from the proceeds of which
payment of the obligation shall be made. 10

Meanwhile, two of the trucks were sold under a pacto de retro sale to a certain Mr. Bais of the Perpetual
Loans and Savings Bank at Baclaran. The sale was authorized by a board resolution made in a meeting
held on March 15, 1978. 11

Upon inquiry, private respondent found that no loan application was ever filed by Akron with DBP. 12

In the meantime, Akron paid rentals of P500.00 a day pursuant to a subsequent agreement, from April 27,
1978 (the end of the 90-day period to pay the balance) to May 31, 1978. Thereafter, no more rental
payments were made.

On June 17, 1978, Coprada wrote private respondent begging for a grace period of until the end of the
month to pay the balance of the purchase price; that he will update the rentals within the week; and in
case he fails, then he will return the 13 units should private respondent elect to get back the
same. 13 Private respondent, through counsel, wrote Akron on August 1, 1978 demanding the return of
the 13 trucks and the payment of P25,000.00 back rentals covering the period from June 1 to August 1,
1978. 14

Again, Coprada wrote private respondent on August 8, 1978 asking for another grace period of up to
August 31, 1978 to pay the balance, stating as well that he is expecting the approval of his loan
application from a certain financing company, and that ten (10) trucks have been returned to Bagbag,
Novaliches. 15 On December 9, 1978, Coprada informed private respondent anew that he had returned
ten (10) trucks to Bagbag and that a resolution was passed by the board of directors confirming the deed
of assignment to private respondent of P475,000 from the proceeds of a loan obtained by Akron from the
State Investment House, Inc. 16
In due time, private respondent filed a compliant for the recovery of P525,000.00 or the return of the 13
trucks with damages against Akron and its officers and directors, Feliciano Coprada, Dario D. Punzalan,
Jemina Coprada, Lucia Lacaste, Wilfredo Layug, Arcadio de la Cruz, Francisco Clave, Vicente Martinez,
Pacifico Dollario and petitioner with the then Court of First Instance of Rizal. Only petitioner answered
the complaint denying any participation in the transaction and alleging that Akron has a distinct
corporate personality. He was, however, declared in default for his failure to attend the pre-trial.

In the meanwhile, petitioner sold all his shares in Akron to Coprada. It also appears that Akron amended
its articles of incorporation thereby changing its name to Akron Transport International, Inc. which
assumed the liability of Akron to private respondent.

After an ex parte reception of the evidence of the private respondent, a decision was rendered on October
28, 1980, the dispositive part of which reads as follows:

Finding the evidence sufficient to prove the case of the plaintiff, judgment is hereby rendered in favor of
the plaintiff and against the defendants, ordering them jointly and severally to pay;

a — the purchase price of the trucks in the amount of P525,000.00 with ... legal rate (of
interest) from the filing of the complaint until the full amount is paid;

b — rentals of Bagbag property at P1,000.00 a month from August 1978 until the premises
is cleared of the said trucks;

c — attorneys fees of P10,000.00, and

d — costs of suit.

The P50,000.00 given as down payment shall pertain as rentals of the trucks from June 1 to August 1,
1978 which is P25,000.00 (see demand letter of Atty. Aniano Exhibit "T") and the remaining P25,000.00
shall be from August 1, 1978 until the trucks are removed totally from the place." 17

A motion for new trial filed by petitioner was denied so he appealed to the then Intermediate Appellate
Court (IAC) wherein in due course a decision was rendered on June 30, 1 983 setting aside the said
decision as far as petitioner is concemed. However, upon a motion for reconsideration filed by private
respondent dent, the IAC, in a resolution dated February 8,1984, set aside the decision dated June 30,
1983. The appellate court entered another decision affirming the appealed decision of the trial court,
with costs against petitioner.

Hence, this petition for review wherein petitioner raises the following issues:

I. The Intermediate Appellate Court (IAC) erred in disregarding the corporate fiction and in
holding the petitioner personally liable for the obligation of the Corporation which decision
is patently contrary to law and the applicable decision thereon.

