Republic of the Philippines Plaintiff died before trial and Justo R.
Albert, his estate's administrator, was
SUPREME COURT
Manila
EN BANC
G.R. No. L-19118 January 30, 1965
MARIANO A. ALBERT, plaintiff-appellant,
vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.
Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.
Aruego, Mamaril & Associates for defendant-appellees.
BENGZON, J.P., J.:
No less than three times have the parties here appealed to this Court.
In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found plaintiff
entitled to damages (for breach of contract) but reduced the amount from P23,000.00
to P15,000.00.
Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, we held
that the judgment for P15,000.00 which had become final and executory, should be
executed to its full amount, since in fixing it, payment already made had been
considered.
Now we are asked whether the judgment may be executed against Jose M. Aruego,
supposed President of University Publishing Co., Inc., as the real defendant.
Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University
Publishing Co., Inc. Plaintiff alleged inter alia that defendant was a corporation duly
organized and existing under the laws of the Philippines; that on July 19, 1948,
defendant, through Jose M. Aruego, its President, entered into a contract with
plaintifif; that defendant had thereby agreed to pay plaintiff P30,000.00 for the
exclusive right to publish his revised Commentaries on the Revised Penal Code and
for his share in previous sales of the book's first edition; that defendant had
undertaken to pay in eight quarterly installments of P3,750.00 starting July 15, 1948;
that per contract failure to pay one installment would render the rest due; and that
defendant had failed to pay the second installment.
Defendant admitted plaintiff's allegation of defendant's corporate existence; admitted
the execution and terms of the contract dated July 19, 1948; but alleged that it was
plaintiff who breached their contract by failing to deliver his manuscript. Furthermore,
defendant counterclaimed for damages. 1äwphï1.ñët
substituted for him.
The Court of First Instance of Manila, after trial, rendered decision on April 26, 1954,
stating in the dispositive portion —
IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor of the plaintiff and against the
defendant the University Publishing Co., Inc., ordering the defendant to pay the administrator Justo R. Albert, the
sum of P23,000.00 with legal [rate] of interest from the date of the filing of this complaint until the whole amount
shall have been fully paid. The defendant shall also pay the costs. The counterclaim of the defendant is hereby
dismissed for lack of evidence.
As aforesaid, we reduced the amount of damages to P15,000.00, to be executed in
full. Thereafter, on July 22, 1961, the court a quo ordered issuance of an execution
writ against University Publishing Co., Inc. Plaintiff, however, on August 10, 1961,
petitioned for a writ of execution against Jose M. Aruego, as the real defendant,
stating, "plaintiff's counsel and the Sheriff of Manila discovered that there is no such
entity as University Publishing Co., Inc." Plaintiff annexed to his petition a certification
from the securities and Exchange Commission dated July 31, 1961, attesting: "The
records of this Commission do not show the registration of UNIVERSITY
PUBLISHING CO., INC., either as a corporation or partnership." "University
Publishing Co., Inc." countered by filing, through counsel (Jose M. Aruego's own law
firm), a "manifestation" stating that "Jose M. Aruego is not a party to this case," and
that, therefore, plaintiff's petition should be denied.
Parenthetically, it is not hard to decipher why "University Publishing Co., Inc.," through
counsel, would not want Jose M. Aruego to be considered a party to the present case:
should a separate action be now instituted against Jose M. Aruego, the plaintiff will
have to reckon with the statute of limitations.
The court a quo denied the petition by order of September 9, 1961, and from this,
plaintiff has appealed.
The fact of non-registration of University Publishing Co., Inc. in the Securities and
Exchange Commission has not been disputed. Defendant would only raise the point
that "University Publishing Co., Inc.," and not Jose M. Aruego, is the party defendant;
thereby assuming that "University Publishing Co., Inc." is an existing corporation with
an independent juridical personality. Precisely, however, on account of the non-
registration it cannot be considered a corporation, not even a corporation de
facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no personality separate from Jose
M. Aruego; it cannot be sued independently.
1
The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is
inapplicable here. Aruego represented a non-existent entity and induced not only the
plaintiff but even the court to believe in such representation. He signed the contract as
"President" of "University Publishing Co., Inc.," stating that this was "a corporation
duly organized and existing under the laws of the Philippines," and obviously misled
plaintiff (Mariano A. Albert) into believing the same. One who has induced another to
act upon his wilful misrepresentation that a corporation was duly organized and
existing under the law, cannot thereafter set up against his victim the principle of
corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).
"University Publishing Co., Inc." purported to come to court, answering the complaint
and litigating upon the merits. But as stated, "University Publishing Co., Inc." has no
independent personality; it is just a name. Jose M. Aruego was, in reality, the one who
answered and litigated, through his own law firm as counsel. He was in fact, if not, in
name, the defendant.
Even with regard to corporations duly organized and existing under the law, we have
in many a case pierced the veil of corporate fiction to administer the ends of
justice. * And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting or
purporting to act on behalf of a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable for contracts entered
into or for other acts performed as such agent." Had Jose M. Aruego been named as
party defendant instead of, or together with, "University Publishing Co., Inc.," there
would be no room for debate as to his personal liability. Since he was not so named,
the matters of "day in court" and "due process" have arisen.
In this connection, it must be realized that parties to a suit are "persons who have a
right to control the proceedings, to make defense, to adduce and cross-examine
witnesses, and to appeal from a decision" (67 C.J.S. 887) — and Aruego was, in
reality, the person who had and exercised these rights. Clearly, then, Aruego had his
day in court as the real defendant; and due process of law has been substantially
observed.
By "due process of law" we mean " "a law which hears before it condemns; which
proceeds upon inquiry, and renders judgment only after trial. ... ." (4 Wheaton, U.S.
518, 581.)"; or, as this Court has said, " "Due process of law" contemplates notice and
opportunity to be heard before judgment is rendered, affecting one's person or
property" (Lopez vs. Director of Lands, 47 Phil. 23, 32)." (Sicat vs. Reyes, L-11023,
Dec. 14, 1956.) And it may not be amiss to mention here also that the "due process"
clause of the Constitution is designed to secure justice as a living reality; not to
sacrifice it by paying undue homage to formality. For substance must prevail
over form. It may now be trite, but none the less apt, to quote what long ago we said
in Alonso vs. Villamor, 16 Phil. 315, 321-322:
A litigation is not a game of technicalities in which one, more deeply schooled and skilled in
the subtle art of movement and position, entraps and destroys the other. It is, rather, a
contest in which each contending party fully and fairly lays before the court the facts in
issue and then, brushing side as wholly trivial and indecisive all imperfections of form and
technicalities of procedure, asks that Justice be done upon the merits. Lawsuits, unlike
duels, are not to be won by a rapier's thrust. Technicality, when it deserts its proper office
as an aid to justice and becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in technicalities.
The evidence is patently clear that Jose M. Aruego, acting as representative of a non-
existent principal, was the real party to the contract sued upon; that he was the one
who reaped the benefits resulting from it, so much so that partial payments of the
consideration were made by him; that he violated its terms, thereby precipitating the
suit in question; and that in the litigation he was the real defendant. Perforce, in line
with the ends of justice, responsibility under the judgment falls on him.
We need hardly state that should there be persons who under the law are liable to
Aruego for reimbursement or contribution with respect to the payment he makes
under the judgment in question, he may, of course, proceed against them through
proper remedial measures.
PREMISES CONSIDERED, the order appealed from is hereby set aside and the case
remanded ordering the lower court to hold supplementary proceedings for the
purpose of carrying the judgment into effect against University Publishing Co., Inc.
and/or Jose M. Aruego. So ordered.
Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala,
Makalintal and Zaldivar, JJ., concur.
Bautista Angelo, J., took no part.
2
 Republic of the Philippines The court below rendered judgment in favor of the plaintiff for the sum demanded in
SUPREME COURT the complaint, with interest on the sum of P24,147.34 from November 1, 1923, at the
Manila rate of 10 per cent per annum, and the costs. From this judgment the defendant
appeals to this court.
EN BANC
At the trial of the case the plaintiff failed to prove affirmatively the corporate existence
G.R. No. 22106 September 11, 1924 of the parties and the appellant insists that under these circumstances the court erred
in finding that the parties were corporations with juridical personality and assigns
ASIA BANKING CORPORATION, plaintiff-appellee, same as reversible error.
vs.
STANDARD PRODUCTS, CO., INC., defendant-appellant. There is no merit whatever in the appellant's contention. The general rule is that in the
absence of fraud a person who has contracted or otherwise dealt with an association
Charles C. De Selms for appellant. in such a way as to recognize and in effect admit its legal existence as a corporate
Gibbs & McDonough and Roman Ozaeta for appellee. body is thereby estopped to deny its corporate existence in any action leading out of
or involving such contract or dealing, unless its existence is attacked for cause which
have arisen since making the contract or other dealing relied on as an estoppel and
OSTRAND, J.:
this applies to foreign as well as to domestic corporations. (14 C. J., 227; Chinese
Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)
This action is brought to recover the sum of P24,736.47, the balance due on the
following promissory note:
The defendant having recognized the corporate existence of the plaintiff by making a
promissory note in its favor and making partial payments on the same is therefore
P37,757.22 estopped to deny said plaintiff's corporate existence. It is, of course, also estopped
from denying its own corporate existence. Under these circumstances it was
MANILA, P. I., Nov. 28, 1921. unnecessary for the plaintiff to present other evidence of the corporate existence of
either of the parties. It may be noted that there is no evidence showing circumstances
taking the case out of the rules stated.
MANILA, P. I., Nov. 28, 1921.
The judgment appealed from is affirmed, with the costs against the appellant. So
On demand, after date we promise to pay to the Asia Banking Corporation, or ordered.
order, the sum of thirty-seven thousand seven hundred fifty-seven and 22/100
pesos at their office in Manila, for value received, together with interest at the Street, Malcolm, Avanceña, Villamor and Romualdez, JJ., concur.
rate of ten per cent per annum.

No. ________ Due __________

THE STANDARD PRODUCTS CO., INC.

By (Sgd.) GEORGE H. SEAVER

By President

3

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 85339 August 11, 1989
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS
ANGELES, petitioners,
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS,
ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH
KAHN and RAMON DEL ROSARIO, JR., respondents.
Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles petitioner.
Roco & Bunag Law Offices for respondent Ernest Kahn.
Siguion Reyna, Montecillo and Ongsiako for other respondents.
NARVASA, J.:
On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San
Miguel Corporation were acquired 1 by fourteen (14) other corporations, 2 and were
placed under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. When
the latter died, Eduardo M. Cojuangco, Jr. was elected Substitute Trustee on April 9,
1984 with power to delegate the trusteeship in writing to Andres Soriano III. 3 Shortly
after the Revolution of February, 1986, Cojuangco left the country amid "persistent
reports" that "huge and unusual cash disbursements from the funds of SMC" had
been irregularly made, and the resources of the firm extensively used in support of the
candidacy of Ferdinand Marcos during the snap elections in February, 1986 .4
On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as
"Buyer," and the 14 corporations, as "Sellers," for the purchase by Soriano, "for
himself and as agent of several persons," of the 33,133,266 shares of stock at the
price of P100.00 per share, or "an aggregate sum of Three Billion Three Hundred
Thirteen Million Three Hundred Twenty Six Thousand Six Hundred
(P3,313,326,600.00) Pesos payable in specified installments. 5 The Agreement
revoked the voting trust above mentioned, and expressed the desire of the 14
corporations to sell the shares of stock "to pay certain outstanding and unpaid debts,"
and Soriano's own wish to purchase the same "in order to institutionalize and stabilize
the management of the COMPANY in .. (himself) and the professional officer corps,
mandated by the COMPANY's By- laws, and to direct the COMPANY towards giving
the highest priority to its principal products and extensive support to agriculture
programme of' the Government ... 6 Actually, according to Soriano and the other
private respondents, the buyer of the shares was a foreign company, Neptunia
Corporation Limited (of Hongkong, a wholly owned subsidiary of San Miguel
International which is, in turn, a wholly owned subsidiary of San Miguel
Corporation; 7 and it was Neptunia which on or about April 1, 1986 had made the
down payment of P500,000,000.00, "from the proceeds of certain loans". 8
At this point the 33,133,266 SMC shares were sequestered by the Presidential
Commission on Good Government (PCGG), on the ground that the stock belonged to
Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former President
Marcos, and the sale thereof was "in direct contravention of .. Executive Orders
Numbered 1 and 2 (.. dated February 28, 1986 and March 12, 1986, respectively)
which prohibit .. the transfer, conveyance, encumbrance, concealment or liquidation of
assets and properties acquired by former President Ferdinand Marcos and/or his wife,
Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business
associates. 9 The sequestration was subsequently lifted, and the sale allowed to
proceed, on representations by San Miguel Corporation x x that the shares were
'owned by 1.3 million coconut farmers;' the seller corporations were 'fully owned' by
said farmers and Cojuangco owned only 2 shares in one of the companies, etc.
However, the sequestration was soon re-imposed by Order of the PCGG dated May
19, 1986 .. The same order forbade the SMC corporate Secretary to register any
transfer or encumbrance of any of the stock without the PCGG's prior written
authority. 10
San Miguel promptly suspended payment of the other installments of the price to the
fourteen (14) seller corporations. The latter as promptly sued for rescission and
damages.11
On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying
shares" in the corporation to seven (7) individuals, including Eduardo de los Angeles,
"from the sequestered shares registered as street certificates under the control of
Anscor- Hagedorn Securities, Inc.," to "be held in trust by .. (said seven [7] persons)
for the benefit of Anscor-Hagedom Securities, Inc. and/or whoever shall finally be
determined to be the owner/owners of said shares. 12
In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume
the loans incurred by Neptunia for the down payment ((P500M)) on the 33,133,266
shares." The Board opined that there was "nothing illegal in this assumption (of
liability for the loans)," since Neptunia was "an indirectly wholly owned subsidiary of
SMC," there "was no additional expense or exposure for the SMC Group, and there
were tax and other benefits which would redound to the SMC group of companies. 13
4
However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los
Angeles, one of the PCGG representatives in the SMC board, impugned said
Resolution No. 86-12-2, denying that it was ever adopted, and stating that what in
truth was agreed upon at the meeting of December 4, 1986 was merely a "further
study" by Director Ramon del Rosario of a plan presented by him for the assumption
of the loan. De los Angeles also pointed out certain "deleterious effects" thereof. He
was however overruled by private respondents. 14 When his efforts to obtain relief
within the corporation and later the PCGG proved futile, he repaired to the Securities
and Exchange Commission (SEC). lâwphî1.ñèt
He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of
San Miguel Corporation, against ten (10) of the fifteen-member Board of Directors
who had "either voted to approve and/or refused to reconsider and revoke Board
Resolution No. 86-12-2." 15 His Amended Petition in the SEC recited substantially the
foregoing antecedents and the following additional facts, to wit:
a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of'
Neptunia Corporation, Ltd., had met and passed a resolution
authorizing the company to borrow up to US $26,500,000.00 from the
Hongkong & Shanghai Banking Corporation, Hongkong "to enable the
Soriano family to initiate steps and sign an agreement for the
purchase of some 33,133,266 shares of San ,Miguel Corporation. 16
b) The loan of $26,500,000.00 was obtained on the same day, the
corresponding loan agreement having been signed for Neptunia by
Ralph Kahn and Carl Ottiger. At the latter's request, the proceeds of
the loan were deposited in different banks 17 for the account of
"Eduardo J. Soriano".
c) Three (3) days later, on April 4, 1986, Soriano III sent identical
letters to the stockholders of San Miguel Corporation, 18 inter
alia soliciting their proxies and announcing that "the Soriano family,
friends and affiliates acquired a considerable block of San Miguel
Corporation shares only a few days ago .., the transaction .. (having
been) made through the facilities of the Manila Stock Exchange, and
33,133,266 shares .. (having thereby been) purchased for the
aggregate price of' P3,313,326,600.00." The letters also stated that
the purchase was "an exercise of the Sorianos' right to buy back the
same number of shares purchased in 1983 by the .. (14 seller
corporations)."
d) In implementing the assumption of the Neptunia loan and the
purchase agreement for which said loan was obtained, which
assumption constituted an improper use of corporate funds to pay
personal obligations of Andres Soriano III, enabling him; to purchase
stock of the corporation using funds of' the corporation itself, the
respondents, through various subsequent machinations and
manipulations, for interior motives and in breach of fiduciary duty,
compound the damages caused San Miguel Corporation by, among
other things: (1) agreeing to pay a higher price for the shares than was
originally covenanted in order to prevent a rescission of the purchase
agreement by the sellers; (2) urging UCPB to accept San Miguel
Corporation and Neptunia as buyers of the shares, thereby committing
the former to the purchase of its own shares for at least 25% higher
than the price at which they were fairly traded in the stock exchanges,
and shifting to said corporations the personal obligations of Soriano III
under the purchase agreement; and (3) causing to be applied to the
part payment of P1,800,000.00 on said purchase, various assets and
receivables of San Miguel Corporation.
The complaint closed with a prayer for injunction against the execution or
consummation of any agreement causing San Miguel Corporation to purchase the
shares in question or entailing the use of its corporate funds or assets for said
purchase, and against Andres Soriano III from further using or disposing of the funds
or assets of the corporation for his obligations; for the nullification of the SMC Board's
resolution of April 2, 1987 making San Miguel Corporation a party to the purchase
agreement; and for damages.
Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to wit:
1 De los Angeles has no legal capacity to sue because —
a) having been merely imposed by the PCGG as a director on San Miguel, he
has no standing to bring a minority derivative suit;
b) he personally holds only 20 shares and hence cannotfairly and adequately
represent the minority stockholders of the corporation;
c) he has not come to court with clean hands; and
5
 2. The Securities & Exchange Commission has no jurisdiction over the
controversy because the matters involved are exclusively within the business
judgment of the Board of Directors. 19
Kahn's motion to dismiss was subsequently adopted by his correspondents .20
The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay Paz, by
order dated September 4, 1987. 21 In her view —
1) the fact that de los Angeles was a PCGG nominee was irrelevant because
in law, ownership of even one share only, sufficed to qualify a person to bring
a derivative suit;
2) it is indisputable that the action had been brought by de los Angeles for the
benefit of the corporation and all the other stockholders;
3) he was a stockholder at the time of the commission of the acts complained
of, the number of shares owned by him being to repeat, immaterial;
4) there is no merit in the assertion that he had come to Court with unclean
hands, it not having been shown that he participated in the act complained of
or ratified the same; and
5) where business judgment transgresses the law, the securities and
Exchange Commission always has competence to inquire thereinto.
Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking
the annulment of this adverse resolution of the SEC Hearing Officer and her perpetual
inhibition from proceeding with SEC Case No. 3152.
A Special Division of that Court sustained him, upon a vote of three-to-two. The
majority 22 ruled that de los Angeles had no egal capacity to institute the derivative
suit, a conclusion founded on the following propositions:
1) a party "who files a derivative suit should adequately represent the interests of the
minority stockholders;" since "De los Angeles holds 20 shares of stock out of
121,645,860 or 0.00001644% (appearing to be undisputed), (he) cannot even be
remotely said to adequately represent the interests of the minority stockholders,
(e)specially so when .. de los Angeles was put by the PCGG to vote the majority
stock," a situation generating "a genuine conflict of interest;"
2) de los Angeles has not met this conflict-of-interest argument, i.e., that his position
as PCGG-nominated director is inconsistent with his assumed role of representative
of minority stockholders; not having been elected by the minority, his voting would
expectedly consider the interest of the entity which placed him in the board of
directors;
3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle that the (a) PCGG
cannot exercise acts of dominion over sequestered property, (b) it has only powers of
administration, and (c) its voting of sequestered stock must be done only pursuant to
its power of administration; and
4) de los Angeles' suit is not a derivative suit, a derivative suit being one brought for
the benefit of the corporation.
The dissenting Justices, 24 on the other hand, were of the opinion that the suit had
been properly brought by de los Angeles because —
1) the number of shares owned by him was immaterial, he being a stockholder in his
own right;
2) he had not voted in favor of the resolution authorizing the purchase of the shares;
and
3) even if PCGG was not the owner of the sequestered shares, it had the right to seek
the protection of the interest of the corporation, it having been held that even an
unregistered shareholder or an equitable owner of shares and pledgees of shares
may be deemed a shareholder for purposes of instituting a derivative suit.
De los Angeles has appealed to this Court. He prays for reversal of the judgment of
the Court of Appeals, imputing to the latter the following errors:
1) having granted the writ of certiorari despite the fact that Kahn had not first
resorted to the plain remedy available to him, i.e., appeal to the SEC en
banc and despite the fact that no question of jurisdiction was involved;
6
 2) having ruled on Kahn's petition on the basis merely of his factual
allegations, although he (de los Angeles) had disputed them and there had
been no trial in the SEC; and
3) having held that he (de los Angeles) could not file a derivative suit as
stockholder and/or director of the San Miguel Corporation.
For their part, and in this Court, the respondents make the following assertions:
1) SEC has no jurisdiction over the dispute at bar which involves the ownership of
the 33,133,266 shares of SMC stock, in light of this Court's Resolution in G.R.
Nos. 74910, 5075, 75094, 76397, 79459 and 79520, promulgated on August 10,
1988; 25
2) de los Angeles was beholden to the controlling stockholder in the corporation
(PCGG), which had "imposed" him on the corporation; since the PCGG had a
clear conflict of interest with the minority, de los Angeles, as director of the former,
had no legal capacity to sue on behalf of the latter;
3) even assuming absence of conflict of interest, de los Angeles does not fairly
and adequately represent the interest of the minority stockholders;
4) the respondents had properly applied for certiorari with the Court of Appeals
because —
a) that Court had, by law, exclusive appellate jurisdiction over officers and
agencies exercising quasi-judicial functions, and hence file competence to issue
the writ of certiorari;
b) the principle of exhaustion of administrative remedies does not apply since the
issue involved is one of law;
c) said respondents had no plain, speedy and adequate remedy within SEC;
d) the Order of the SEC Investigating Officer — denying the motion to dismiss —
was issued without or in excess of jurisdiction, hence was correctly nullified by the
Court of Appeals; and
e) de los Angeles had not raised the issue of absence of a motion for
reconsideration by respondents in the SEC case; in any event, such a motion was
unnecessary in the premises.
De los Angeles' Reply seeks to make the following points:
1) since the law lays down three (3) requisites for a derivative suit, viz:
a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of,
b) he has exhausted intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to
heed his plea; and
c) c)the cause of action actually devolves on the corporation, the ,wrongdoing or
harm having been caused to the corporation and not to .the particular stockholder
bringing the suit;
and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right,
having acquired those shares as early as 1977, (2) he had sought without success to
have the board of' directors remedy with wrong, and (3) that wrong was in truth a
'wrong against the stockholders of the corporation, generally, ,and not against him
individually — and it was the corporation, and not he, particularly, that would be
entitled to the appropriate' relief — the propriety of his suit cannot be gainsaid;
2) Kahn had not limited himself to questions of law in the proceedings in the Court of Appeals and
hence could not claim exclusion from the scope of the doctrine of exhaustion of remedies; moreover,
Rule 65, invoked by him, bars a resort to certiorari. where a plain, speedy and accurate remedy was
available to him in this case, to wit, a motion for reconsideration before the Sec en banc and,
contrary to the respondent's claim, De Los Angeles had in fact asserted to this propositions before
the Appellate Tribunal; and
3) the respondent had not raised the issue of jurisdiction before the Court of Appeals; indeed, they
admit to their Comment that that
issue has not yet been resolved by the SEC," be this as it may, the derivative suit does not fall within
the BASECO doctrine since it does not involve any question of ownership of the 33,133,266
sequestered SMC shares but rather, the validity of the resolution of the board of directors for the
assumption by the corporation, for the benefit of certain of its officers and stockholders, of liability for
loans contracted by another corporation, which is an intra-corporate dispute within the exclusive
jurisdiction of the SEC.
7
1. De los Angeles is not opposed to the asserted position of the PCGG that the
sequestered SMC shares of stock belong to Ferdinand Marcos and/or his dummies and/or
cronies. His consent to sit in the board as nominee of PCGG unquestionably indicates his
advocacy of the PCGG position. He does not here seek, and his complaint in the SEC
does not pray for, the annulment of the purchase by SMC of the stock in question, or even
the subsequent purchase of the same stock by others which proposition was challenged
26
by (1) one Evio, in SEC Case No. 3000; (2) by the 14 corporations which sold the stock to
SMC, in Civil Case No. 13865 of the Manila RTC, said cases having later become subject
of G.R. No. 74910 of this Court; (3) by Neptunia, SMC, and others, in G.R. No. 79520 of
this Court; and (4) by Eduardo Cojuangco and others in Civil Case No. 16371 of the RTC,
Makati, [on the theory that the sequestered stock in fact belonged to coconut planters and
oil millers], said case later having become subject of G.R. No. 79459 of this court
. Neither does de los Angeles impugn, obviously, the right of the PCGG to vote the
27
sequestered stock thru its nominee directors — as was done by United Coconut Planters
Bank and the 14 seller corporations (in SEC Case No. 3005, later consolidated with SEC
Case No. 3000 above mentioned, these two (2) cases later having become subject of
G.R.No. 76397) as well as by one Clifton Ganay, a UCPB stockholder (in G.R. No. 75094
of this Court).
l âwphî1.ñèt
28
The subject matter of his complaint in the SEC does not therefore fall within the ambit
of this Court's Resolution of August 10, 1988 on the cases just mentioned, to the
effect that, citing PCGG v. Pena, et al 29 an 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." His complaint does
not involve any property illegally acquired or misappropriated by Marcos, et al., or
"any incidents arising from, incidental to, or related to" any case involving such
property, but assets indisputably belonging to San Miguel Corporation which were, in
his (de los Angeles') view, being illicitly committed by a majority of its board of
directors to answer for loans assumed by a sister corporation, Neptunia Co., Ltd.
De los Angeles' complaint, in fine, is confined to the issue of the validity of the
assumption by the corporation of the indebtedness of Neptunia Co., Ltd., allegedly for
the benefit of certain of its officers and stockholders, an issue evidently distinct from,
and not even remotely requiring inquiry into the matter of whether or not the
33,133,266 SMC shares sequestered by the PCGG belong to Marcos and his cronies
or dummies (on which- issue, as already pointed out, de los Angeles, in common with
the PCGG, had in fact espoused the affirmative). De los Angeles' dispute, as
stockholder and director of SMC, with other SMC directors, an intra-corporate one, to
be sure, is of no concern to the Sandiganbayan, having no relevance whatever to the
ownership- of the sequestered stock. The contention, therefore, that in view of this
Court's ruling as regards the sequestered SMC stock above adverted to, the SEC has
no jurisdiction over the de los Angeles complaint, cannot be sustained and must be
rejected. The dispute concerns acts of the board of directors claimed to amount to
fraud and misrepresentation which may be detrimental to the interest of the
stockholders, or is one arising out of intra-corporate relations between and among
stockholders, or between any or all of them and the corporation of which they are
stockholders .30
2. The theory that de los Angeles has no personality to bring suit in behalf of
the corporation — because his stockholding is minuscule, and there is a
"conflict of interest" between him and the PCGG — cannot be sustained,
either.
It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent
only. 00001644% of the total number of outstanding shares (1 21,645,860), he cannot
be deemed to fairly and adequately represent the interests of the minority
stockholders. The implicit argument — that a stockholder, to be considered as
qualified to bring a derivative suit, must hold a substantial or significant block of stock
— finds no support whatever in the law. The requisites for a derivative suit 31 are as
follows:
a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material; 32
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on
the board of directors for the appropriate relief but the latter has failed or refused
to heed his plea; and
33
c) the cause of action actually devolves on the corporation, the wrongdoing or
harm having been, or being caused to the corporation and not to the particular
stockholder bringing the suit. 34
The bona fide ownership by a stockholder of stock in his own right suffices to invest
him with standing to bring a derivative action for the benefit of the corporation. The
number of his shares is immaterial since he is not suing in his own behalf, or for the
protection or vindication of his own particular right, or the redress of a wrong
8
committed against him, individually, but in behalf and for the benefit of the The issues raised here do not peremptorily call for a determination of whether or not
corporation. in voting petitioner de los Angeles to the San Miguel Board, the PCGG kept within the
parameters announced in Baseco; and absent any showing to the contrary,
3. Neither can the "conflict-of-interest" theory be upheld. From the conceded premise consistently with the presumption that official duty is regularly performed, it must be
that de los Angeles now sits in the SMC Board of Directors by the grace of the PCGG, assumed to have done so.
it does not follow that he is legally obliged to vote as the PCGG would have him do,
that he cannot legitimately take a position inconsistent with that of the PCGG, or that, WHEREFORE, the petition is GRANTED. The appealed decision of the Court of
not having been elected by the minority stockholders, his vote would necessarily Appeals in CA- G.R. SP No. 12857 — setting aside the order of September 4, 1987
never consider the latter's interests. The proposition is not only logically issued in SEC Case No. 3153 and dismissing said case — is REVERSED AND SET
indefensible, non sequitur, but also constitutes an erroneous conception of a director's ASIDE. The further disposition in the appealed decision for the issuance of a writ of
role and function, it being plainly a director's duty to vote according to his own preliminary injunction upon the filing and approval of a bond of P500,000.00 by
independent judgment and his own conscience as to what is in the best interests of respondent Ernest Kahn (petitioner in the Appellate Court) is also SET ASIDE, and
the company. Moreover, it is undisputed that apart from the qualifying shares given to any writ of injunction issued pursuant thereto is lifted. Costs against private
him by the PCGG, he owns 20 shares in his own right, as regards which he cannot respondents.
from any aspect be deemed to be "beholden" to the PCGG, his ownership of these
shares being precisely what he invokes as the source of his authority to bring the SO ORDERED.
derivative suit.
Gancayco, Griñ;o-Aquino and Medialdea, JJ., concur.
4. It is also theorized, on the authority of the BASECO decision, that the PCGG has
no power to vote sequestered shares of stock as an act of dominion but only in
pursuance — to its power of administration. The inference is that the PCGG's act of
voting the stock to elect de los Angeles to the SMC Board of Directors was
unauthorized and void; hence, the latter could not bring suit in the corporation's
behalf. The argument is strained and obviously of no merit. As already more than
plainly indicated, it was not necessary for de los Angeles to be a director in order to
bring a derivative action; all he had to be was a stockholder, and that he was owning
in his own right 20 shares of stock, a fact not disputed by the respondents.

Nor is there anything in the Baseco decision which can be interpreted as ruling that
sequestered stock may not under any circumstances be voted by the PCGG to elect a
director in the company in which such stock is held. On the contrary, that it held such
act permissible is evident from the context of its reference to the Presidential
Memorandum of June 26, 1986 authorizing the PCGG, "pending the outcome of
proceedings to determine the ownership of .. sequestered shares of stock,"'to vote
such shares .. at all stockholders' meetings called for the election of directors ..," the
only caveat being that the stock is not to be voted simply because the power to do so
exists, whether it be to oust and replace directors or to effect substantial changes in
corporate policy, programs or practice, but only "for demonstrably weighty and
defensible grounds" or "when essential to prevent disappearance or wastage of
corporate property."

9

EN BANC
G.R. No. L-23241 March 14, 1925
HENRY FLEISCHER, Plaintiff-Appellee, vs. BOTICA NOLASCO CO., INC., Defendant-
Appellant.
Antonio Gonzalez for appellant.
Emilio M. Javier for appellee.
JOHNSON, J.:
This action was commenced in the Court of First Instance of the Province of Oriental
Negros on the 14th day of August, 1923, against the board of directors of the Botica
Nolasco, Inc., a corporation duly organized and existing under the laws of the Philippine
Islands. The plaintiff prayed that said board of directors be ordered to register in the books
of the corporation five shares of its stock in the name of Henry Fleischer, the plaintiff, and
to pay him the sum of P500 for damages sustained by him resulting from the refusal of
said body to register the shares of stock in question. The defendant filed a demurrer on
the ground that the facts alleged in the complaint did not constitute sufficient cause of
action, and that the action was not brought against the proper party, which was the Botica
Nolasco, Inc. The demurrer was sustained, and the plaintiff was granted five days to
amend his complaint. chanrobles virtualawlibr ar y c hanrobl es virtual law li brar y
On November 15, 1923, the plaintiff filed an amended complaint against the Botica
Nolasco, Inc., alleging that he became the owner of five shares of stock of said
corporation, by purchase from their original owner, one Manuel Gonzalez; that the said
shares were fully paid; and that the defendant refused to register said shares in his name
in the books of the corporation in spite of repeated demands to that effect made by him
upon said corporation, which refusal caused him damages amounting to P500. Plaintiff
prayed for a judgment ordering the Botica Nolasco, Inc. to register in his name in the
books of the corporation the five shares of stock recorded in said books in the name of
Manuel Gonzalez, and to indemnify him in the sum of P500 as damages, and to pay the
costs. The defendant again filed a demurrer on the ground that the amended complaint
did not state facts sufficient to constitute a cause of action, and that said amended
complaint was ambiguous, unintelligible, uncertain, which demurrer was overruled by the
court.
chanrobles virtualawlibr ar y c hanrobl es virtual law li brar y
The defendant answered the amended complaint denying generally and specifically each
and every one of the material allegations thereof, and, as a special defense, alleged that
the defendant, pursuant to article 12 of its by-laws, had preferential right to buy from the
plaintiff said shares at the par value of P100 a share, plus P90 as dividends corresponding
to the year 1922, and that said offer was refused by the plaintiff. The defendant prayed for
a judgment absolving it from all liability under the complaint and directing the plaintiff to
deliver to the defendant the five shares of stock in question, and to pay damages in the
sum of P500, and the costs. chanr obl es virtual awlibr ary chanrobles virtual l aw libr ar y
Upon the issue presented by the pleadings above stated, the cause was brought on for
trial, at the conclusion of which, and on August 21, 1924, the Honorable N. Capistrano,
judge, held that, in his opinion, article 12 of the by-laws of the corporation which gives it
preferential right to buy its shares from retiring stockholders, is in conflict with Act No.
1459 (Corporation Law), especially with section 35 thereof; and rendered a judgment
ordering the defendant corporation, through its board of directors, to register in the books
of said corporation the said five shares of stock in the name of the plaintiff, Henry
Fleischer, as the shareholder or owner thereof, instead of the original owner, Manuel
Gonzalez, with costs against the defendant. c hanrobl es virtual awlibrar y chanr obles virtual l aw libr ar y
The defendant appealed from said judgment, and now makes several assignment of error,
all of which, in substance, raise the question whether or not article 12 of the by-laws of the
corporation is in conflict with the provisions of the Corporation Law (Act No. 1459). chanr obl es virtual awlibr ar y chanrobles virtual l aw libr ar y
There is no controversy as to the facts of the present case. They are simple and may be
stated as follows: c hanr obl es virtual law librar y
That Manuel Gonzalez was the original owner of the five shares of stock in question, Nos.
16, 17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned
and delivered said five shares to the plaintiff, Henry Fleischer, by accomplishing the form
of endorsement provided on the back thereof, together with other credits, in consideration
of a large sum of money owed by Gonzalez to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-
4); that on March 13, 1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said
corporation, offered to buy from Henry Fleischer, on behalf of the corporation, said shares
of stock, at their par value of P100 a share, for P500; that by virtue of article 12 of the by-
laws of Botica Nolasco, Inc., said corporation had the preferential right to buy from Manuel
Gonzalez said shares (Exhibit 2); that the plaintiff refused to sell them to the defendant;
that the plaintiff requested Doctor Miciano to register said shares in his name; that Doctor
Miciano refused to do so, saying that it would be in contravention of the by-laws of the
corporation. c hanr obl es virtual awlibr ary chanrobles virtual l aw libr ar y
10
It also appears from the record that on the 13th day of March, 1923, two days after the
assignment of the shares to the plaintiff, Manuel Gonzales made a written statement to
the Botica Nolasco, Inc., requesting that the five shares of stock sold by him to Henry
Fleischer be noted transferred to Fleischer's name. He also acknowledged in said written
statement the preferential right of the corporation to buy said five shares (Exhibit 3). On
June 14, 1923, Gonzalez wrote a letter to the Botica Nolasco, withdrawing and cancelling
his written statement of March 13, 1923 (Exhibit C), to which letter the Botica Nolasco on
June 15, 1923, replied, declaring that his written statement was in conformity with the by-
laws of the corporation; that his letter of June 14th was of no effect, and that the shares in
question had been registered in the name of the Botica Nolasco, Inc., (Exhibit X).
As indicated above, the important question raised in this appeal is whether or not article
12 of the by-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the
Corporation Law (Act No. 1459). Appellant invoked said article as its ground for denying
the request of the plaintiff that the shares in question be registered in his (plaintiff's) name,
and for claiming that it (Botica Nolasco, Inc.) had the preferential right to buy said shares
from Gonzalez. Appellant now contends that article 12 of the said by-laws is in conformity
with the provisions of Act No. 1459. Said article is as follows:
ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona, pero
para que estas transferencias tengan validez legal, deben constar en los registros de la
Corporacion con el debido endoso del accionista a cuyo nombre se ha expedido la accion
o acciones que se transfieran, o un documento de transferencia. Entendiendose que,
ningun accionista transferira accion alguna a otra persona sin participar antes por escrito
al Secretario-Tesorero. En igualdad de condiciones, la sociedad tendra el derecho de
adquirir para si la accion o acciones que se traten de transferir. (Exhibit 2.)
The above-quoted article constitutes a by-law or regulation adopted by the Botica
Nolasco, Inc., governing the transfer of shares of stock of said corporation. The latter part
of said article creates in favor of the Botica Nolasco, Inc., a preferential right to buy, under
the same conditions, the share or shares of stock of a retiring shareholder. Has said
corporation any power, under the Corporation Law (Act. No. 1459), to adopt such by-
law? chanr obles virtual l aw libr ar y
The particular provisions of the Corporation Law referring to transfer of shares of stock are
as follows:
SEC. 13. Every corporation has the power:
xxx xxx xxx chanrobl es virtual law li brar y
chanrobl es virtual awlibrar y
(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of
the number of its officers and directors within the limits prescribed by law, and for
the transferring of its stock, the administration of its corporate affairs, etc.
xxx xxx xxx chanrobl es virtual law li brar y
SEC. 35. The capital stock of stock corporations shall de divided into shares for which
certificates signed by the president or the vice-president, countersigned by the secretary
or clerk and sealed with the seal of the corporation, shall be issued in accordance with the
chanr obles virtual l aw libr ar y
by-laws. Shares of stock so issued are personal property and may be transferred by
delivery of the certificate 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 entered and noted upon the books of the
corporation so as to show the names of the parties to the transaction, that date of the
transfer, the number of the certificate, and the number of shares transferred. c hanr obl es virtual law librar y
No share of stock against which the corporation holds any unpaid claim shall be
transferable on the books of the corporation.
Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not
inconsistent with any existing law, for the transferring of its stock. It follows from said
provision, that a by-law adopted by a corporation relating to transfer of stock should be in
harmony with the law on the subject of transfer of stock. The law on this subject is found in
section 35 of Act No. 1459 above quoted. Said section specifically provides that the
shares of stock "are personal property and may be transferred by delivery of the certificate
indorsed by the owner, etc." Said section 35 defines the nature, character and
transferability of shares of stock. Under said section they are personal property and may
be transferred as therein provided. Said section contemplates no restriction as to whom
they may be transferred or sold. It does not suggest that any discrimination may be
created by the corporation in favor or against a certain purchaser. The holder of shares,
as owner of personal property, is at liberty, under said section, to dispose of them in favor
of whomsoever he pleases, without any other limitation in this respect, than the general
provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer of
shares of stock should take into consideration the specific provisions of section 35 of Act
No. 1459, and said by-law should be made to harmonize with said provisions. It should not
be inconsistent therewith.chanr obles virtualawlibrary chanrobles virtual l aw libr ar y
The by-law now in question was adopted under the power conferred upon the corporation
by section 13, paragraph 7, above quoted; but in adopting said by-law the corporation has
transcended the limits fixed by law in the same section, and has not taken into
consideration the provisions of section 35 of Act No. 1459. c hanr obl es virtual awlibr ar y c hanrobles virtual l aw libr ar y
11
As a general rule, the by-laws of a corporation are valid if they are reasonable and
calculated to carry into effect the objects of the corporation, and are not contradictory to
the general policy of the laws of the land. (Supreme Commandery of the Knights of the
Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.) c hanr obl es virtual law librar y
On the other hand, it is equally well settled that by-laws of a corporation must be
reasonable and for a corporate purpose, and always within the charter limits. They must
always be strictly subordinate to the constitution and the general laws of the land. They
must not infringe the policy of the state, nor be hostile to public welfare. (46 Am. Rep.,
332.) They must not disturb vested rights or impair the obligation of a contract, take away
or abridge the substantial rights of stockholder or member, affect rights of property or
create obligations unknown to the law. (People's Home Savings Bank vs. Superior Court,
104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)
virtual law li brar y
The validity of the by-law of a corporation is purely a question of law. (South Florida
Railroad Co. vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale and transfer of stock must be found in the
governing statute or the charter. Restrictions upon the traffic in stock must have their
source in legislative enactment, as the corporation itself cannot create such impediments.
By-law are intended merely for the protection of the corporation, and prescribe regulation
and not restriction; they are always subject to the charter of the corporation. The
corporation, in the absence of such a power, cannot ordinarily inquire into or pass upon
the legality of the transaction by which its stock passes from one person to another, nor
can it question the consideration upon which a sale is based. A by-law cannot take away
or abridge the substantial rights of stockholder. Under a statute authorizing by- laws for
the transfer of stock, a corporation can do no more than prescribe a general mode of
transfer on the corporate books and cannot justify an unreasonable restriction upon the
right of sale. (4 Thompson on Corporations, sec. 4137, p. 674. c hanr obl es virtual awlibr ar y
The right of unrestrained transfer of shares inheres in the very nature of a corporation, and
courts will carefully scrutinize any attempt to impose restrictions or limitations upon the
right of stockholders to sell and assign their stock. The right to impose any restraint in this
respect must be conferred upon the corporation either by the governing statute or by the
articles of the corporation. It cannot be done by a by-law without statutory or charter
authority. (4 Thompson on Corporations, sec. 4334, pp. 818, 819.)
The jus disponendi, being an incident of the ownership of property, the general rule
(subject to exceptions hereafter pointed out and discussed) is that every owner of
corporate shares has the same uncontrollable right to alien them which attaches to the
ownership of any other species of property. A shareholder is under no obligation to refrain
from selling his shares at the sacrifice of his personal interest, in order to secure the
welfare of the corporation, or to enable another shareholder to make gains and profits. (10
Cyc., p. 577.)
chanrobles virtual l aw libr ar y
It follows from the foregoing that a corporation has no power to prevent or to restrain
transfers of its shares, unless such power is expressly conferred in its charter or governing
statute. This conclusion follows from the further consideration that by-laws or other
regulations restraining such transfers, unless derived from authority expressly granted by
the legislature, would be regarded as impositions in restraint of trade. (10 Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking on this question. They
hold that the power of a corporation to enact by-laws restraining the sale and transfer of
shares, should not only be in harmony with the law or charter of the corporation, but such
chanr obles
power should be expressly granted in said law or charter. chanr obl es virtual awlibr ar y c hanrobles virtual l aw li brar y
The only restraint imposed by the Corporation Law upon transfer of shares is found in
section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be
valid, except as between the parties, until the transfer is entered and noted upon the
books of the corporation so as to show the names of the parties to the transaction, the
date of the transfer, the number of the certificate, and the number of shares transferred."
This restriction is necessary in order that the officers of the corporation may know who are
the stockholders, which is essential in conducting elections of officers, in calling meeting
of stockholders, and for other purposes. but any restriction of the nature of that imposed in
the by-law now in question, is ultra vires, violative of the property rights of shareholders,
and in restraint of trade. c hanr obl es virtual awlibr ar y chanr obl es virtual law librar y
And moreover, the by-laws now in question cannot have any effect on the appellee. He
had no knowledge of such by-law when the shares were assigned to him. He obtained
them in good faith and for a valuable consideration. He was not a privy to the contract
chanrobles virtual l aw libr ar y
created by said by-law between the shareholder Manuel Gonzalez and the Botica
Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares without first offering
them to the corporation for a period of thirty days is not binding upon an assignee of the
stock as a personal contract, although his assignor knew of the by-law and took part in its
adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.) c hanr obl es virtual law librar y
c hanrobl es virtual law li brar y
When no restriction is placed by public law on the transfer of corporate stock, a purchaser
is not affected by any contractual restriction of which he had no notice. (Brinkerhoff-Farris
Trust and Savings Co. vs. Home Lumber Co., 118 Mo., 447.) chanr obles virtual l aw libr ar y
12
The assignment of shares of stock in a corporation by one who has assented to an
unauthorized by-law has only the effect of a contract by, and enforceable against, the
assignor; the assignee is not bound by such by-law by virtue of the assignment alone.
(Ireland vs. Globe Milling Co., 21 R.I., 9.) c hanrobles virtual law li brar y