II. The Intermediate Appellate Court (IAC) committed grave error of law in its decision by
sanctioning the merger of the personality of the corporation with that of the petitioner
when the latter was held liable for the corporate debts. 18
We reverse.

The environmental facts of this case show that there is no cogent basis to pierce the corporate veil of
Akron and hold petitioner personally liable for its obligation to private respondent. While it is true that in
December, 1977 petitioner was still a member of the board of directors of Akron and that he participated
in the adoption of a resolution authorizing the purchase of 13 trucks for the use in the brokerage
business of Akron to be paid out of a loan to be secured from a lending institution, it does not appear that
said resolution was intended to defraud anyone and more particularly private respondent. It was
Coprada, President and Chairman of Akron, who negotiated with said respondent for the purchase of 13
cargo trucks on January 25, 1978. It was Coprada who signed a promissory note to guarantee the
payment of the unpaid balance of the purchase price out of the proceeds of a loan he supposedly sought
from the DBP. The word "WE' in the said promissory note must refer to the corporation which Coprada
represented in the execution of the note and not its stockholders or directors. Petitioner did not sign the
said promissory note so he cannot be personally bound thereby.

Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there
was a forthcoming loan from the DBP when it fact there was none, it is Coprada who should account for
the same and not petitioner.

As to the sale through pacto de retro of the two units to a third person by the corporation by virtue of a
board resolution, petitioner asserts that he never signed said resolution. Be that as it may, the sale is not
inherently fraudulent as the 13 units were sold through a deed of absolute sale to Akron so that the
corporation is free to dispose of the same. Of course, it was stipulated that in case of default in payment to
private respondent of the balance of the consideration, a chattel mortgage lien shag be constituted on the
13 units. Nevertheless, said mortgage is a prior lien as against the pacto de retro sale of the 2 units.

As to the amendment of the articles of incorporation of Akron thereby changing its name to Akron
Transport International, Inc., petitioner alleges that the change of corporate name was in order to include
trucking and container yard operations in its customs brokerage of which private respondent was duly
informed in a letter. 19Indeed, the new corporation confirmed and assumed the obligation of the old
corporation. There is no indication of an attempt on the part of Akron to evade payment of its obligation
to private respondent.

There is the fact that petitioner sold his shares in Akron to Coprada during the pendency of the case.
Since petitioner has no personal obligation to private respondent, it is his inherent right as a stockholder
to dispose of his shares of stock anytime he so desires.

Mention is also made of the alleged "dumping" of 10 units in the premises of private respondent at
Bagbag, Novaliches which to the mind of the Court does not prove fraud and instead appears to be an
attempt on the part of Akron to attend to its obligations as regards the said trucks. Again petitioner has
no part in this.

If the private respondent is the victim of fraud in this transaction, it has not been clearly shown that
petitioner had any part or participation in the perpetration of the same. Fraud must be established by
clear and convincing evidence. If at all, the principal character on whom fault should be attributed is
Feliciano Coprada, the President of Akron, whom private respondent dealt with personally all through
out. Fortunately, private respondent obtained a judgment against him from the trial court and the said
judgment has long been final and executory.
WHEREFORE, the petition is GRANTED. The questioned resolution of the Intermediate Appellate Court
dated February 8,1984 is hereby set aside and its decision dated June 30,1983 setting aside the decision
of the trial court dated October 28, 1980 insofar as petitioner is concemed is hereby reinstated and
affirmed, without costs.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 123553 July 13, 1998

(CA-G.R. No. 33291) July 13, 1998

NORA A. BITONG, petitioner,

vs.

COURT OF APPEALS (FIFTH DIVISION), EUGENIA D. APOSTOL, JOSE A. APOSTOL, MR. & MS.
PUBLISHING CO., LETTY J. MAGSANOC, AND ADORACION G. NUYDA, respondents.

(CA-G.R. No. 33873) July 13, 1998

NORA A. BITONG, petitioner,

vs.