A by-law of a corporation which provides that transfers of stock shall not be valid unless
approved by the board of directors, while it may be enforced as a reasonable regulation
for the protection of the corporation against worthless stockholders, cannot be made
available to defeat the rights of third persons. (Farmers' and Merchants' Bank of
Lineville vs. Wasson, 48 Iowa, 336.)

Counsel for defendant incidentally argues in his brief, that the plaintiff does not have any
right of action against the defendant corporation, but against the president and secretary
thereof, inasmuch as the signing and registration of shares is incumbent upon said officers
pursuant to section 35 of the Corporation Law. This contention cannot be sustained now.
The question should have been raised in the lower court. It is too late to raise it now in this
appeal. Besides, as stated above, the corporation was made defendant in this action upon
the demurrer of the attorney of the original defendant in the lower court, who contended
that the Botica Nolasco, Inc., should be made the party defendant in this action.
Accordingly, upon order of the court, the complaint was amended and the said corporation
was made the party defendant. c hanrobl es virtual awlibrar y chanrobles virtual l aw libr ar y

Whenever a corporation refuses to transfer and register stock in cases like the present,
mandamus will lie to compel the officers of the corporation to transfer said stock upon the
books of the corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.) c hanrobl es virtual law li brar y

In view of all the foregoing, we are of the opinion, and so hold, that the decision of the
lower court is in accordance with law and should be and is hereby affirmed, with costs. So
ordered.

Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.

13
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 176579 October 9, 2012
HEIRS OF WILSON P. GAMBOA,* Petitioners,
vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE
UNDERSECRETARYJOHN P. SEVILLA, AND COMMISSIONER RICARDO
ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS,
RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI
SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF
METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN
OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS
CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD.,
PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES AND
EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE
STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.
RESOLUTION
CARPIO, J.:
This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1)
the Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan
(Pangilinan),2 (3) Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities and
Exchange Commission (SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on
behalfofthe SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed
a Consolidated Comment on behalf of the State,6 declaring expressly that it agrees
with the Court's definition of the term "capital" in Section 11, Article XII of the
Constitution. During the Oral Arguments on 26 June 2012, the OSG reiterated its
position consistent with the Court's 28 June 2011 Decision.
We deny the motions for reconsideration.
I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.
As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term
"capital" in Section 11, Article XII of the Constitution has far-reaching implications to
the national economy. In fact, a resolution of this issue will determine whether
Filipinos are masters, or second-class citizens, in their own country. What is at stake
here is whether Filipinos or foreigners will have effective control of the Philippine
national economy. Indeed, if ever there is a legal issue that has far-reaching
implications to the entire nation, and to future generations of Filipinos, it is the
threshold legal issue presented in this case.
Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in
the interpretation of the term "capital" in Section 11, Article XII of the Constitution
undoubtedly demand an immediate adjudication of this issue. Simply put, the far-
reaching implications of this issue justify the treatment of the petition as one
for mandamus.7
In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and
expedient to resolve the case although the petition for declaratory relief could be
outrightly dismissed for being procedurally defective. There, appellant admittedly had
already committed a breach of the Public Service Act in relation to the Anti-Dummy
Law since it had been employing non- American aliens long before the decision in a
prior similar case. However, the main issue in Luzon Stevedoring was of
transcendental importance, involving the exercise or enjoyment of rights, franchises,
privileges, properties and businesses which only Filipinos and qualified corporations
could exercise or enjoy under the Constitution and the statutes. Moreover, the same
issue could be raised by appellant in an appropriate action. Thus, in Luzon
Stevedoring the Court deemed it necessary to finally dispose of the case for the
guidance of all concerned, despite the apparent procedural flaw in the petition.
The circumstances surrounding the present case, such as the supposed procedural
defect of the petition and the pivotal legal issue involved, resemble those in Luzon
Stevedoring. Consequently, in the interest of substantial justice and faithful adherence
14
to the Constitution, we opted to resolve this case for the guidance of the public and all
concerned parties.
II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."
Movants contend that the term "capital" in Section 11, Article XII of the Constitution
has long been settled and defined to refer to the total outstanding shares of stock,
whether voting or non-voting. In fact, movants claim that the SEC, which is the
administrative agency tasked to enforce the 60-40 ownership requirement in favor of
Filipino citizens in the Constitution and various statutes, has consistently adopted this
particular definition in its numerous opinions. Movants point out that with the 28 June
2011 Decision, the Court in effect introduced a "new" definition or "midstream
redefinition"9 of the term "capital" in Section 11, Article XII of the Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court has not interpreted or
defined the term "capital" found in various economic provisions of the 1935, 1973 and
1987 Constitutions. There has never been a judicial precedent interpreting the term
"capital" in the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently
wrong and utterly baseless to claim that the Court in defining the term "capital" in its
28 June 2011 Decision modified, reversed, or set aside the purported long-standing
definition of the term "capital," which supposedly refers to the total outstanding shares
of stock, whether voting or non-voting. To repeat, until the present case there has
never been a Court ruling categorically defining the term "capital" found in the various
economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.
The opinions of the SEC, as well as of the Department of Justice (DOJ), on the
definition of the term "capital" as referring to both voting and non-voting shares
(combined total of common and preferred shares) are, in the first place, conflicting
and inconsistent. There is no basis whatsoever to the claim that the SEC and the DOJ
have consistently and uniformly adopted a definition of the term "capital" contrary to
the definition that this Court adopted in its 28 June 2011 Decision.
In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term
"capital" in Section 9, Article XIV of the 1973 Constitution was raised, that is, whether
the term "capital" includes "both preferred and common stocks." The issue was raised
in relation to a stock-swap transaction between a Filipino and a Japanese corporation,
both stockholders of a domestic corporation that owned lands in the Philippines. Then
Minister of Justice Estelito P. Mendoza ruled that the resulting ownership structure of
the corporation would be unconstitutional because 60% of the voting stock would be
owned by Japanese while Filipinos would own only 40% of the voting stock, although
when the non-voting stock is added, Filipinos would own 60% of the combined voting
and non-voting stock. This ownership structure is remarkably similar to the
current ownership structure of PLDT. Minister Mendoza ruled:
xxxx
Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock
(common and preferred) while the Japanese investors control sixty percent (60%) of
the common (voting) shares.
It is your position that x x x since Section 9, Article XIV of the Constitution uses
the word "capital," which is construed "to include both preferred and common
shares" and "that where the law does not distinguish, the courts shall not
distinguish."
xxxx
In light of the foregoing jurisprudence, it is my opinion that the stock-swap
transaction in question may not be constitutionally upheld. While it may be
ordinary corporate practice to classify corporate shares into common voting shares
and preferred non-voting shares, any arrangement which attempts to defeat the
constitutional purpose should be eschewed. Thus, the resultant equity
arrangement which would place ownership of 60%11 of the common (voting)
shares in the Japanese group, while retaining 60% of the total percentage of
common and preferred shares in Filipino hands would amount to circumvention
of the principle of control by Philippine stockholders that is implicit in the 60%
Philippine nationality requirement in the Constitution. (Emphasis supplied)
In short, Minister Mendoza categorically rejected the theory that the term "capital" in
Section 9, Article XIV of the 1973 Constitution includes "both preferred and common
stocks" treated as the same class of shares regardless of differences in voting rights
and privileges. Minister Mendoza stressed that the 60-40 ownership requirement in
favor of Filipino citizens in the Constitution is not complied with unless the corporation
"satisfies the criterion of beneficial ownership" and that in applying the same "the
primordial consideration is situs of control."
15
On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo
Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-
Paco applied the Voting Control Test, that is, using only the voting stock to
determine whether a corporation is a Philippine national. The Opinion states:
Applying the foregoing, particularly the Control Test, MLRC is deemed as a
Philippine national because: (1) sixty percent (60%) of its outstanding capital
stock entitled to vote is owned by a Philippine national, the Trustee; and (2) at least
sixty percent (60%) of the ERF will accrue to the benefit of Philippine nationals. Still
pursuant to the Control Test, MLRC’s investment in 60% of BFDC’s outstanding
capital stock entitled to vote shall be deemed as of Philippine nationality,
thereby qualifying BFDC to own private land.
Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine
nationals, considering that: (1) sixty percent (60%) of their respective outstanding
capital stock entitled to vote is owned by a Philippine national (i.e., by the Trustee,
in the case of MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of
their respective board of directors are Filipino citizens. (Boldfacing and italicization
supplied)
Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of
the 60-40 ownership requirement in favor of Filipino citizens mandated by the
Constitution for certain economic activities. At the same time, these opinions highlight
the conflicting, contradictory, and inconsistent positions taken by the DOJ and the
SEC on the definition of the term "capital" found in the economic provisions of the
Constitution.
The opinions issued by SEC legal officers do not have the force and effect of SEC
rules and regulations because only the SEC en banc can adopt rules and regulations.
As expressly provided in Section 4.6 of the Securities Regulation Code,12 the SEC
cannot delegate to any of its individual Commissioner or staff the power to adopt any
rule or regulation. Further, under Section 5.1 of the same Code, it is the SEC as a
collegial body, and not any of its legal officers, that is empowered to
issue opinions and approve rules and regulations. Thus:
4.6. The Commission may, for purposes of efficiency, delegate any of its functions to
any department or office of the Commission, an individual Commissioner or staff
member of the Commission except its review or appellate authority and its power to
adopt, alter and supplement any rule or regulation.
The Commission may review upon its own initiative or upon the petition of any
interested party any action of any department or office, individual Commissioner, or
staff member of the Commission.
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act
with transparency and shall have the powers and functions provided by this Code,
Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law,
the Financing Company Act and other existing laws. Pursuant thereto the
Commission shall have, among others, the following powers and functions:
xxxx
(g) Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with such
rules, regulations and orders;
x x x x (Emphasis supplied)
Thus, the act of the individual Commissioners or legal officers of the SEC in issuing
opinions that have the effect of SEC rules or regulations is ultra vires. Under Sections
4.6 and 5.1(g) of the Code, only the SEC en banc can "issue opinions" that have the
force and effect of rules or regulations. Section 4.6 of the Code bars the SEC en
banc from delegating to any individual Commissioner or staff the power to adopt rules
or regulations. In short, any opinion of individual Commissioners or SEC legal
officers does not constitute a rule or regulation of the SEC.
The SEC admits during the Oral Arguments that only the SEC en banc, and not any of
its individual commissioners or legal staff, is empowered to issue opinions which have
the same binding effect as SEC rules and regulations, thus:
Significantly, the SEC en banc, which is the collegial body statutorily empowered to
issue rules and opinions on behalf of the SEC, has adopted even the Grandfather
Rule in determining compliance with the 60-40 ownership requirement in favor of
Filipino citizens mandated by the Constitution for certain economic activities. This
prevailing SEC ruling, which the SEC correctly adopted to thwart any circumvention of
the required Filipino "ownership and control," is laid down in the 25 March 2010
SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc.,
et al.,15 to wit:
16
The avowed purpose of the Constitution is to place in the hands of Filipinos the
exploitation of our natural resources. Necessarily, therefore, the Rule interpreting
the constitutional provision should not diminish that right through the legal
fiction of corporate ownership and control. But the constitutional provision, as
interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary to
the command of the Constitution. Hence, the Grandfather Rule must be applied to
accurately determine the actual participation, both direct and indirect, of
foreigners in a corporation engaged in a nationalized activity or business.
Compliance with the constitutional limitation(s) on engaging in nationalized activities
must be determined by ascertaining if 60% of the investing corporation’s outstanding
capital stock is owned by "Filipino citizens", or as interpreted, by natural or individual
Filipino citizens. If such investing corporation is in turn owned to some extent by
another investing corporation, the same process must be observed. One must not
stop until the citizenships of the individual or natural stockholders of layer after layer
of investing corporations have been established, the very essence of the Grandfather
Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to adopt the
Grandfather Rule. In one of the discussions on what is now Article XII of the present
Constitution, the framers made the following exchange:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in
Section 15.
This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40
ownership requirement in favor of Filipino citizens in the Constitution to engage in
certain economic activities applies not only to voting control of the corporation,
but also to the beneficial ownership of the corporation. Thus, in our 28 June 2011
Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in
the Constitution. Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is required. The legal
and beneficial ownership of 60 percent of the outstanding capital stock must rest in
the hands of Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis
supplied)
Both the Voting Control Test and the Beneficial Ownership Test must be applied to
determine whether a corporation is a "Philippine national."
The interpretation by legal officers of the SEC of the term "capital," embodied in
various opinions which respondents relied upon, is merely preliminary and an opinion
only of such officers. To repeat, any such opinion does not constitute an SEC rule or
regulation. In fact, many of these opinions contain a disclaimer which expressly
states: "x x x the foregoing opinion is based solely on facts disclosed in your query
and relevant only to the particular issue raised therein and shall not be used in the
nature of a standing rule binding upon the Commission in other cases whether
of similar or dissimilar circumstances."16 Thus, the opinions clearly make
a caveat that they do not constitute binding precedents on any one, not even on the
SEC itself.
Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law
are neither conclusive nor controlling and thus, do not bind the Court. It is hornbook
doctrine that any interpretation of the law that administrative or quasi-judicial agencies
make is only preliminary, never conclusive on the Court. The power to make a final
interpretation of the law, in this case the term "capital" in Section 11, Article XII of the
1987 Constitution, lies with this Court, not with any other government entity.
In his motion for reconsideration, the PSE President cites the cases of National
Telecommunications Commission v. Court of Appeals17 and Philippine Long Distance
Telephone Company v. National Telecommunications Commission18 in arguing that
the Court has already defined the term "capital" in Section 11, Article XII of the 1987
Constitution.19
The PSE President is grossly mistaken. In both cases of National
Telecommunications v. Court of Appeals20 and Philippine Long Distance Telephone
Company v. National Telecommunications Commission,21 the Court did not define the
term "capital" as found in Section 11, Article XII of the 1987 Constitution. In fact,
these two cases never mentioned, discussed or cited Section 11, Article XII of
the Constitution or any of its economic provisions, and thus cannot serve as
precedent in the interpretation of Section 11, Article XII of the Constitution.
These two cases dealt solely with the determination of the correct regulatory fees
under Section 40(e) and (f) of the Public Service Act, to wit:
(e) For annual reimbursement of the expenses incurred by the Commission in the
supervision of other public services and/or in the regulation or fixing of their rates,
twenty centavos for each one hundred pesos or fraction thereof, of the capital stock
17
subscribed or paid, or if no shares have been issued, of the capital invested, or of
the property and equipment whichever is higher.
(f) For the issue or increase of capital stock, twenty centavos for each one hundred
pesos or fraction thereof, of the increased capital. (Emphasis supplied)
The Court’s interpretation in these two cases of the terms "capital stock subscribed or
paid," "capital stock" and "capital" does not pertain to, and cannot control, the
definition of the term "capital" as used in Section 11, Article XII of the Constitution, or
any of the economic provisions of the Constitution where the term "capital" is found.
The definition of the term "capital" found in the Constitution must not be taken out of
context. A careful reading of these two cases reveals that the terms "capital stock
subscribed or paid," "capital stock" and "capital" were defined solely to determine the
basis for computing the supervision and regulation fees under Section 40(e) and (f) of
the Public Service Act.
III.
Filipinization of Public Utilities
The Preamble of the 1987 Constitution, as the prologue of the supreme law of the
land, embodies the ideals that the Constitution intends to achieve.22 The Preamble
reads:
We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build
a just and humane society, and establish a Government that shall embody our ideals
and aspirations, promote the common good, conserve and develop our patrimony,
and secure to ourselves and our posterity, the blessings of independence and
democracy under the rule of law and a regime of truth, justice, freedom, love, equality,
and peace, do ordain and promulgate this Constitution. (Emphasis supplied)
Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as
State policy the development of a national economy "effectively controlled" by
Filipinos:
Section 19. The State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:
Section 10. The Congress shall, upon recommendation of the economic and planning
agency, when the national interest dictates, reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by
such citizens, or such higher percentage as Congress may prescribe, certain areas of
investments. The Congress shall enact measures that will encourage the formation
and operation of enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and
patrimony, the State shall give preference to qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its
national jurisdiction and in accordance with its national goals and priorities.23
Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to
citizens of the Philippines or to corporations or associations at least sixty per
centum of whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments." Thus, in numerous laws
Congress has reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the "capital" of which is owned by Filipino
citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or
R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna
Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine
Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping
Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of
2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.
With respect to public utilities, the 1987 Constitution specifically ordains:
Section 11. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines
or to corporations or associations organized under the laws of the Philippines,
at least sixty per centum of whose capital is owned by such citizens; nor shall
such franchise, certificate, or authorization be exclusive in character or for a longer
period than fifty years. Neither shall any such franchise or right be granted except
under the condition that it shall be subject to amendment, alteration, or repeal by the
Congress when the common good so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of foreign
investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines. (Emphasis supplied)
18
This provision, which mandates the Filipinization of public utilities, requires that any
form of authorization for the operation of public utilities shall be granted only to
"citizens of the Philippines or to corporations or associations organized under the laws
of the Philippines at least sixty per centum of whose capital is owned by such
citizens." "The provision is [an express] recognition of the sensitive and vital
position of public utilities both in the national economy and for national
security."24
The 1987 Constitution reserves the ownership and operation of public utilities
exclusively to (1) Filipino citizens, or (2) corporations or associations at least 60
percent of whose "capital" is owned by Filipino citizens. Hence, in the case of
individuals, only Filipino citizens can validly own and operate a public utility. In the
case of corporations or associations, at least 60 percent of their "capital" must be
owned by Filipino citizens. In other words, under Section 11, Article XII of the 1987
Constitution, to own and operate a public utility a corporation’s capital must at
least be 60 percent owned by Philippine nationals.
IV.
Definition of "Philippine National"
Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution,
Congress enacted Republic Act No. 7042 or the Foreign Investments Act of
1991 (FIA), as amended, which defined a "Philippine national" as follows:
SEC. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which
one hundred percent (100%) of the capital stock outstanding and entitled to vote is
wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own
stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least
sixty percent (60%) of the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the Philippines and at least
sixty percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the corporation, shall be
considered a "Philippine national." (Boldfacing, italicization and underscoring
supplied)
Thus, the FIA clearly and unequivocally defines a "Philippine national" as a
Philippine citizen, or a domestic corporation at least "60% of the capital stock
outstanding and entitled to vote" is owned by Philippine citizens.
The definition of a "Philippine national" in the FIA reiterated the meaning of such term
as provided in its predecessor statute, Executive Order No. 226 or the Omnibus
Investments Code of 1987,25 which was issued by then President Corazon C. Aquino.
Article 15 of this Code states:
Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic
partnership or association wholly-owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty
per cent (60%) of the capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national
and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own
stock in a registered enterprise, at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote of both corporations must be owned and held by the
citizens of the Philippines and at least sixty per cent (60%) of the members of the
Board of Directors of both corporations must be citizens of the Philippines in order
that the corporation shall be considered a Philippine national. (Boldfacing, italicization
and underscoring supplied)
Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x
which is not a ‘Philippine national’ x x x shall do business
x x x in the Philippines x x x without first securing from the Board of Investments a
written certificate to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines."27 Thus, a "non-
Philippine national" cannot own and operate a reserved economic activity like a public
utility. This means, of course, that only a "Philippine national" can own and operate a
public utility.
19
In turn, the definition of a "Philippine national" under Article 15 of the Omnibus
Investments Code of 1987 was a reiteration of the meaning of such term as provided
in Article 14 of the Omnibus Investments Code of 1981,28 to wit:
Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty
per cent (60%) of the capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national
and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own
stock in a registered enterprise, at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote of both corporations must be owned and held by the
citizens of the Philippines and at least sixty per cent (60%) of the members of the
Board of Directors of both corporations must be citizens of the Philippines in order
that the corporation shall be considered a Philippine national. (Boldfacing, italicization
and underscoring supplied)
Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x
which is not a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x
without first securing a written certificate from the Board of Investments to the effect
that such business or economic activity x x x would not conflict with the Constitution
or laws of the Philippines."29 Thus, a "non-Philippine national" cannot own and operate
a reserved economic activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.
Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or
the Investment Incentives Act, which took effect on 16 September 1967, contained a
similar definition of a "Philippine national," to wit:
(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or
association wholly owned by citizens of the Philippines; or a corporation organized
under the laws of the Philippines of which at least sixty per cent of the capital
stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine National and at least sixty per
cent of the fund will accrue to the benefit of Philippine Nationals: Provided, That
where a corporation and its non-Filipino stockholders own stock in a registered
enterprise, at least sixty per cent of the capital stock outstanding and entitled to vote
of both corporations must be owned and held by the citizens of the Philippines and at
least sixty per cent of the members of the Board of Directors of both corporations
must be citizens of the Philippines in order that the corporation shall be considered a
Philippine National. (Boldfacing, italicization and underscoring supplied)
Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act,
which took effect on 30 September 1968, if the investment in a domestic enterprise by
non-Philippine nationals exceeds 30% of its outstanding capital stock, such enterprise
must obtain prior approval from the Board of Investments before accepting such
investment. Such approval shall not be granted if the investment "would conflict with
existing constitutional provisions and laws regulating the degree of required
ownership by Philippine nationals in the enterprise."31 A "non-Philippine national"
cannot own and operate a reserved economic activity like a public utility. Again, this
means that only a "Philippine national" can own and operate a public utility.
The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as
a Filipino citizen, or a domestic corporation "at least sixty percent (60%) of the
capital stock outstanding and entitled to vote" is owned by Filipino citizens. A
domestic corporation is a "Philippine national" only if at least 60% of its voting
stock is owned by Filipino citizens. This definition of a "Philippine national" is crucial
in the present case because the FIA reiterates and clarifies Section 11, Article XII of
the 1987 Constitution, which limits the ownership and operation of public utilities to
Filipino citizens or to corporations or associations at least 60% Filipino-owned.
The FIA is the basic law governing foreign investments in the Philippines, irrespective
of the nature of business and area of investment. The FIA spells out the procedures
by which non-Philippine nationals can invest in the Philippines. Among the key
features of this law is the concept of a negative list or the Foreign Investments
Negative List.32 Section 8 of the law states:
SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign
Investment Negative List]. - The Foreign Investment Negative List shall have
two 2 component lists: A and B:
a. List A shall enumerate the areas of activities reserved to Philippine nationals
by mandate of the Constitution and specific laws.
b. List B shall contain the areas of activities and enterprises regulated pursuant to law:
20
1. which are defense-related activities, requiring prior clearance and authorization
from the Department of National Defense [DND] to engage in such activity, such as
the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal
weapons, military ordinance, explosives, pyrotechnics and similar materials; unless
such manufacturing or repair activity is specifically authorized, with a substantial
export component, to a non-Philippine national by the Secretary of National Defense;
or
2. which have implications on public health and morals, such as the manufacture and
distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses,
dance halls, sauna and steam bathhouses and massage clinics. (Boldfacing,
underscoring and italicization supplied)
Section 8 of the FIA enumerates the investment areas "reserved to Philippine
nationals." Foreign Investment Negative List A consists of "areas of activities
reserved to Philippine nationals by mandate of the Constitution and specific
laws," where foreign equity participation in any enterprise shall be limited to the
maximum percentage expressly prescribed by the Constitution and other
specific laws. In short, to own and operate a public utility in the Philippines one
must be a "Philippine national" as defined in the FIA. The FIA is abundant
notice to foreign investors to what extent they can invest in public utilities in
the Philippines.
To repeat, among the areas of investment covered by the Foreign Investment
Negative List A is the ownership and operation of public utilities, which the
Constitution expressly reserves to Filipino citizens and to corporations at least 60%
owned by Filipino citizens. In other words, Negative List A of the FIA reserves the
ownership and operation of public utilities only to "Philippine nationals,"
defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a
corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or (4) a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which
one hundred percent (100%) of the capital stock outstanding and entitled to vote is
wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals."
Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of
the Omnibus Investments Code of 1981, to the enactment of the Omnibus
Investments Code of 1987, and to the passage of the present Foreign Investments
Act of 1991, or for more than four decades, the statutory definition of the term
"Philippine national" has been uniform and consistent: it means a Filipino
citizen, or a domestic corporation at least 60% of the voting stock is owned by
Filipinos. Likewise, these same statutes have uniformly and consistently
required that only "Philippine nationals" could own and operate public utilities
in the Philippines. The following exchange during the Oral Arguments is revealing:
Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the
FIA which categorically prescribe that certain economic activities, like the ownership
and operation of public utilities, are reserved to corporations "at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines." Foreign Investment Negative List A refers to "activities
reserved to Philippine nationals by mandate of the Constitution and specific
laws." The FIA is the basic statute regulating foreign investments in the
Philippines. Government agencies tasked with regulating or monitoring foreign
investments, as well as counsels of foreign investors, should start with the FIA in
determining to what extent a particular foreign investment is allowed in the
Philippines. Foreign investors and their counsels who ignore the FIA do so at their
own peril. Foreign investors and their counsels who rely on opinions of SEC legal