COURT OF APPEALS (FIFTH DIVISION) and EDGARDO B. ESPIRITU, respondents.

BELLOSILLO, J.:

These twin cases originated from a derivative suit 1 filed by petitioner Nora A. Bitong before
the Securities and Exchange Commission (SEC hereafter) allegedly for the benefit of private
respondent Mr. & Ms. Publishing Co., Inc. (Mr. & Ms. hereafter), among others, to hold respondent
spouses Eugenia D. Apostol and Jose A. Apostol 2 liable for fraud, misrepresentation, disloyalty,
evident bad faith, conflict of interest and mismanagement in directing the affairs of Mr. & Ms. to
the damage and prejudice of Mr. & Ms. and its stockholders, including petitioner.

Alleging before the SEC that she had been the Treasurer and a Member of the Board of Directors of
Mr. & Ms. from the time it was incorporated on 29 October 1976 to 11 April 1989, and was the
registered owner of 1,000 shares of stock out of the 4,088 total outstanding shares, petitioner
complained of irregularities committed from 1983 to 1987 by Eugenia D. Apostol, President and
Chairperson of the Board of Directors. Petitioner claimed that except for the sale of the
name Philippine Inquirer to Philippine Daily Inquirer (PDI hereafter) all other transactions and
agreements entered into by Mr. & Ms. with PDI were not supported by any bond and/or
stockholders' resolution. And, upon instructions of Eugenia D. Apostol, Mr. & Ms. made several
cash advances to PDI on various occasions amounting to P3.276 million. On some of these
borrowings PDI paid no interest whatsoever. Despite the fact that the advances made by Mr. & Ms.
to PDI were booked as advances to an affiliate, there existed no board or stockholders' resolution,
contract nor any other document which could legally authorize the creation of and support to an
affiliate.

Petitioner further alleged that respondents Eugenia and Jose Apostol were stockholders, directors
and officers in both Mr. & Ms. and PDI. In fact on 2 May 1986 respondents Eugenia D. Apostol,
Leticia J. Magsanoc and Adoracion G. Nuyda subscribed to PDI shares of stock at P50,000.00 each
or a total of P150,000.00. The stock subscriptions were paid for by Mr. & Ms. and initially treated,
as receivables from officers and employees. But, no payments were ever received from
respondents, Magsanoc and Nuyda.

The petition principally sought to (a) enjoin respondents Eugenia D. Apostol and Jose A. Apostol
from further acting as president-director and director, respectively, of Mr. & Ms. and disbursing
any money or funds except for the payment of salaries and similar expenses in the ordinary
course of business, and from disposing of their Mr. & Ms. shares; (b) enjoin respondents Apostol
spouses, Magsanoc and Nuyda from disposing of the PDI shares of stock registered in their names;
(c) compel respondents Eugenia and Jose Apostol to account for and reconvey all profits and
benefits accruing to them as a result of their improper and fraudulent acts; (d) compel
respondents Magsanoc and Nuyda to account for and reconvey to Mr. & Ms. all shares of stock paid
from cash advances from it and all accessions or fruits thereof; (e) hold respondents Eugenia and
Jose Apostol liable for damages suffered by Mr. & Ms. and the other stockholders, including
petitioner, by reason of their improper and fraudulent acts; (f) appoint a management committee
for Mr. & Ms. during the pendency of the suit to prevent further dissipation and loss of its assets
and funds as well as paralyzation of business operations; and, (g) direct the management
committee for Mr. & Ms. to file the necessary action to enforce its rights against PDI and other
third parties.

Private respondents Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms., on the other hand, refuted
the allegations of petitioner by starting with a narration of the beginnings of Mr. & Ms. They
recounted that on 9 March 1976 Ex Libris Publishing Co., Inc. (Ex Libris hereafter) was
incorporated for the purpose of publishing a weekly magazine. Its original principal stockholders
were spouses Senator Juan Ponce Enrile (then Minister of National Defense) and Cristina Ponce
Enrile through Jaka Investments Corporation (JAKA hereafter), and respondents Eugenia and Jose
Apostol. When Ex Libris suffered financial difficulties, JAKA and the Apostols, together with new
investors Luis Villafuerte and Ramon Siy, restructured Ex Libris by organizing a new corporation
known as Mr. & Ms.