officers that obviously contradict the FIA do so also at their own peril.
Occasional opinions of SEC legal officers that obviously contradict the FIA should
immediately raise a red flag. There are already numerous opinions of SEC legal
officers that cite the definition of a "Philippine national" in Section 3(a) of the FIA in
determining whether a particular corporation is qualified to own and operate a
nationalized or partially nationalized business in the Philippines. This shows that SEC
legal officers are not only aware of, but also rely on and invoke, the provisions of the
FIA in ascertaining the eligibility of a corporation to engage in partially nationalized
industries. The following are some of such opinions:
1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;
2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the
Philippine Overseas Employment Administration;
3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda
and Renato S. Calma;
21
 4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos
& Jardeleza;
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura
Sayoc & De Los Angeles;
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and
Rudyard S. Arbolado.
The SEC legal officers’ occasional but blatant disregard of the definition of the term
"Philippine national" in the FIA signifies their lack of integrity and competence in
resolving issues on the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution.
The PSE President argues that the term "Philippine national" defined in the FIA
should be limited and interpreted to refer to corporations seeking to avail of tax and
fiscal incentives under investment incentives laws and cannot be equated with the
term "capital" in Section 11, Article XII of the 1987 Constitution. Pangilinan similarly
contends that the FIA and its predecessor statutes do not apply to "companies which
have not registered and obtained special incentives under the schemes established
by those laws."
Both are desperately grasping at straws. The FIA does not grant tax or fiscal
incentives to any enterprise. Tax and fiscal incentives to investments are granted
separately under the Omnibus Investments Code of 1987, not under the FIA. In fact,
the FIA expressly repealed Articles 44 to 56 of Book II of the Omnibus Investments
Code of 1987, which articles previously regulated foreign investments in nationalized
or partially nationalized industries.
The FIA is the applicable law regulating foreign investments in nationalized or partially
nationalized industries. There is nothing in the FIA, or even in the Omnibus
Investments Code of 1987 or its predecessor statutes, that states, expressly or
impliedly, that the FIA or its predecessor statutes do not apply to enterprises not
availing of tax and fiscal incentives under the Code. The FIA and its predecessor
statutes apply to investments in all domestic enterprises, whether or not such
enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of
1987 or its predecessor statutes. The reason is quite obvious – mere non-
availment of tax and fiscal incentives by a non-Philippine national cannot
exempt it from Section 11, Article XII of the Constitution regulating foreign
investments in public utilities. In fact, the Board of Investments’ Primer on
Investment Policies in the Philippines,34 which is given out to foreign investors,
provides:
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES
Investors who do not seek incentives and/or whose chosen activities do not qualify for
incentives, (i.e., the activity is not listed in the IPP, and they are not exporting at least
70% of their production) may go ahead and make the investments without seeking
incentives. They only have to be guided by the Foreign Investments Negative
List (FINL).
The FINL clearly defines investment areas requiring at least 60% Filipino ownership.
All other areas outside of this list are fully open to foreign investors. (Emphasis
supplied)
V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino ownership required
by the Constitution to engage in certain economic activities applies not only to voting
control of the corporation, but also to the beneficial ownership of the corporation.
To repeat, we held:
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is required. The legal
and beneficial ownership of 60 percent of the outstanding capital stock must rest in
the hands of Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis
supplied)
This is consistent with Section 3 of the FIA which provides that where 100% of the
capital stock is held by "a trustee of funds for pension or other employee retirement or
separation benefits," the trustee is a Philippine national if "at least sixty percent (60%)
of the fund will accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of
the Implementing Rules of the FIA provides that "for stocks to be deemed owned and
held by Philippine citizens or Philippine nationals, mere legal title is not enough to
22
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled
with appropriate voting rights, is essential."
Since the constitutional requirement of at least 60 percent Filipino ownership applies
not only to voting control of the corporation but also to the beneficial ownership of the
corporation, it is therefore imperative that such requirement apply uniformly and
across the board to all classes of shares, regardless of nomenclature and category,
comprising the capital of a corporation. Under the Corporation Code, capital
stock35 consists of all classes of shares issued to stockholders, that is, common shares
as well as preferred shares, which may have different rights, privileges or restrictions
as stated in the articles of incorporation.36
The Corporation Code allows denial of the right to vote to preferred and redeemable
shares, but disallows denial of the right to vote in specific corporate matters. Thus,
common shares have the right to vote in the election of directors, while preferred
shares may be denied such right. Nonetheless, preferred shares, even if denied the
right to vote in the election of directors, are entitled to vote on the following corporate
matters: (1) amendment of articles of incorporation; (2) increase and decrease of
capital stock; (3) incurring, creating or increasing bonded indebtedness; (4) sale,
lease, mortgage or other disposition of substantially all corporate assets; (5)
investment of funds in another business or corporation or for a purpose other than the
primary purpose for which the corporation was organized; (6) adoption, amendment
and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of
corporation.37
Since a specific class of shares may have rights and privileges or restrictions different
from the rest of the shares in a corporation, the 60-40 ownership requirement in favor
of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to
shares with voting rights but also to shares without voting rights. Preferred shares,
denied the right to vote in the election of directors, are anyway still entitled to vote on
the eight specific corporate matters mentioned above. Thus, if a corporation,
engaged in a partially nationalized industry, issues a mixture of common and
preferred non-voting shares, at least 60 percent of the common shares and at
least 60 percent of the preferred non-voting shares must be owned by
Filipinos. Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos. In short, the 60-40
ownership requirement in favor of Filipino citizens must apply separately to
each class of shares, whether common, preferred non-voting, preferred voting
or any other class of shares. This uniform application of the 60-40 ownership
requirement in favor of Filipino citizens clearly breathes life to the constitutional
command that the ownership and operation of public utilities shall be reserved
exclusively to corporations at least 60 percent of whose capital is Filipino-owned.
Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to
each class of shares, regardless of differences in voting rights, privileges and
restrictions, guarantees effective Filipino control of public utilities, as mandated by the
Constitution.
Moreover, such uniform application to each class of shares insures that the
"controlling interest" in public utilities always lies in the hands of Filipino citizens. This
addresses and extinguishes Pangilinan’s worry that foreigners, owning most of the
non-voting shares, will exercise greater control over fundamental corporate matters
requiring two-thirds or majority vote of all shareholders.
VI.
Intent of the framers of the Constitution
While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations
of the Constitutional Commission to support his claim that the term "capital" refers to
the total outstanding shares of stock, whether voting or non-voting, the following
excerpts of the deliberations reveal otherwise. It is clear from the following exchange
that the term "capital" refers to controlling interest of a corporation, thus:
The use of the term "capital" was intended to replace the word "stock" because
associations without stocks can operate public utilities as long as they meet the 60-40
ownership requirement in favor of Filipino citizens prescribed in Section 11, Article XII
of the Constitution. However, this did not change the intent of the framers of the
Constitution to reserve exclusively to Philippine nationals the "controlling interest" in
public utilities.
During the drafting of the 1935 Constitution, economic protectionism was "the battle-
cry of the nationalists in the Convention."41 The same battle-cry resulted in the
nationalization of the public utilities.42 This is also the same intent of the framers of the
1987 Constitution who adopted the exact formulation embodied in the 1935 and 1973
Constitutions on foreign equity limitations in partially nationalized industries.
The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Court’s
interpretation of the term "capital." In its Consolidated Comment, the OSG explains
that the deletion of the phrase "controlling interest" and replacement of the word
"stock" with the term "capital" were intended specifically to extend the scope of the
entities qualified to operate public utilities to include associations without stocks. The
23
framers’ omission of the phrase "controlling interest" did not mean the inclusion of all
shares of stock, whether voting or non-voting. The OSG reiterated essentially the
Court’s declaration that the Constitution reserved exclusively to Philippine nationals
the ownership and operation of public utilities consistent with the State’s policy to
"develop a self-reliant and independent national economy effectively controlled by
Filipinos."
As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the
total outstanding capital stock, treated as a single class regardless of the actual
classification of shares, grossly contravenes the intent and letter of the Constitution
that the "State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos." We illustrated the glaring anomaly
which would result in defining the term "capital" as the total outstanding capital stock
of a corporation, treated as a single class of shares regardless of the actual
classification of shares, to wit:
Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (₱ 1.00) per share. Under the broad definition of the
term "capital," such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming majority,
or more than 99.999 percent, of the total outstanding capital stock is Filipino owned.
This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting
rights in the election of directors, even if they hold only 100 shares. The foreigners,
with a minuscule equity of less than 0.001 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the
public utility. This starkly circumvents the intent of the framers of the Constitution, as
well as the clear language of the Constitution, to place the control of public utilities in
the hands of Filipinos. x x x
Further, even if foreigners who own more than forty percent of the voting shares elect
an all-Filipino board of directors, this situation does not guarantee Filipino control and
does not in any way cure the violation of the Constitution. The independence of the
Filipino board members so elected by such foreign shareholders is highly doubtful. As
the OSG pointed out, quoting Justice George Sutherland’s words in Humphrey’s
Executor v. US,44 "x x x it is quite evident that one who holds his office only during the
pleasure of another cannot be depended upon to maintain an attitude of
independence against the latter’s will." Allowing foreign shareholders to elect a
controlling majority of the board, even if all the directors are Filipinos, grossly
circumvents the letter and intent of the Constitution and defeats the very purpose of
our nationalization laws.
VII.
Last sentence of Section 11, Article XII of the Constitution
The last sentence of Section 11, Article XII of the 1987 Constitution reads:
The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens
of the Philippines.
During the Oral Arguments, the OSG emphasized that there was never a question on
the intent of the framers of the Constitution to limit foreign ownership, and assure
majority Filipino ownership and control of public utilities. The OSG argued, "while the
delegates disagreed as to the percentage threshold to adopt, x x x the records show
they clearly understood that Filipino control of the public utility corporation can only be
and is obtained only through the election of a majority of the members of the board."
Indeed, the only point of contention during the deliberations of the Constitutional
Commission on 23 August 1986 was the extent of majority Filipino control of public
utilities. This is evident from the following exchange:
THE PRESIDENT. Commissioner Jamir is recognized.
MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to
delete the phrase "two thirds of whose voting stock or controlling interest," and
instead substitute the words "SIXTY PERCENT OF WHOSE CAPITAL" so that the
sentence will read: "No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines at least
SIXTY PERCENT OF WHOSE CAPITAL is owned by such citizens."
While they had differing views on the percentage of Filipino ownership of capital, it is
clear that the framers of the Constitution intended public utilities to
be majority Filipino-owned and controlled. To ensure that Filipinos control public
utilities, the framers of the Constitution approved, as additional safeguard, the
24
inclusion of the last sentence of Section 11, Article XII of the Constitution
commanding that "[t]he participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share in its capital, and all
the executive and managing officers of such corporation or association must be
citizens of the Philippines." In other words, the last sentence of Section 11, Article XII
of the Constitution mandates that (1) the participation of foreign investors in the
governing body of the corporation or association shall be limited to their proportionate
share in the capital of such entity; and (2) all officers of the corporation or association
must be Filipino citizens.
Commissioner Rosario Braid proposed the inclusion of the phrase requiring the
managing officers of the corporation or association to be Filipino citizens specifically
to prevent management contracts, which were designed primarily to circumvent the
Filipinization of public utilities, and to assure Filipino control of public utilities, thus:
MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision
by adding a phrase which states: "THE MANAGEMENT BODY OF EVERY
CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY
CITIZENS OF THE PHILIPPINES." I have with me their position paper.
The results show 29 votes in favor and 4 against; Section 15, as amended, is
approved.48 (Emphasis supplied)
The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the
provision on the limited participation of foreign investors in the governing body of
public utilities, is a reiteration of the last sentence of Section 5, Article XIV of the 1973
Constitution,49 signifying its importance in reserving ownership and control of public
utilities to Filipino citizens.
VIII.
The undisputed facts
There is no dispute, and respondents do not claim the contrary, that (1) foreigners
own 64.27% of the common shares of PLDT, which class of shares exercises
the sole right to vote in the election of directors, and thus foreigners control PLDT; (2)
Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the
voting stock, and thus Filipinos do not control PLDT; (3) preferred shares, 99.44%
owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the
dividends that common shares earn;50 (5) preferred shares have twice the par value of
common shares; and (6) preferred shares constitute 77.85% of the authorized capital
stock of PLDT and common shares only 22.15%.
Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling
on the question of whether PLDT violated the 60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of the 1987 Constitution. Such question
indisputably calls for a presentation and determination of evidence through a hearing,
which is generally outside the province of the Court’s jurisdiction, but well within the
SEC’s statutory powers. Thus, for obvious reasons, the Court limited its decision on
the purely legal and threshold issue on the definition of the term "capital" in Section
11, Article XII of the Constitution and directed the SEC to apply such definition in
determining the exact percentage of foreign ownership in PLDT.
IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.
In his petition, Gamboa prays, among others:
xxxx
5. For the Honorable Court to issue a declaratory relief that ownership of common or
voting shares is the sole basis in determining foreign equity in a public utility and that
any other government rulings, opinions, and regulations inconsistent with this
declaratory relief be declared unconstitutional and a violation of the intent and spirit of
the 1987 Constitution;
6. For the Honorable Court to declare null and void all sales of common stocks to
foreigners in excess of 40 percent of the total subscribed common shareholdings; and
7. For the Honorable Court to direct the Securities and Exchange
Commission and Philippine Stock Exchange to require PLDT to make a public
disclosure of all of its foreign shareholdings and their actual and real beneficial
owners.
Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)
As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the
SEC to perform its statutory duty to investigate whether "the required percentage of
25
ownership of the capital stock to be owned by citizens of the Philippines has been
complied with [by PLDT] as required by x x x the Constitution."51 Such plea clearly
negates SEC’s argument that it was not impleaded.
Granting that only the SEC Chairman was impleaded in this case, the Court has
ample powers to order the SEC’s compliance with its directive contained in the 28
June 2011 Decision in view of the far-reaching implications of this case. In Domingo v.
Scheer,52 the Court dispensed with the amendment of the pleadings to implead the
Bureau of Customs considering (1) the unique backdrop of the case; (2) the utmost
need to avoid further delays; and (3) the issue of public interest involved. The Court
held:
The Court may be curing the defect in this case by adding the BOC as party-
petitioner. The petition should not be dismissed because the second action would only
be a repetition of the first. In Salvador, et al., v. Court of Appeals, et al., we held that
this Court has full powers, apart from that power and authority which is inherent, to
amend the processes, pleadings, proceedings and decisions by substituting as party-
plaintiff the real party-in-interest. The Court has the power to avoid delay in the
disposition of this case, to order its amendment as to implead the BOC as
party-respondent. Indeed, it may no longer be necessary to do so taking into
account the unique backdrop in this case, involving as it does an issue of
public interest. After all, the Office of the Solicitor General has represented the
petitioner in the instant proceedings, as well as in the appellate court, and maintained
the validity of the deportation order and of the BOC’s Omnibus Resolution. It cannot,
thus, be claimed by the State that the BOC was not afforded its day in court, simply
because only the petitioner, the Chairperson of the BOC, was the respondent in the
CA, and the petitioner in the instant recourse. In Alonso v. Villamor, we had the
occasion to state:
There is nothing sacred about processes or pleadings, their forms or contents.
Their sole purpose is to facilitate the application of justice to the rival claims of
contending parties. They were created, not to hinder and delay, but to facilitate and
promote, the administration of justice. They do not constitute the thing itself, which
courts are always striving to secure to litigants. They are designed as the means best
adapted to obtain that thing. In other words, they are a means to an end. When they
lose the character of the one and become the other, the administration of justice is at
fault and courts are correspondingly remiss in the performance of their obvious
duty.53 (Emphasis supplied)
In any event, the SEC has expressly manifested54 that it will abide by the Court’s
decision and defer to the Court’s definition of the term "capital" in Section 11,
Article XII of the Constitution. Further, the SEC entered its special appearance
in this case and argued during the Oral Arguments, indicating its submission to
the Court’s jurisdiction. It is clear, therefore, that there exists no legal
impediment against the proper and immediate implementation of the Court’s
directive to the SEC.
PLDT is an indispensable party only insofar as the other issues, particularly the
factual questions, are concerned. In other words, PLDT must be impleaded in order to
fully resolve the issues on (1) whether the sale of 111,415 PTIC shares to First Pacific
violates the constitutional limit on foreign ownership of PLDT; (2) whether the sale of
common shares to foreigners exceeded the 40 percent limit on foreign equity in
PLDT; and (3) whether the total percentage of the PLDT common shares with voting
rights complies with the 60-40 ownership requirement in favor of Filipino citizens
under the Constitution for the ownership and operation of PLDT. These issues
indisputably call for an examination of the parties’ respective evidence, and thus are
clearly within the jurisdiction of the SEC. In short, PLDT must be impleaded, and must
necessarily be heard, in the proceedings before the SEC where the factual issues will
be thoroughly threshed out and resolved.
Notably, the foregoing issues were left untouched by the Court. The Court did
not rule on the factual issues raised by Gamboa, except the single and purely legal
issue on the definition of the term "capital" in Section 11, Article XII of the
Constitution. The Court confined the resolution of the instant case to this threshold
legal issue in deference to the fact-finding power of the SEC.
Needless to state, the Court can validly, properly, and fully dispose of the fundamental
legal issue in this case even without the participation of PLDT since defining the term
"capital" in Section 11, Article XII of the Constitution does not, in any way, depend on
whether PLDT was impleaded. Simply put, PLDT is not indispensable for a complete
resolution of the purely legal question in this case.55 In fact, the Court, by treating the
petition as one for mandamus,56 merely directed the SEC to apply the Court’s definition
of the term "capital" in Section 11, Article XII of the Constitution in determining
whether PLDT committed any violation of the said constitutional provision. The
dispositive portion of the Court’s ruling is addressed not to PLDT but solely to
the SEC, which is the administrative agency tasked to enforce the 60-40
ownership requirement in favor of Filipino citizens in Section 11, Article XII of
the Constitution.
26
Since the Court limited its resolution on the purely legal issue on the definition of the
term "capital" in Section 11, Article XII of the 1987 Constitution, and directed the SEC
to investigate any violation by PLDT of the 60-40 ownership requirement in favor of
Filipino citizens under the Constitution,57 there is no deprivation of PLDT’s property or
denial of PLDT’s right to due process, contrary to Pangilinan and Nazareno’s
misimpression. Due process will be afforded to PLDT when it presents proof to the
SEC that it complies, as it claims here, with Section 11, Article XII of the Constitution.
X.
Foreign Investments in the Philippines
Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as
it may result in a sudden flight of existing foreign investors to "friendlier" countries and
simultaneously deterring new foreign investors to our country. In particular, the PSE
claims that the 28 June 2011 Decision may result in the following: (1) loss of more
than ₱ 630 billion in foreign investments in PSE-listed shares; (2) massive decrease
in foreign trading transactions; (3) lower PSE Composite Index; and (4) local investors
not investing in PSE-listed shares.58
Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared
movants’ apprehension. Without providing specific details, he pointed out the
depressing state of the Philippine economy compared to our neighboring countries
which boast of growing economies. Further, Dr. Villegas explained that the solution to
our economic woes is for the government to "take-over" strategic industries, such as
the public utilities sector, thus:
JUSTICE CARPIO:
I would like also to get from you Dr. Villegas if you have additional information on
whether this high FDI59 countries in East Asia have allowed foreigners x x x control [of]
their public utilities, so that we can compare apples with apples.
DR. VILLEGAS:
Correct, but let me just make a comment. When these neighbors of ours find an
industry strategic, their solution is not to "Filipinize" or "Vietnamize" or
"Singaporize." Their solution is to make sure that those industries are in the
hands of state enterprises. So, in these countries, nationalization means the
government takes over. And because their governments are competent and
honest enough to the public, that is the solution. x x x 60 (Emphasis supplied)
If government ownership of public utilities is the solution, then foreign investments in
our public utilities serve no purpose. Obviously, there can never be foreign
investments in public utilities if, as Dr. Villegas claims, the "solution is to make sure
that those industries are in the hands of state enterprises." Dr. Villegas’s argument
that foreign investments in telecommunication companies like PLDT are badly needed
to save our ailing economy contradicts his own theory that the solution is for
government to take over these companies. Dr. Villegas is barking up the wrong tree
since State ownership of public utilities and foreign investments in such industries are
diametrically opposed concepts, which cannot possibly be reconciled.
In any event, the experience of our neighboring countries cannot be used as
argument to decide the present case differently for two reasons. First, the
governments of our neighboring countries have, as claimed by Dr. Villegas, taken
over ownership and control of their strategic public utilities like the
telecommunications industry. Second, our Constitution has specific provisions limiting
foreign ownership in public utilities which the Court is sworn to uphold regardless of
the experience of our neighboring countries.
In our jurisdiction, the Constitution expressly reserves the ownership and operation of
public utilities to Filipino citizens, or corporations or associations at least 60 percent of
whose capital belongs to Filipinos. Following Dr. Villegas’s claim, the Philippines
appears to be more liberal in allowing foreign investors to own 40 percent of public
utilities, unlike in other Asian countries whose governments own and operate such
industries.
XI.
Prospective Application of Sanctions
In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning
period of the application and imposition of appropriate sanctions against PLDT if
found violating Section 11, Article XII of the Constitution. 1avv phi 1
As discussed, the Court has directed the SEC to investigate and determine whether
PLDT violated Section 11, Article XII of the Constitution. Thus, there is no dispute that
it is only after the SEC has determined PLDT’s violation, if any exists at the time of the
commencement of the administrative case or investigation, that the SEC may impose
the statutory sanctions against PLDT. In other words, once the 28 June 2011 Decision
becomes final, the SEC shall impose the appropriate sanctions only if it finds after due
hearing that, at the start of the administrative case or investigation, there is an existing
violation of Section 11, Article XII of the Constitution. Under prevailing jurisprudence,
27
public utilities that fail to comply with the nationality requirement under Section 11,
Article XII and the FIA can cure their deficiencies prior to the start of the administrative
case or investigation.61
XII.
Final Word
The Constitution expressly declares as State policy the development of an economy
"effectively controlled" by Filipinos. Consistent with such State policy, the
Constitution explicitly reserves the ownership and operation of public utilities to
Philippine nationals, who are defined in the Foreign Investments Act of 1991 as
Filipino citizens, or corporations or associations at least 60 percent of whose
capital with voting rights belongs to Filipinos. The FIA’s implementing rules explain
that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine
nationals, mere legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate voting rights is
essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that
the term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares
with voting rights, as well as with full beneficial ownership. This is precisely
because the right to vote in the election of directors, coupled with full beneficial
ownership of stocks, translates to effective control of a corporation.
Any other construction of the term "capital" in Section 11, Article XII of the
Constitution contravenes the letter and intent of the Constitution. Any other meaning
of the term "capital" openly invites alien domination of economic activities reserved
exclusively to Philippine nationals. Therefore, respondents’ interpretation will
ultimately result in handing over effective control of our national economy to
foreigners in patent violation of the Constitution, making Filipinos second-class
citizens in their own country.
Filipinos have only to remind themselves of how this country was exploited under the
Parity Amendment, which gave Americans the same rights as Filipinos in the
exploitation of natural resources, and in the ownership and control of public utilities, in
the Philippines. To do this the 1935 Constitution, which contained the same 60
percent Filipino ownership and control requirement as the present 1987 Constitution,
had to be amended to give Americans parity rights with Filipinos. There was bitter
opposition to the Parity Amendment62 and many Filipinos eagerly awaited its
expiration. In late 1968, PLDT was one of the American-controlled public utilities that
became Filipino-controlled when the controlling American stockholders divested in
anticipation of the expiration of the Parity Amendment on 3 July 1974.63 No economic
suicide happened when control of public utilities and mining corporations passed to
Filipinos’ hands upon expiration of the Parity Amendment.
Movants’ interpretation of the term "capital" would bring us back to the same evils
spawned by the Parity Amendment, effectively giving foreigners parity rights with
Filipinos, but this time even without any amendment to the present
Constitution. Worse, movants’ interpretation opens up our national economy
to effective control not only by Americans but also by all foreigners, be they
Indonesians, Malaysians or Chinese, even in the absence of reciprocal treaty
arrangements. At least the Parity Amendment, as implemented by the Laurel-
Langley Agreement, gave the capital-starved Filipinos theoretical parity – the same
rights as Americans to exploit natural resources, and to own and control public
utilities, in the United States of America. Here, movants’ interpretation would
effectively mean a unilateral opening up of our national economy to all
foreigners, without any reciprocal arrangements. That would mean that
Indonesians, Malaysians and Chinese nationals could effectively control our mining
companies and public utilities while Filipinos, even if they have the capital, could not
control similar corporations in these countries.
The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership
and control requirement for public utilities like PLOT. Any deviation from this
requirement necessitates an amendment to the Constitution as exemplified by the
Parity Amendment. This Court has no power to amend the Constitution for its power
and duty is only to faithfully apply and interpret the Constitution.
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further
pleadings shall be entertained.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
28

SECOND DIVISION
[G.R. NO. 136978 : May 8, 2009]
GD EXPRESS WORLDWIDE N.V. and AMIHAN MANAGEMENT SERVICES,
INC., Petitioners, v. HON. COURT OF APPEALS (FOURTH DIVISION), HON. SECURITIES
AND EXCHANGE COMMISSION (en banc), HON. ROSITA R. GUERRERO, in her capacity as
Hearing Officer, and FILCHART AIRWAYS, INC., Respondents*** .
DECISION
TINGA, J.:
Before the Court is a Petition for Review on Certiorari 1 under Rule 45 of the 1997 Rules of Civil
Procedure assailing the Decision2 of the Court of Appeals in CA-G.R. SP No. 48442 and praying for
the dismissal of the petition filed before the Securities and Exchange Commission (SEC) by
respondent Filchart Airways, Inc. (Filchart) in SEC Case No. 08-97-5746.
The following factual antecedents are matters of record.
Petitioner GD Express Worldwide N.V. (GD Express) is a corporation duly organized and existing
under the laws of the Netherlands. On 27 September 1990, its predecessor-in-interest, TNT
Limited (TNT) entered into a joint venture agreement with Philippine Aerospace Development
Corporation (PADC) for the establishment of a domestic corporation as their corporate vehicle to
operate as an international air freight carrier. The joint venture agreements stipulated that PADC
would own 80% of the shares of stock of the corporate vehicle while TNT would own the remaining
20%.3
The agreements essentially laid down the relationship between TNT and PADC and the
management, control and existence of the corporation. Also, pursuant to the joint venture
agreements, PADC and TNT registered with the SEC a corporation to be known as Air Philippines
Corporation (APC).
Subsequently, on 11 December 1992, APC amended its articles of incorporation to change its
corporate name to Pacific East Asia Cargo Airlines, Inc. (PEAC). On 02 April 1993, TNT transferred
all its shares in PEAC to petitioner GD Express.4 PEAC immediately commenced operations. Herein
petitioner Amihan Management Services, Inc. (Amihan), a domestic corporation, was contracted
to undertake the daily operations in PEAC pursuant to the joint venture agreement.5
Sometime in 1994, the Office of the President mandated the Committee on Privatization to require
the Asset Privatization Trust (APT) to dispose of PADC's 80% share in PEAC. Thus, petitioner GD
Express and PADC executed the Terms of Reference that would govern the disposition of PADC's
equity comprising 12,800 subscribed shares of stock in PEAC.6
In March 1996, the APT issued the Asset Specific Bidding Rules (ASBR) incorporating the Terms of
Reference for the sale of PADC's shares of stock in PEAC. The ASBR required prospective bidders,
among others, to comply with the obligations and undertakings/warranties enumerated therein. At
the bidding conducted on 19 March 1996, respondent Filchart, also a domestic corporation,
emerged as the highest bidder of the 12,800 shares of stock owned by PADC in PEAC.
Alleging that respondent Filchart was bent on reneging on its obligations and warranties under the
ASBR and Terms of Reference, petitioner GD Express instituted on 14 October 1996, Civil Case No.
96-1675 for specific performance before the Regional Trial Court (RTC) of Makati to compel PADC
and APT to faithfully comply with the joint venture agreements, the ASBR and the Terms of
Reference, with a prayer for the preservation of the status quo ante litem.
During the pendency of Civil Case No. 96-1675, PADC and respondent Filchart executed on 04
March 1997 the corresponding deed of absolute sale, by virtue of which PADC sold to respondent
Filchart its shares of stock in PEAC in consideration of the bid price of P110,000,000.00.7 The sale
was duly recorded in PEAC's stock and transfer book and the shares of stock were transferred in
the name of respondent Filchart.8
This prompted petitioner GD Express to file an amended complaint9 to introduce another cause of
action for the nullification of the said transfer and to implead the Committee on Privatization, the
PEAC and respondent Filchart as additional defendants. The amended complaint reiterated the
prayer for the issuance of a temporary restraining order (TRO) and writ of preliminary injunction.
Respondent Filchart opposed the issuance of TRO, claiming that the dispute was intra-corporate in
nature falling within the SEC's jurisdiction.10
In the amended complaint dated 06 June 1997, petitioner sought to nullify the approval by the
Committee on Privatization and the notice of award issued by the APT in favor of respondent
Filchart and to compel the defendants to perform all their respective obligations under the joint
venture agreements, the ASBR and the Terms of Reference and to desist from committing further
breach thereof or, in the alternative, to nullify any transfer and/or issuance of PADC's subscribed
shares of stock in PEAC in favor of respondent Filchart. Petitioner GD Express also prayed for an
award of temperate and exemplary damages and attorney's fees.11 On 22 August 1997, the RTC
issued a temporary restraining order against respondent Filchart in Civil Case No. 96-1675.12
Meanwhile, on 12 August 1997, respondent Filchart filed before the SEC a petition, docketed as
SEC Case No. 08-97-5746, praying for the appointment of a management committee to take over
the business operations of PEAC pending litigation and for judgment declaring, among others, the
nullity of certain provisions in the joint venture agreement between PADC and petitioner GD
Express, particularly those requiring the consent of petitioner GD Express in the sale of PADC's
shareholdings in PEAC. Also sought to be nullified were certain provisions in PEAC's articles of
incorporation and by-laws, and the management agreement between petitioners GD Express and
Amihan. Named respondents were herein petitioners GD Express and Amihan.13
29
On 29 September 1997, petitioners filed a motion to dismiss the petition in SEC Case No. 08-97-
5746 on the grounds that its filing constituted a willful and deliberate act of forum shopping and
that respondent Filchart had no capacity to sue and cause of action to ask for the appointment of
a management committee pending the determination of its status as a stockholder.14
On 21 November 1997, Hearing Officer Rosita R. Guerrero issued an order denying petitioners'
motion to dismiss, holding that SEC Case No. 08-97-5746 pertained to different causes of action
falling under the exclusive jurisdiction of the SEC. Petitioners' motion for reconsideration was
denied in an Order dated 08 December 1997.15
Petitioners elevated the matter to the SEC en banc via a petition for certiorari . Acting on
petitioners' prayer for the issuance of a TRO, the SEC en banc issued an order on 15 December
1997 enjoining the Hearing Officer from appointing a management committee and conducting any
proceedings on the petition. However, the SEC en banc eventually dismissed the petition
for certiorari and affirmed the two aforementioned orders of the Hearing Officer. The SEC en
banc likewise denied petitioners' motion for reconsideration.16
Aggrieved, petitioners filed a Rule 43 petition before the Court of Appeals arguing that the Hearing
Officer had no jurisdiction over SEC Case No. 08-97-5746 on the following grounds: (1) the
dispute was not intra-corporate in character considering that respondent Filchart had not fully paid
the subscription rights in PADC; (2) respondent Filchart's status as stockholder in PEAC must be
settled first in Civil Case No. 96-1675; and (3) a request from the supervising government agency
must be secured first before the appointment of a management committee to undertake the
management of PEAC. Petitioners also pointed out that the filing of the petition in SEC Case No.
08-97-5746 constituted a willful and deliberate act of forum shopping and that the Hearing Officer
dismissed petitioners' motion to dismiss and motion for reconsideration without stating clearly and
distinctly the reasons of the dismissal.17
ςηα ñrοb lε š ν ιr†υαl l αω lιb rα rÿ
On 23 December 1998, the Court of Appeals rendered the assailed decision, dismissing the
petition for lack of merit. The appellate court ruled that the SEC had jurisdiction over a petition
filed by a non-stockholder like respondent Filchart under Section 5(a) of P.D. No. 902-A, where
fraud and misrepresentation detrimental to public interest were alleged to have been committed
by petitioner GD Express against PEAC. As regards the issue of respondent Filchart's status as a
stockholder, the appellate court held that the resolution thereof needed a study of the merits of
the case and should be referred to the SEC Hearing Officer. The appellate court further held that
respondent Filchart did not commit forum shopping in filing SEC Case No. 08-97-5746 because the
causes of action raised therein were different from those raised in Civil Case No. 96-1675.18
Hence, the instant petition, arguing that the SEC Hearing Officer was not authorized to assume
jurisdiction over SEC Case No. 08-97-5746 for the following reasons: (1) the status of respondent
Filchart must first be resolved with finality in Civil Case No. 96-1675; (2) there is no intra-
corporate dispute since respondent Filchart is not a stockholder; (3) SEC jurisdiction under Section
5(a) of P.D. No. 902-A does not apply to SEC Case No. 08-97-5746; (4) prior request of the
supervising government agency must first be secured before the SEC Hearing Officer can appoint
a management committee; and (5) the filing of SEC Case No. 08-97-5746 constitutes a willful and
deliberate act of forum shopping.19
Subsequently, petitioners filed a supplemental petition,20 which was admitted by the Court. The
supplemental petition averred that the SEC constituted a Hearing Panel in SEC Case No. 08-97-
5746. On the same day the instant petition was filed or on 29 January 1999, the said SEC Hearing
Panel purportedly issued an ex-parte order creating and appointing an Interim Management
Committee in PEAC. Two members of the SEC Hearing Panel allegedly went to the PEAC office to
implement the said order. Thus, petitioners sought to implead additional respondents, namely:
SEC Hearing Officers Ysobel S.Y. Murillo and Juanito B. Almosa, Jr., as well as Atty. Cornelio T.
Peralta and Jose Antonio Lim, two of the members of the Interim Management Committee.21
ςηα ñrοb lε š ν ιr†υαl l αω
lιbrαrÿ
The supplemental petition was accompanied by an application for the issuance of a TRO and/or
writ of preliminary injunction to enjoin the SEC Hearing Panel from assuming jurisdiction over SEC
Case No. 08-97-5746 and the Interim Management Committee from implementing the Order
dated 29 January 1999.22 The supplemental petition reiterated the prayers for the reversal of the
assailed decision of the Court of Appeals, for the dismissal of respondent Filchart's petition in SEC
Case No. 08-97-5746 and for making permanent the injunction which may be granted in the
instant case.23
At the core of the instant petition is the issue of whether the SEC erred in assuming jurisdiction
over respondent Filchart's petition in SEC Case No. 08-97-5746 during the pendency of Civil Case
No. 96-1675. Corollary to this is the question whether the filing thereof during the pendency of
Civil Case No. 96-1675 constitutes a willful and deliberate act of forum shopping on the part of
respondent Filchart.
At the outset, it must be emphasized that pursuant to Section 5.224 of Republic Act No.
8799,25 the SEC's jurisdiction over intra-corporate controversies has been transferred to the RTCs
or Special Commercial Courts (SCC) designated by the Court pursuant to A.M. No. 00-11-03-SC
promulgated on 21 November 2000.
In view of the said transfer of jurisdiction, the SEC Hearing Panel which the SEC constituted and
the Interim Management Committee which the SEC Hearing Panel appointed have become functus
officio. Petitioners' prayer for a TRO and/or writ of injunction to prevent the said bodies from
acting upon their authority has been rendered moot and academic by this development.
R.A. No. 8799 became effective during the pendency of both Civil Case No. 96-1675 and SEC Case
No. 08-97-5746. It appears that the records of SEC Case No. 08-97-5746 have already been
forwarded to the Office of the Court Administrator for proper transmittal to the appropriate
SCC.26 Be that as it may, the resolution of this petition is not rendered moot by the transfer of
jurisdiction from the SEC to the SCC. The question whether Civil Case No. 96-1675 can proceed
simultaneously and independently with the intra-corporate case or whether both cases should be
consolidated or either case suspended or dismissed remains to be settled.
Petitioners argue that the assumption of jurisdiction by the SEC over SEC Case No. 08-97-5746
has resulted in the splitting of jurisdiction over the issues of which the RTC has already previously
assumed jurisdiction in Civil Case No. 96-17-675. Petitioners theorize that all issues pertaining to
the validity and enforceability of the obligations of respondent Filchart under the joint venture
agreements, the ASBR and the Terms of Reference, as well as the validity of certain provisions in
PEAC's articles of incorporation and by-laws, the supposed transfer and issuance of subscribed
30
shares to respondent Filchart and the exercise of rights of ownership over said shares, must be
resolved by the RTC in Civil Case No. 96-17-675.
On the other hand, respondent Filchart argues that Civil Case No. 96-17-675 is an intra-corporate
dispute exclusively cognizable by the SEC because the questions therein necessarily involve a
determination of the validity of certain acts of a shareholder of a corporation, that is, whether the
sale by PADC of its shares in PEAC to respondent Filchart is valid.
Respondent Filchart's petition in SEC Case No. 08-97-5746 prays for the following reliefs:
WHEREFORE, it is respectfully prayed that, after notice and hearing:
1. Pending judgment on the merits, an interim order be issued creating and appointing a
Management Committee to take over the management of the business operations and affairs of
PEAC; such Management Committee to be composed of a SEC representative to serve as
Chairman, three (3) members to be nominated by Filchart and one (1) member to be nominated
by GD Express.
2. After hearing on the merits, judgment be rendered in favor of Filchart:
(a) Declaring void ab initio for being contrary to law and public policy, and the Constitution (i) Sec.
6.1 of the Pre-Incorporation Agreement and Section 21.1 of the Shareholders Agreement which
provisions purport to restrict PADC's right to sell, assign or transfer its shareholdings in PEAC
without the written consent of GD Express; (ii) Article 10 [2], [3] of the Article of Incorporation of
PEAC; and (iii) Section 8, Article II Section 5, Article III of the By-Laws of PEAC.
(b) Annulling and setting aside for being contrary to law, public policy and the Constitution the
Management Agreement entered into between PEAC and Amihan.
(c) Directing the stockholders of PEAC to amend PEAC's Articles of Incorporation and By-Laws by
deleting the provisions declared void ab initio as prayed for above.
(d) Declaring Filchart's nominees, namely: Robin Sy, Jose Antonio Lim, Eduardo R. Ceniza,
Domingo G. Castillo and Ricardo P.G. Ongkiko, as having been duly elected directors of PEAC at
the Special Meeting of the Stockholders held on August 5, 1997, and ordering defendant GD
Express, its officers, and all persons acting in their behalf to allow said nominee directors of
Filchart to have access to the office premises of PEAC, its records and its properties.
(e) Ordering GD Express to pay Filchart '
[i] nominal damages in the amount of P1,000,000.00;
[ii] temperate damages in such amount as the Honorable Commission may fix in its discretion;
[iii] exemplary damages in the amount of P500,000.00;
[iv] attorney's fees, in the amount of P2,000,000.00, plus expenses of litigation the amount of
which will be proved at the trial.
[v] the costs of suit.
Filchart prays for such other reliefs just and equitable under the premises.27
There is no question that the prayers for the appointment of a management receiver, the
nullification and amendment of certain provisions of PEAC's articles of incorporation and by-laws,
the recognition of the election of respondent Filchart's directors, as well as the inspection of the
corporate books, are intra-corporate in nature as they pertain to the regulation of corporate
affairs.
Even the issue of respondent Filchart's status as stockholder in PEAC and, concomitantly, its
capacity to file SEC Case No. 08-97-5746 must be threshed out in the intra-corporate
proceedings. Petitioner GD Express' allegation that respondent Filchart has not fully paid its
subscription to the shares in PEAC and, thus, cannot claim to be a stockholder in PEAC does not
oust the SCC of its jurisdiction over the case. For the purpose of determining whether SEC Case
No. 08-97-5746 should be heard as an intra-corporate proceeding, the allegation in respondent
Filchart's petition that it is a stockholder in PEAC is deemed hypothetically admitted. It is only
after a full-blown hearing that the SCC may determine whether respondent Filchart's may be
considered a bona fide stockholder of PEAC and is entitled to the reliefs prayed for in its petition.
However, in view of the transfer of jurisdiction over intra-corporate disputes from the SEC to the
SCCs, which are the same RTCs exercising general jurisdiction, the question of jurisdiction is no
longer decisive to the resolution of the instant case.
It should be noted that the SCCs are still considered courts of general jurisdiction. Section 5.2 of
R.A. No. 879928 directs merely the Supreme Court's designation of RTC branches that shall
exercise jurisdiction over intra-corporate disputes. Nothing in the language of the law suggests the
diminution of jurisdiction of those RTCs to be designated as SCCs. The assignment of intra-
corporate disputes to SCCs is only for the purpose of streamlining the workload of the RTCs so
that certain branches thereof like the SCCs can focus only on a particular subject matter.
The designation of certain RTC branches to handle specific cases is nothing new. For instance,
pursuant to the provisions of the R.A. No. 6657 or the Comprehensive Agrarian Reform Law, the
Supreme Court has assigned certain RTC branches to hear and decide cases under Sections 56
and 57 of R.A. No. 6657.
The RTC exercising jurisdiction over an intra-corporate dispute can be likened to an RTC exercising
its probate jurisdiction or sitting as a special agrarian court. The designation of the SCCs as such
has not in any way limited their jurisdiction to hear and decide cases of all nature, whether civil,
criminal or special proceedings.
There is no jurisdictional infirmity for either court (the RTC hearing Civil Case No. 96-17-675 and
the SCC assigned to hear SEC Case No. 08-97-5746), the only question that remains is whether
Civil Case No. 96-17-675 and SEC Case No. 08-97-5746, now transferred to the proper SCC, may
31
proceed concurrently or should be consolidated or whether SEC Case No. 08-97-5746 should be The essence of forum shopping is the filing of multiple suits involving the same parties for the
suspended to await the outcome of Civil Case No. 96-17-675. same cause of action, either simultaneously or successively, for the purpose of obtaining a
favorable judgment. The elements of forum shopping are: (a) identity of parties, or at least such
parties as represent the same interests in both action; (b) identity of rights asserted and reliefs
Incidentally, not all the prayers and reliefs sought by respondent Filchart in SEC Case No. 08-97-
prayed for, the reliefs being founded on the same facts; and (c) the identity with respect to the
5746 can be characterized as intra-corporate in nature. For instance, respondent Filchart's petition
two preceding particulars in the two cases is such that any judgment rendered in the pending
does not allege that the cause of action for the nullification of the management contract between
cases, regardless of which party is successful, amount to res judicata in the other case.32
PEAC and petitioner Amihan is being instituted as a derivative suit. It is an ordinary action for the
nullification of a contract, which is cognizable by courts of general jurisdiction.
To begin with, respondent Filchart did not file multiple suits but only a single action which is SEC
Case No. 08-97-5746. As already explained above, the outcome in Civil Case No. 96-17-675 will
The issue of the interpretation of the provisions of the joint venture agreements is among the
only determine respondent Filchart's capacity to institute the intra-corporate suit. Thus, the
subjects of Civil Case No. 96-17-675. On the one hand, petitioner GD Express is claiming therein
judgment in the said civil case cannot amount to res judicata in SEC Case No. 08-97-5746. Strictly
that the joint venture agreements requiring the petitioner GD Express' consent to the sale of
speaking, the latter can still proceed independently of Civil Case No. 96-17-675, but the SCC may
PADC's shares in PEAC must be enforced while respondent Filchart instituted SEC Case No. 08-97-
exercise its sound discretion to suspend the intra-corporate proceeding if it believes that the
5746 precisely to nullify the said provision. There is no doubt that the objects of both suits are
outcome of the civil case will affect the causes of action raised in SEC Case No. 96-17-675.
necessarily connected; hence, respondent Filchart's prayer for the nullification of the joint venture
agreements should have been raised as a defense in Civil Case No. 96-17-675 because there
exists a logical relationship between the two claims. Conducting separate trials of the respective WHEREFORE, the instant petition is DENIED. Costs against petitioners.
claims of the parties would entail substantial duplication of time and effort by the parties and the
court.29
SO ORDERED.