The original stockholders of Mr. & Ms., i.e., JAKA, Luis Villafuerte, Ramon Siy, the Apostols and Ex
Libriscontinued to be virtually the same up to 1989. Thereafter it was agreed among them that,
they being close friends, Mr. & Ms. would be operated as a partnership or a close corporation;
respondent Eugenia D. Apostol would manage the affairs of Mr. & Ms.; and, no shares of stock
would be sold to third parties without first offering the shares to the other stockholders so that
transfers would be limited to and only among the original stockholders.

Private respondents also asserted that respondent Eugenia D. Apostol had been informing her
business partners of her actions as manager, and obtaining their advice and consent.
Consequently the other stockholders consented, either expressly or impliedly, to her
management. They offered no objections. As a result, the business prospered. Thus, as shown in a
statement prepared by the accounting firm Punongbayan and Araullo, there were increases from
1976 to 1988 in the total assets of Mr. & Ms. from P457,569.00 to P10,143,046.00; in the total
stockholders' equity from P203,378.00 to P2,324,954.00; and, in the net sales, from P301,489.00
to P16,325,610.00. Likewise, cash dividends were distributed and received by the stockholders.

Private respondents further contended that petitioner, being merely a holder-in-trust of JAKA
shares, only represented and continued to represent JAKA in the board. In the beginning,
petitioner cooperated with and assisted the management until mid-1986 when relations between
her and her principals on one hand, and respondent Eugenia D. Apostol on the other, became
strained due to political differences. Hence from mid-1986 to mid-1988 petitioner refused to
speak with respondent Eugenia D. Apostol, and in 1988 the former became openly critical of the
management of the latter. Nevertheless, respondent Eugenia D. Apostol always made available to
petitioner and her representatives all the books of the corporation.

Private respondents averred that all the PDI shares owned by respondents Eugenia and Jose
Apostol were acquired through their own private funds and that the loan of P750,000.00 by PDI
from Mr. & Ms. had been fully paid with 20% interest per annum. And, it was PDI, not Mr. & Ms.,
which loaned off P250,000.00 each to respondents Magsanoc and Nuyda. Private respondents
further argued that petitioner was not the true party to this case, the real party being JAKA which
continued to be the true stockholder of Mr. & Ms.; hence, petitioner did not have the personality to
initiate and prosecute the derivative suit which, consequently, must be dismissed.

On 6 December 1990, the SEC Hearing Panel 3 issued a writ of preliminary injunction enjoining
private respondents from disbursing any money except for the payment of salaries and other
similar expenses in the regular course of business. The Hearing Panel also enjoined respondent
Apostol spouses, Nuyda and Magsanoc from disposing of their PDI shares, and further ruled —

. . . respondents' contention that petitioner is not entitled to the provisional reliefs


prayed for because she is not the real party in interest . . . is bereft of any merit. No
less than respondents' Amended Answer, specifically paragraph V, No. 8 on
Affirmative Allegations/Defenses states that "The petitioner being herself a minor
stockholder and holder-in-trust of JAKA shares represented and continues to
represent JAKA in the Board." This statement refers to petitioner sitting in the board
of directors of Mr. & Ms. in two capacities, one as a minor stockholder and the other
as the holder in trust of the shares of JAKA in Mr. & Ms. Such reference alluded to by
the respondents indicates an admission on respondents' part of the petitioner's legal
personality to file a derivative suit for the benefit of the respondent Mr. & Ms.
Publishing Co., Inc.