As regards the aforementioned intra-corporate issues raised in SEC Case No. 08-97-5746, the
resolution thereof is necessarily connected with the outcome of Civil Case No. 96-17-675. The
transactions alleged in SEC Case No. 08-97-5746 had come about as an offshoot of the events
forming the basis of Civil Case No. 96-17-675. The latter ultimately seeks to nullify the award in
favor of and the consequent transfer of PEAC shares to respondent Filchart. The outcome in Civil
Case No. 96-17-675, that is, whether or not the award in favor of and the sale of PEAC's shares to
respondent Filchart is valid, will have a bearing on respondent Filchart's capacity to institute the
intra-corporate suit.

The test to determine whether the suspension of the proceedings in the SECOND CASE is proper is
whether the issues raised by the pleadings in the FIRST CASE are so related with the issues raised
in the SECOND CASE, such that the resolution of the issues in the FIRST CASE would determine
the issues in the SECOND CASE.30

The power to stay proceedings is incidental to the power inherent in every court to control the
disposition of the cases on its dockets, considering its time and effort, that of counsel and the
litigants. But if proceedings must be stayed, it must be done in order to avoid multiplicity of suits
and prevent vexatious litigations, conflicting judgments, confusion between litigants and courts. It
bears stressing that whether or not the RTC, in this case the SCC, would suspend the proceedings
in the SECOND CASE is submitted to its sound discretion.31

Thus, the SCC to which SEC Case No. 08-97-5746 was transferred has sufficient discretion to
determine whether under the circumstances of the case, it should await the outcome of Civil Case
No. 96-17-675.

Furthermore, petitioners also contend that respondent Filchart committed a deliberate act of
forum shopping in filing SEC Case No. 08-97-5746.

32
 Commission, the Chief Justice and six (6) Justices of this Court had already
promulgated their opinions that the validity of the amended by-laws insofar and
only insofar as the parties herein are concerned, can no longer be relitigated on the
basis of the "law of the. case" doctrine and, therefore, the enforcement of the
amended by-laws could not have been ipso factor stayed by the motion for
reconsideration. Petitioner's allegation that respondent Commission (Securities and
EN BANC
Exchange Commission) could not have validly sustained the resolution of the San
Miguel Corporation Board because some members of the Board were also
G.R. No. L-52129 April 21, 1980
disqualified as they were situated like petitioner appears inapposite. The alleged
disqualification of some members of the Board was never in issue during the
JOHN GOKONGWEI, JR., Petitioner, vs. SECURITIES AND EXCHANGE
hearing of the disqualification case, and petitioner has not submitted any evidence
COMMISSION, SAN MIGUEL CORPORATION, ANDRES M. SORIANO,
in support of his contention. Petitioner's assertion that the order of respondent
JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO
Commission disqualifying him is based on evidence which are "at the most,
BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, EMIGDIO
contingent and flimsy" appears unsupported by the records. The order of
TANJUATCO and EDUARDO VISAYA, Respondents.
respondent Commission was based principally on the affidavits of Nazario
Avendaño, Ruperto Sarandi, Jr., Fernando Constantino, Jose Picornell and Mabini
ANTONIO, J.:
Antonio and documentary evidence showing that petitioner is engaged in
agricultural and poultry business competitive with that of San Miguel Corporation.
In this petition for review, petitioner seeks to nullify and set aside the resolution en
Petitioner did not adduce any evidence to rebut the evidence of his
banc dated May 7, 1979 of respondent Securities and Exchange Commission in
disqualification. It is well-settled that findings of fact of administrative bodies will
SEC Case No. 1375, sustaining the findings of the San Miguel Corporation's
not be interferred with by the courts in the absence of grave abuse of discretion on
Board of Directors that petitioner is engaged in a business competitive with or
the part of said agencies, or unless the afore-mentioned findings are not supported
antagonistic to that of the San Miguel Corporation and, therefore, ineligible for
by substantial evidence (Central Bank V. Cloribel, 44 SCRA 307 [1972]).
election as director, pursuant to Section 3, Article III of the amended by-laws.
chanroblesvirtualawlibrary chanrobles virtual law library

Petitioner alleges that the matter of petitioner's disqualification should not have
WHEREFORE, in view of the foregoing, the Court resolves to DISMISS the
been heard in view of the pendency of petitioner's motion for reconsideration with
petition for lack of merit.
this Court; that when respondent Commission sustained the disqualification of
chanroblesvirtualawlibrary chanrobles virtual law library

petitioner, it failed to consider that private respondents are precluded from

SO ORDERED.
disqualifying petitioner because of the rule of pari delicto; and that the resolution
chanroblesvirtualawlibrary chanrobles virtual law library

of disqualification of the respondent Board of Directors was an "over exertion of

corporate power" because by this act the afore-mentioned Board of Directors
chanrobles virtual law library

intended to perpetuate themselves in power. Considering the afore-mentioned

allegations and the comments thereto, We find no merit in the petition. chanroblesvirtualawlibrary chanrobles virtual law library

Aside from the presumptive validity of the amended by-laws at the time the
questioned resolution was rendered by respondent Securities and Exchange
33
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-2598 June 29, 1950
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED
BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of
the Far Eastern Lumber and Commercial Co., Inc., respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No. 381 of the Court
of First Instance of Leyte and to enjoin the respondent judge from further acting upon
the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella,
signed and acknowledged in Leyte, the article of incorporation of the Far Eastern
Lumber and Commercial Co., Inc., organized to engage in a general lumber business
to carry on as general contractors, operators and managers, etc. Attached to the
article was an affidavit of the treasurer stating that 23,428 shares of stock had been
subscribed and fully paid with certain properties transferred to the corporation
described in a list appended thereto.
(2) Immediately after the execution of said articles of incorporation, the corporation
proceeded to do business with the adoption of by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of incorporation were filed in the office of
the Securities and Exchange Commissioner, for the issuance of the corresponding
certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of incorporation by the
aforesaid governmental office, the respondents Fred Brown, Emma Brown, Hipolita D.
Chapman and Ceferino S. Abella filed before the Court of First Instance of Leyte the
civil case numbered 381, entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging
among other things that the Far Eastern Lumber and Commercial Co. was an
unregistered partnership; that they wished to have it dissolved because of bitter
dissension among the members, mismanagement and fraud by the managers and
heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a
motion to dismiss, contesting the court's jurisdiction and the sufficiently of the cause
of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the
company; and at the request of plaintiffs, appointed of the properties thereof, upon the
filing of a P20,000 bond.
(7) The defendants therein (petitioners herein) offered to file a counter-bond for the
discharge of the receiver, but the respondent judge refused to accept the offer and to
discharge the receiver. Whereupon, the present special civil action was instituted in
this court. It is based upon two main propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the
company, because it being a de facto corporation, dissolution thereof may only be
ordered in a quo warranto proceeding instituted in accordance with section 19 of the
Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of
incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties are
informed that the Securities and Exchange Commission has not, so far, issued the
corresponding certificate of incorporation. All of them know, or sought to know, that
the personality of a corporation begins to exist only from the moment such certificate
is issued — not before (sec. 11, Corporation Law). The complaining associates have
not represented to the others that they were incorporated any more than the latter had
made similar representations to them. And as nobody was led to believe anything to
his prejudice and damage, the principle of estoppel does not apply. Obviously this is
not an instance requiring the enforcement of contracts with the corporation through
the rule of estoppel.
34
The first proposition above stated is premised on the theory that, inasmuch as the Far company or corporation, and it was no error to reject the counter-bond, the court
Eastern Lumber and Commercial Co., is a de facto corporation, section 19 of the having declared the dissolution. As to the amount of the bond to be demanded of the
Corporation Law applies, and therefore the court had not jurisdiction to take receiver, much depends upon the discretion of the trial court, which in this instance
cognizance of said civil case number 381. Section 19 reads as follows: we do not believe has been clearly abused.

. . . The due incorporation of any corporations claiming in good faith to be a
corporation under this Act and its right to exercise corporate powers shall not
be inquired into collaterally in any private suit to which the corporation may be
a party, but such inquiry may be had at the suit of the Insular Government on
information of the Attorney-General.
Judgment: The petition will, therefore, be dismissed, with costs. The preliminary
injunction heretofore issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.

There are least two reasons why this section does not govern the situation. Not
having obtained the certificate of incorporation, the Far Eastern Lumber and
Commercial Co. — even its stockholders — may not probably claim "in good faith" to
be a corporation.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the
issuance of a certificate of incorporation by the Director of the Bureau of
Commerce and Industry which calls a corporation into being. The immunity if
collateral attack is granted to corporations "claiming in good faith to be a
corporation under this act." Such a claim is compatible with the existence of
errors and irregularities; but not with a total or substantial disregard of the law.
Unless there has been an evident attempt to comply with the law the claim to
be a corporation "under this act" could not be made "in good faith." (Fisher on
the Philippine Law of Stock Corporations, p. 75. See also Humphreys vs.
Drew, 59 Fla., 295; 52 So., 362.)

Second, this is not a suit in which the corporation is a party. This is a litigation
between stockholders of the alleged corporation, for the purpose of obtaining its
dissolution. Even the existence of a de jure corporation may be terminated in a private
suit for its dissolution between stockholders, without the intervention of the state.

There might be room for argument on the right of minority stockholders to sue for
dissolution;1 but that question does not affect the court's jurisdiction, and is a matter
for decision by the judge, subject to review on appeal. Whkch brings us to one
principal reason why this petition may not prosper, namely: the petitioners have their
remedy by appealing the order of dissolution at the proper time.

There is a secondary issue in connection with the appointment of a receiver. But it

must be admitted that receivership is proper in proceedings for dissolution of a
35

EN BANC
G.R. No. L-37331 March 18, 1933
FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own
behalf and in that all other stockholders of the Balatoc Mining
Company, etc., Plaintiffs-Appellants, vs. BENGUET CONSOLIDATED
MINING COMPANY, BALATOC MINING COMPANY, H. E. RENZ, JOHN W.
JAUSSERMANN, and A. W. BEAM, Defendants-Appellees.
Gibbs and McDonough and Roman Ozaeta for appellants.
DeWitt, Perkins and Brady for appellees.
Ross, Lawrence and Selph for appellee Balatoc Mining Company.
STREET, J.:
This action was originally instituted in the Court of First Instance of the City of
Manila by F. M. Harden, acting in his own behalf and that of all other
stockholders of the Balatoc Mining Co. who might join in the action and
contribute to the expense of the suit. With the plaintiff Harden two others, J.
D. Highsmith and John C. Hart, subsequently associated themselves. The
defendants are the Benguet Consolidated Mining Co., the Balatoc Mining Co.,
H. E. Renz, John W. Haussermann, and A. W. Beam. The principal purpose of
the original action was to annul a certificate covering 600,000 shares of the
stock of the Balatoc Mining Co., which have been issued to the Benguet
Consolidated Mining Co., and to secure to the Balatoc Mining Co., the
restoration of a large sum of money alleged to have been unlawfully collected
by the Benguet Consolidated Mining Co., with legal interest, after deduction
therefrom of the amount expended by the latter company under a contract
between the two companies, bearing date of March 9, 1927. The complaint
was afterwards amended so as to include a prayer for the annulment of this
contract. Shortly prior to the institution of this lawsuit, the Benguet
Consolidated Mining Co., transferred to H. E. Renz, as trustee, the certificate
for 600,000 shares of the Balatoc Mining Co. which constitute the principal
subject matter of the action. This was done apparently to facilitate the splitting
up to the shares in the course of the sale or distribution. To prevent this the
plaintiffs, upon filing their original complaint, procured a preliminary injunction
restraining the defendants, their agents and servants, from selling, assigning
or transferring the 600,000 shares of the Balatoc Mining Co., or any part
thereof, and from removing said shares from the Philippine Islands. This
explains the connection of Renz with the case. The other individual defendants
are made merely as officials of the Benguet Consolidated Mining Co. Upon
hearing the cause the trial court dismissed the complaint and dissolved the
preliminary injunction, with costs against the plaintiffs. From this judgment the
plaintiffs appealed.
cha nro blesvi rtua lawlib rary cha nrob les vi rtua l la w libra ry
The facts which have given rise this lawsuit are simple, as the financial
interests involve are immense. Briefly told these facts are as follows: The
Benguet Consolidated Mining Co. was organized in June, 1903, as a sociedad
anonima in conformity with the provisions of Spanish law; while the Balatoc
Mining Co. was organized in December 1925, as a corporation, in conformity
with the provisions of the Corporation Law (Act No. 1459). Both entities were
organized for the purpose of engaging in the mining of gold in the Philippine
Islands, and their respective properties are located only a few miles apart in
the subprovince of Benguet. The capital stock of the Balatoc Mining Co.
consists of one million shares of the par value of one peso (P1) each. c han roblesv irt ualawli bra ry chan roble s virtual law l ibra ry
When the Balatoc Mining Co. was first organized the properties acquired by it
were largely undeveloped; and the original stockholders were unable to supply
the means needed for profitable operation. For this reason, the board of
directors of the corporation ordered a suspension of all work, effective July 31,
1926. In November of the same year a general meeting of the company's
stockholders appointed a committee for the purpose of interesting outside
capital in the mine. Under the authority of this resolution the committee
approached A. W. Beam, then president and general manager of the Benguet
Company, to secure the capital necessary to the development of the Balatoc
property. As a result of the negotiations thus begun, a contract, formally
authorized by the management of both companies, was executed on March 9,
1927, the principal features of which were that the Benguet Company was to
proceed with the development and construct a milling plant for the Balatoc
mine, of a capacity of 100 tons of ore per day, and with an extraction of at
least 85 per cent of the gold content. The Benguet Company also agreed to
erect an appropriate power plant, with the aerial tramlines and such other
surface buildings as might be needed to operate the mine. In return for this it
36
was agreed that the Benguet Company should receive from the treasurer of
the Balatoc Company shares of a par value of P600,000, in payment for the
first P600,000 be thus advanced to it by the Benguet Company.
The performance of this contract was speedily begun, and by May 31, 1929,
the Benguet Company had spent upon the development the sum of
P1,417,952.15. In compensation for this work a certificate for six hundred
thousand shares of the stock of the Balatoc Company has been delivered to
the Benguet Company, and the excess value of the work in the amount of
P817,952.15 has been returned to the Benguet Company in cash. Meanwhile
dividends of the Balatoc Company have been enriching its stockholders, and at
the time of the filing of the complaint the value of its shares had increased in
the market from a nominal valuation to more than eleven pesos per share.
While the Benguet Company was pouring its million and a half into the Balatoc
property, the arrangements made between the two companies appear to have
been viewed by the plaintiff Harden with complacency, he being the owner of
many thousands of the shares of the Balatoc Company. But as soon as the
success of the development had become apparent, he began this litigation in
which he has been joined by two others of the eighty shareholders of the
Balatoc Company. chan roble svi rtualawl ib rary chan roble s virtual law l ibra ry
Briefly, the legal point upon which the action is planted is that it is unlawful for
the Benguet Company to hold any interest in a mining corporation and that
the contract by which the interest here in question was acquired must be
annulled, with the consequent obliteration of the certificate issued to the
Benguet Company and the corresponding enrichment of the shareholders of
the Balatoc Company. c hanro blesvi rt ualawlib rary
When the Philippine Islands passed to the sovereignty of the United States, in
the attention of the Philippine Commission was early drawn to the fact that
there is no entity in Spanish law exactly corresponding to the notion of the
corporation in English and American law; and in the Philippine Bill, approved
July 1, 1902, the Congress of the United States inserted certain provisions,
under the head of Franchises, which were intended to control the lawmaking
power in the Philippine Islands in the matter of granting of franchises,
privileges and concessions. These provisions are found in section 74 and 75 of
the Act. The provisions of section 74 have been superseded by section 28 of
the Act of Congress of August 29, 1916, but in section 75 there is a provision
referring to mining corporations, which still remains the law, as amended. This
provisions, in its original form, reads as follows: "... it shall be unlawful for any
member of a corporation engaged in agriculture or mining and for any
corporation organized for any purpose except irrigation to be in any wise
chan roble svirtualawl ibra ry chan roble s virtual law l ibra ry interested in any other corporation engaged in agriculture or in mining." chan roble s virtual law l ibra ry
Under the guidance of this and certain other provisions thus enacted by
Congress, the Philippine Commission entered upon the enactment of a general
law authorizing the creation of corporations in the Philippine Islands. This
rather elaborate piece of legislation is embodied in what is called our
Corporation Law (Act No. 1459 of the Philippine Commission). The evident
purpose of the commission was to introduce the American corporation into the
Philippine Islands as the standard commercial entity and to hasten the day
when the sociedad anonima of the Spanish law would be obsolete. That statute
is a sort of codification of American corporate law. chan rob lesvi rtualaw lib rary chan roble s virtual law lib rary
For the purposes general description only, it may be stated that the sociedad
anonima is something very much like the English joint stock company, with
features resembling those of both the partnership is shown in the fact that
sociedad, the generic component of its name in Spanish, is the same word that
is used in that language to designate other forms of partnership, and in its
organization it is constructed along the same general lines as the ordinary
partnership. It is therefore not surprising that for purposes of loose translation
the expression sociedad anonima has not infrequently the other hand, the
affinity of this entity to the American corporation has not escaped notice, and
the expression sociedad anonima is now generally translated by the word
corporation. But when the word corporation is used in the sense of sociedad
anonima and close discrimination is necessary, it should be associated with the
cha nrob les vi rtua l law lib ra ry Spanish expression sociedad anonima either in a parenthesis or connected by
the word "or". This latter device was adopted in sections 75 and 191 of the
Corporation Law. cha nrob lesvi rtua lawlib rary cha nrob les vi rtual law lib rary
In drafting the Corporation Law the Philippine Commission inserted bodily, in
subsection (5) of section 13 of that Act (No. 1459) the words which we have
already quoted from section 75 of the Act of Congress of July 1, 1902
(Philippine Bill); and it is of course obvious that whatever meaning originally
attached to this provision in the Act of Congress, the same significance should
be attached to it in section 13 of our Corporation Law. c hanroblesv irt ualawli bra ry cha nro bles vi rtua l law lib ra ry
As it was the intention of our lawmakers to stimulate the introduction of the
American Corporation into Philippine law in the place of the sociedad anonima,
it was necessary to make certain adjustments resulting from the continued co-
37
existence, for a time, of the two forms of commercial entities. Accordingly, in
section 75 of the Corporation Law, a provision is found making the sociedad
anonima subject to the provisions of the Corporation Law "so far as such
provisions may be applicable", and giving to the sociedades
anonimas previously created in the Islands the option to continue business as
such or to reform and organize under the provisions of the Corporation Law.
Again, in section 191 of the Corporation Law, the Code of Commerce is
repealed in so far as it relates to sociedades anonimas. The purpose of the
commission in repealing this part of the Code of Commerce was to compel
commercial entities thereafter organized to incorporate under the Corporation
Law, unless they should prefer to adopt some form or other of the partnership.
To this provision was added another to the effect that existing sociedades
anonimas, which elected to continue their business as such, instead of
reforming and reorganizing under the Corporation Law, should continue to be
governed by the laws that were in force prior to the passage of this Act "in
relation to their organization and method of transacting business and to the
rights of members thereof as between themselves, but their relations to the
public and public officials shall be governed by the provisions of this Act."
As already observed, the provision above quoted from section 75 of the Act
Congress of July 1, 1902 (Philippine Bill), generally prohibiting corporations
engaged in mining and members of such from being interested in any other
corporation engaged in mining, was amended by section 7 of Act No. 3518 of
the Philippine Legislature, approved by Congress March 1, 1929. The change in
the law effected by this amendment was in the direction of liberalization. Thus,
the inhibition contained in the original provision against members of a
corporation engaged in agriculture or mining from being interested in other
corporations engaged in agriculture or in mining was so modified as merely to
prohibit any such member from holding more than fifteen per centum of the
outstanding capital stock of another such corporation. Moreover, the explicit
prohibition against the holding by any corporation (except for irrigation) of an
interest in any other corporation engaged in agriculture or in mining was so
modified as to limit the restriction to corporations organized for the purpose of
engaging in agriculture or in mining.
chanroblesvi rt ualawlib ra ry cha nrob les vi rtua l law lib rary
As originally drawn, our Corporation Law (Act No. 1459) did not contain any
appropriate clause directly penalizing the act of a corporation, a member of a
corporation , in acquiring an interest contrary to paragraph (5) of section 13 of the Act.
The Philippine Legislature undertook to remedy this situation in section 3 of Act No.
2792 of the Philippine Legislature, approved on February 18, 1919, but this
provision was declared invalid by this court in Government of the Philippine
Islands vs. El Hogar Filipino (50 Phil., 399), for lack of an adequate title to the
Act. Subsequently the Legislature reenacted substantially the same penal
provision in section 21 of Act No. 3518, under a title sufficiently broad to
comprehend the subject matter. This part of Act No. 3518 became effective
upon approval by the Governor-General, on December 3, 1928, and it was
therefore in full force when the contract now in question was made. chan roble svirtualawl ibra ry ch anroble s virtual law l ib rary
This provision was inserted as a new section in the Corporation Law, forming
section 1990 (A) of said Act as it now stands. Omitting the proviso, which
seems not to be pertinent to the present controversy, said provision reads as
follows:
SEC. 190 (A). Penalties. - The violation of any of the provisions of this Act and
its amendments not otherwise penalized therein, shall be punished by a fine of
not more than five thousand pesos and by imprisonment for not more than
five years, in the discretion of the court. If the violation is committed by a
corporation, the same shall, upon such violation being proved, be dissolved
chan rob les vi rtual law lib rary
by quo warranto proceedings instituted by the Attorney-General or by any
provincial fiscal by order of said Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that there are two
fundamental questions involved in this controversy. The first is whether the
plaintiffs can maintain an action based upon the violation of law supposedly
committed by the Benguet Company in this case. The second is whether,
assuming the first question to be answered in the affirmative, the Benguet
Company, which was organized as a sociedad anonima, is a corporation within
the meaning of the language used by the Congress of the United States, and
later by the Philippine Legislature, prohibiting a mining corporation from
becoming interested in another mining corporation. It is obvious that, if the
first question be answered in the negative, it will be unnecessary to consider
the second question in this lawsuit.
chanrob lesvi rtua lawlib rary chan roble s virtual law lib rary
Upon the first point it is at once obvious that the provision referred to was
adopted by the lawmakers with a sole view to the public policy that should
control in the granting of mining rights. Furthermore, the penalties imposed in
what is now section 190 (A) of the Corporation Law for the violation of the
prohibition in question are of such nature that they can be enforced only by a
criminal prosecution or by an action of quo warranto. But these proceedings
can be maintained only by the Attorney-General in representation of the
Government. c han roblesv irt ualawli bra ry c hanro bles vi rtu al law li bra ry
38
What room then is left for the private action which the plaintiffs seek to assert
in this case? The defendant Benguet Company has committed no civil wrong
against the plaintiffs, and if a public wrong has been committed, the directors
of the Balatoc Company, and the plaintiff Harden himself, were the active
inducers of the commission of that wrong. The contract, supposing it to have
been unlawful in fact, has been performed on both sides, by the building of the
Balatoc plant by the Benguet Company and the delivery to the latter of the
certificate of 600,000 shares of the Balatoc Company. There is no possibility of
really undoing what has been done. Nobody would suggest the demolition of
the mill. The Balatoc Company is secure in the possession of that
improvement, and talk about putting the parties in status quo ante by
restoring the consideration with interest, while the Balatoc Company remains
in possession of what it obtained by the use of that money, does not quite
meet the case. Also, to mulct the Benguet Company in many millions of dollars
in favor of individuals who have not the slightest equitable right to that money
in a proposition to which no court can give a ready assent.
c hanroblesv irt ualawli bra ry
The most plausible presentation of the case of the plaintiffs proceeds on the
assumption that only one of the contracting parties has been guilty of a
misdemeanor, namely, the Benguet Company, and that the other party, the
Balatoc Company, is wholly innocent to participation in that wrong. The
plaintiffs would then have us apply the second paragraph of article 1305 of the
Civil Code which declares that an innocent party to an illegal contract may
recover anything he may have given, while he is not bound to fulfill any
promise he may have made. But, supposing that the first hurdle can be safely
vaulted, the general remedy supplied in article 1305 of the Civil Code cannot
be invoked where an adequate special remedy is supplied in a special law. It
has been so held by this court in Go Chioco vs. Martinez (45 Phil., 256, 280),
where we refused to apply that article to a case of nullity arising upon a
usurious loan. The reason given for the decision on this point was that the
Usury Act, as amended, contains all the provisions necessary for the
effectuation of its purposes, with the result that the remedy given in article
1305 of the Civil Code is unnecessary. Much more is that idea applicable to the
situation now before us, where the special provisions give ample remedies for
the enforcement of the law by action in the name of the Government, and
where no civil wrong has been done to the party here seeking redress.
The view of the case presented above rest upon considerations arising upon our own
statutes; and it would seem to be unnecessary to ransack the American decisions for
analogies pertinent to the case. We may observe, however, that the situation involved
is not unlike that which has frequently arisen in the United States under provisions of
the National Bank Act prohibiting banks organized under that law from holding real
property. It has been uniformly held that a trust deed or mortgaged conveying property
of this kind to a bank, by way of security, is valid until the transaction is assailed in a
direct proceeding instituted by the Government against the bank, and the illegality of
such tenure supplies no basis for an action by the former private owner, or his creditor,
to annul the conveyance. (National Bank vs. Matthews, 98 U. S., 621; Kerfoot vs.
Farmers & M. Bank, 218 U. S., 281.) Other analogies point in the same direction.
(South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes &
Griggs Mfg. Co. vs. Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y.
& N. R. Co., 77 Hun., 332.) chan robles v irt ual law li bra ry
Most suggestive perhaps of all the cases in Compa�ia Azucarera de Carolina vs.
Registrar (19 Porto Rico, 143), for the reason that this case arose under a provision of
the Foraker Act, a law analogous to our Philippine Bill. It appears that the registrar had
refused to register two deeds in favor of the Compa�ia Azucarera on the ground that
the land thereby conveyed was in excess of the area permitted by law to the company.
The Porto Rican court reversed the ruling of the registrar and ordered the registration
of the deeds, saying:
c hanro bles vi rtua l law lib ra ry
Thus it may be seen that a corporation limited by the law or by its charter has until the
State acts every power and capacity that any other individual capable of acquiring
lands, possesses. The corporation may exercise every act of ownership over such
lands; it may sue in ejectment or unlawful detainer and it may demand specific
performance. It has an absolute title against all the world except the State after a
proper proceeding is begun in a court of law. ... The Attorney General is the exclusive
officer in whom is confided the right to initiate proceedings for escheat or attack the
right of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of action against the
Benguet Company for the infraction of law supposed to have been committed,
we forego cny discussion of the further question whether a sociedad
anonima created under Spanish law, such as the Benguet Company, is a
corporation within the meaning of the prohibitory provision already so many
times mentioned. That important question should, in our opinion, be left until
it is raised in an action brought by the Government. chan rob lesvi rtua lawlib rary chan roble s virtual law lib rary
The judgment which is the subject of his appeal will therefore be affirmed, and
ch anro bl esvirt ualawli bra ry cha nro bles vi rtua l law lib ra ry it is so ordered, with costs against the appellants.
Avance�a, C.J., Villamor, Ostrand, Villa-Real, Abad Santos, Hull, Vickers,
Imperial and Butte, JJ., concur.
39