The Hearing Panel however denied petitioner's prayer for the constitution of a
management committee.
On 25 March 1991 private respondents filed a Motion to Amend Pleadings to Conform to
Evidence alleging that the issue of whether petitioner is the real party-in-interest had been tried
by express or implied consent of the parties through the admission of documentary exhibits
presented by private respondents proving that the real party-in-interest was JAKA, not petitioner
Bitong. As such, No. 8, par. V (Affirmative Allegations/Defenses), Answer to the Amended Petition,
was stipulated due to inadvertence and excusable mistake and should be amended. On 10 October
1991 the Hearing Panel denied the motion for amendment.

Petitioner testified at the trial that she became the registered and beneficial owner of 997 shares
of stock of Mr. & Ms. out of the 4,088 total outstanding shares after she acquired them from JAKA
through a deed of sale executed on 25 July 1983 and recorded in the Stock and Transfer Book of
Mr. & Ms. under Certificate of Shares of Stock No. 008. She pointed out that Senator Enrile decided
that JAKA should completely divest itself of its holdings in Mr. & Ms. and this resulted in the sale to
her of JAKA's interest and holdings in that publishing firm.

Private respondents refuted the statement of petitioner that she was a stockholder of Mr. & Ms.
since 25 July 1983 as respondent Eugenia D. Apostol signed Certificate of Stock No. 008 only on 17
March 1989, and not on 25 July 1983. Respondent Eugenia D. Apostol explained that she stopped
using her long signature (Eugenia D. Apostol) in 1987 and changed it to E.D. Apostol, the signature
which appeared on the face of Certificate of Stock No. 008 bearing the date 25 July 1983. And,
since the Stock and Transfer Book which petitioner presented in evidence was not registered with
the SEC, the entries therein including Certificate of Stock No. 008 were fraudulent. Respondent
Eugenia D. Apostol claimed that she had not seen the Stock and Transfer Book at anytime until 21
March 1989 when it was delivered by petitioner herself to the office of Mr. & Ms., and that
petitioner repeatedly referred to Senator Enrile as "my principal" during the Mr. & Ms. board
meeting of 22 September 1988, seven (7) times no less.

On 3 August 1993, after trial on the merits, the SEC Hearing Panel dismissed the derivative suit
filed by petitioner and dissolved the writ of preliminary injunction barring private respondents
from disposing of their PDI shares and any of Mr. & Ms. assets. The Hearing Panel ruled that there
was no serious mismanagement of Mr. & Ms. which would warrant drastic corrective measures. It
gave credence to the assertion of respondent Eugenia D. Apostol that Mr. & Ms. was operated like
a close corporation where important matters were discussed and approved through informal
consultations at breakfast conferences. The Hearing Panel also concluded that while the evidence
presented tended to show that the real party-in-interest indeed was JAKA and/or Senator Enrile,
it viewed the real issue to be the alleged mismanagement, fraud and conflict of interest on the
part of respondent Eugenia D. Apostol, and allowed petitioner to prosecute the derivative suit if
only to resolve the real issues. Hence, for this purpose, the Hearing Panel considered petitioner to
be the real party-in-interest.

On 19 August 1993 respondent Apostol spouses sold the PDI shares registered in the name of
their holding company, JAED Management Corporation, to Edgardo B. Espiritu. On 25 August 1993
petitioner Bitong appealed to the SEC En Banc.

On 24 January 1994 the SEC En Banc 4 reversed the decision of the Hearing Panel and, among
others, ordered private respondents to account for, return and deliver to Mr. & Ms. any and all
funds and assets that they disbursed from the coffers of the corporation including shares of stock,
profits, dividends and/or fruits that they might have received as a result of their investment in
PDI, including those arising from the P150,000.00 advanced to respondents Eugenia D. Apostol,
Leticia J. Magsanoc and Adoracion G. Nuyda; account for and return any profits and fruits of all
amounts irregularly or unlawfully advanced to PDI and other third persons; and, cease and desist
from managing the affairs of Mr. & Ms. for reasons of fraud, mismanagement, disloyalty and
conflict of interest.

The SEC En Banc also declared the 19 August 1993 sale of the PDI shares of JAED Management
Corporation to Edgardo B. Espiritu to be tainted with fraud, hence, null and void, and considered
Mr. & Ms.