FIRST DIVISION
[G.R. NO. 169835 : July 3, 2007]
HYATT ELEVATORS AND ESCALATORS CORPORATION, Petitioner, v. LG OTIS
ELEVATOR COMPANY, Respondent.
DECISION
GARCIA, J.:
This Petition for Review under Rule 45 of the Rules of Court seeks to nullify and set aside the
Decision1 dated December 22, 2003 of the Court of Appeals (CA) in CA-G.R. SP No. 74320
and its Resolution2 of September 27, 2005, denying petitioner's motion for reconsideration
Petitioner Hyatt Elevators and Escalators Corporation (Hyatt) is a domestic corporation
primarily engaged in the business of selling, installing and maintaining/servicing elevators,
escalators and parking equipment, with address at the 6th Floor, Dao I Condominium,
Salved St., Legaspi Village, Makati, as stated in its Articles of Incorporation. When this case
started, Hyatt listed its office address as located at Hyatt Centre, Ortigas Avenue,
Mandaluyong City. Respondent LG Otis Elevator Company (LG Otis), on the other hand,
evolved as a result of a joint venture agreement between LG Electronics, Inc., of South
Korea and Otis Elevator Company of Connecticut, U.S.A.
The facts, as established by the appellate court, are as follows:
It appears that private respondent [herein petitioner] Hyatt Elevators & Escalators Company
(HYATT) was the Philippine distributor until 1997 of elevators and escalators of Lucky
Goldstar International Corporation (LUCKY GOLDSTAR) and Goldstar Industrial Systems, Co.
Ltd. (GOLDSTAR INDUSTRIAL).
Herein petitioner [now herein respondent] LG OTIS Elevator Company (LG OTIS) alleges that
it is a joint venture established on November 22, 1999 by LG Electronics Inc. (LG
ELECTRONICS), which is based in Korea, and Otis Elevator Company (OTIS), which is based
in the United States of America. Otis subsequently transferred its rights and obligations
under the LG Otis joint venture to Sirius (Korea) Limited, which is based in London, England.
LG Otis purchased the business of LG Industrial Systems Co. Ltd. (LGISC), a Korean
corporation which, at the time of said purchase, was the principal stockholder of LG
Industrial Systems Philippines, Inc. (LGISP), a domestic corporation established in 1998. On
March 28, 2000, LGISP changed its name to Goldstar Elevators Philippines, Inc.
(GOLDSTAR).
Records show that [in the Regional Trial Court of Mandaluyong City] - Hyatt filed a complaint
for unfair trade practices and damages against LGISC and LG International Corporation. It
was alleged in the complaint that defendant LGISC was formerly known as Goldstar
Industrial Systems Co., Ltd. (Goldstar Industrial) and co-defendant LG International
Corporation was formerly known as Lucky Goldstar Industrial Corporation (Lucky Goldstar).
Hyatt claimed that after establishing a Philippine market for defendants' elevators and
escalators pursuant to a distributorship agreement executed in 1988, the defendants unfairly
committed trade practices intended to establish their own company, ease out Hyatt and
cripple its business operations as the exclusive distributor of LG elevators, escalators and
parking equipment in the Philippines.
An amended complaint was subsequently filed by Hyatt impleading herein petitioner LG Otis.
It was alleged that LG Otis was formerly LGISC and Goldstar Industrial. The amended
complaint also impleaded Goldstar Elevators '. which was allegedly formerly known as LG
Industrial Systems Philippines, Inc. (LGISP).
LGISC and LG Industrial Corporation opposed the amended complaint on the ground that LG
Otis should not be substituted to LGISC as the two are separate and distinct corporations,
retaining separate organizations, assets and liabilities. Despite such opposition, the amended
complaint was admitted by the trial court.
Petitioner LG Otis [and Goldstar Elevators] then filed a motion to dismiss the amended
complaint on the grounds - that venue was improperly laid, and that the amended complaint
fails to state a cause of action.3 (Emphasis and words in brackets supplied.)
On May 27, 2002, in Civil Case No. MC-99-600, the Regional Trial Court (RTC) of
Mandaluyong City, Branch 213,4 issued an order5 denying the motion to dismiss separately
interposed by respondent LG Otis and Goldstar Elevators, as defendants a quo.
In another order6 dated October 1, 2002, the Mandaluyong RTC denied Goldstar Elevators'
and respondent LG Otis' separate motions for reconsideration.
Therefrom, both Goldstar Elevators and respondent LG Otis went to the CA via separate
petitions for certiorari under Rule 65 of the Rules of Court, Goldstar Elevators' recourse
docketed as CA-G.R. SP No. 74319 and that of respondent LG Otis, as CA-G.R. SP No.
74320.7 CA-G.R. SP No. 74319 was raffled to the 6th Division of the appellate court, while
CA-G.R. SP No. 74320 went to its Special Fourth Division
40
In its Decision dated June 26, 2003, in CA-G.R. SP No. 74319, as reiterated in a Resolution
of November 27, 2003, the CA set aside the May 27, 2002 and October 1, 2002 Orders of
the RTC of Mandaluyong City. The decretal portion of the CA Decision reads:
WHEREFORE, in view of the foregoing, the assailed Orders dated May 27, 2002 and October
1, 2002 of the RTC, Branch 213, Mandaluyong City in Civil Case No. 99-600, are hereby SET
ASIDE. The said case is hereby ordered DISMISSED on the ground of improper venue.
(Emphasis added.)
Hyatt would subsequently appeal the CA's decision and resolution in CA-G.R. SP No. 74319
to this Court, but failed to secure a favorable disposition. For by Decision8 dated October 24,
2005, in G.R. No. 161026, entitled "Hyatt Elevators and Escalators Corporation v. Goldstar
Elevators, Phil., Inc.," the Court affirmed the said assailed CA decision and ruling.
As in CA-G.R. SP No. 74319, the appellate court, in CA-G.R. SP No. 74320, also ruled
against herein petitioner HYATT, as respondent therein, and for LG Otis, albeit for reasons in
addition to the issue of improper venue. The fallo of the CA's Decision9 dated December 22,
2003 in CA-G.R. SP No. 74320 which, together with its Resolution10 of September 27, 2005
denying reconsideration thereof, is subject of this recourse, reads, as follows:
WHEREFORE, based on the foregoing premises, the instant petition is hereby GRANTED.
Consequently, the assailed May 27, 2002 and October 1, 2002 Orders of the Regional Trial
Court of Mandaluyong City in Civil Case No. MC-99-600 are REVERSED and SET ASIDE.
SO ORDERED.
In this recourse, petitioner urges the reversal of the assailed CA decision and resolution,
raising the following issues:
1. WHETHER OR NOT THE [CA], IN REVERSING THE DECISION OF THE REGIONAL TRIAL
COURT, ERRED AS A MATTER OF LAW AND JURISPRUDENCE, AS WELL AS COMMITTED
GRAVE ABUSE OF DISCRETION, IN HOLDING THAT IN THE LIGHT OF THE PECULIAR FACTS
OF THIS CASE, VENUE WAS IMPROPER;
2. WHETHER OR NOT THE [CA], IN REVERSING THE DECISION OF THE [RTC], ERRED AS A
MATTER OF LAW AND JURISPRUDENCE, AS WELL AS COMMITTED GRAVE ABUSE OF
DISCRETION, IN HOLDING THAT IN THE LIGHT OF THE PECULIAR FACTS OF THIS CASE,
RESPONDENT COULD NOT BE SUED IN THE PHILIPPINES AS A SUCCESSOR-IN-INTEREST
OF LG INDUSTRIAL SYSTEMS CO. SIMPLY BECAUSE IT IS NOT DOING BUSINESS IN THE
PHILIPPINES.11 (Words in brackets added.)
We DENY.
As may be noted, G.R. No. 161026 and this case involve virtually the same parties and
sprang from one and the same Civil Case No. MC-99-600, a suit for unfair trade practices
instituted by petitioner Hyatt against respondent LG Otis and Goldstar Elevators and
eventually disposed of by the Mandaluyong RTC. In fine, G.R. No. 161026 and this case are
cast against the same factual and legal settings, save perhaps for the fact that respondent in
the former case is a domestic corporation, while the instant case has as respondent a foreign
corporation. And as contextually abundantly made clear in G.R. No. 161026, petitioner Hyatt
could not successfully initiate a civil suit, like Civil Case No. MC-99-600, in Mandaluyong
City, its place of business, as stated in its Articles of Incorporation, being in Makati City. As
explained by the Court in its Decision in G.R. No. 161026:
x x x Admittedly, the latter's principal place of business is Makati, as indicated in its Articles
of Incorporation. Since the principal place of business of a corporation determines its
residence or domicile, then the place indicated in petitioner's [Hyatt's] articles of
incorporation becomes controlling in determining the venue for this case.
Petitioner [Hyatt] argues that the Rules of Court do not provide that when the plaintiff is a
corporation, the complaint should be filed in the location of its principal office as indicated in
its articles of incorporation. Jurisprudence has, however, settled that the place where the
principal office of a corporation is located, as stated in the articles, indeed establishes its
residence. This ruling is important in determining the venue of an action by or against a
corporation, as in the present case.
Without merit is the argument of petitioner [Hyatt] that the locality stated in its Articles of
Incorporation does not conclusively indicate that its principal office is still in the same place.
We agree with the appellate court in its observation that the requirement to state in the
articles the place where the principal office of the corporation is to be located "is not a
meaningless requirement. That proviso would be rendered nugatory if corporations were to
be allowed to simply disregard what is expressly stated in their Articles of Incorporation."
Inconclusive are the bare allegations of petitioner [Hyatt] that it had closed its Makati office
and relocated to Mandaluyong City, and that respondent [Goldstar Elevators] was well aware
of those circumstances. Assuming arguendo that they transacted business with each other in
the Mandaluyong office of petitioner [Hyatt], the fact remains that, in law, the latter's
residence was still the place indicated in its Articles of Incorporation. Further unacceptable is
its faulty reasoning that the ground for the CA's dismissal of its Complaint was its failure to
amend its Articles of Incorporation so as to reflect its actual and present principal office. The
appellate court was clear enough in its ruling that the Complaint was dismissed because the
venue had been improperly laid, not because of the failure of petitioner to amend the latter's
Articles of Incorporation.12 (Words in brackets and emphasis added.)
chanrob les vi rtua l law lib rary
In the light of the foregoing considerations, the challenged dismissal of Civil Case No. MC-
99-600, as ordered in the assailed judgment of the CA, on the ground of improper venue, is
correct. The Court will even go further and apply its Decision in G.R. No. 161026 as the law
of the case with respect to Hyatt on the issue of venue. Whatever is once irrevocably
established as the controlling legal rule or decision between the same parties in the same
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case continues to be the law of the case so long as the facts on which such decision was
predicated continue to be the facts of the case before the court.13 With the view we take of
this case, the factual milieu upon which the Decision in G.R. No. 161026 was based has
remained unchanged to justify the application of the salutary law of the case principle.

Given the above perspective, the second issue of whether or not foreign-based respondent
LG Otis, as alleged successor-in-interest of a domestic corporation, could be sued in the
country need not detain the Court further. For, the matter of suability would, in final
reckoning, really have no bearing on the dismissal of a suit on the ground of improper
venue. And besides, the second issue raised would require the Court to delve into certain
unresolved factual questions and assumptions. Needless to stress, such exercise is beyond
the purview of the Court's power of review on certiorari .

WHEREFORE, the petition is DENIED. The appealed Decision and Resolution of the CA in CA-
G.R. SP No. 74320 are AFFIRMED, and Civil Case No. MC-99-600 is DISMISSED without
prejudice.

Costs against the petitioner.

SO ORDERED.

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